The Free Enterprise System - Demand

Objectives: Explain the law of demand Explain diminishing marginal utility Identify products with elastic and inelastic demand

I. The Law of Demand A. Demand - consumers' willingness and ability to buy products B. Assumption - If price is low, demand will increase C. Assumption - If price is high, demand will decrease

D. Demand Curve - Downward sloping curve representing correlation between different prices and the quantity people will buy at each price 1. demand schedule - used to prepare the demand curve 2. draw a demand curve example: price # of units

E. Diminishing Marginal Utility - the fact that people may buy a limited quantity of a product even if price continues to drop 1. this limits the extent of demand 2. i.e. if Reeboks go down to $50.00 you may buy 2 pairs - - then they go down to $40 - -you may not buy any more because you have enough for awhile

F. Elasticity of Demand - the exception to the "law" 1. The degree to which demand for a product is affected by a change in price a. Elastic demand - slight change in price creates a large change in demand b. Inelastic demand - change in price has very little effect on demand

2. Four factors that determine if a product will have elastic or inelastic demand a. Are substitutes available if price goes up? if yes = elastic i.e.: McDonald's prices go up, so you go to Wendy's or Hardees if no = inelastic i.e.: we will still buy insulin even if the price goes up

b. Is price relative to your income? if the price is a large part of your income = elastic i.e.: vacationing if the price is small in comparison to your income = inelastic i.e.: potato chips

c. Is the product a luxury or necessity? luxury = elastic i.e.: hot tubs necessity = inelastic i.e.: insulin

d. Is the purchase an emergency? not emergency = elastic i.e.: gasoline emergency = inelastic i.e.: gas might be purchased in an emergency at any price