Chapter 7 The Demand Curve and Elasticity of Demand

Graphing the Demand Curve A demand schedule is a table reflecting quantities demanded at different possible prices. A demand curve shows the quantity demanded of a good or service at each possible price. Demand curves slope downward, clearly showing the inverse relationship.

Determinants of Demand Main Idea: A change in the demand for a particular item shifts the entire demand curve to the left or right. *Increase moves right *Decrease moves left Highlight this in your notes!!

1. Population D1 – represents the original demand for TV’s D2 – represents the demand after the population increased If population decreased, demand would also decrease

2. Income If Income increases, demand also increases.

3. Tastes & Preferences *This refers to what people like and prefer to choose. *Fads (trends) This Beanie Baby graph represents the demand in the early 1990’s. As the popularity died down, the demand curve shifted back to the left. FYI-There are Beanie Babies 2.0 now in stores featuring Cartoon characters (Madagascar, Diego & Dora, WonderPets)

4. Substitutes Determined by availability & price of substitute Think it through! If the price of the substitute decreases, then you’ll buy that instead of the original item. Vice versa: If the price of the substitute increases, you’ll be more of the original item.

5. Compliments *Things that are bought and sold together If the price of one decreases, the demand of BOTH complimentary items increases. This examples shows: If the price of a digital camera decreases, the demand of the camera AND the flash memory increases.

The Price Elasticity of Demand Main Idea: Elasticity of demand measures how much the quantity demanded changes when price goes up or down.

For some goods, a rise or fall in price greatly affects the amount people are willing to buy. This economic concept is referred to as elasticity. The measure of how much consumers respond to a given change in price is referred to as price elasticity of demand.

Examples Elastic Demand Luxury items, vacations, high-end electronics, even coffee are examples of elastic goods/services and have a very elastic demand. Inelastic Demand Staple foods, medicine, spices have an inelastic demand. A price change has little impact on the quantity demanded by consumers.

Three factors determine the price elasticity of demand for an item: –The existence of substitutes –The percentage of a person’s total budget devoted to the purchase of that good –The time consumers are given to adjust to a change in price

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