Chapter 4

 Demand – the desire AND ability to own or purchase  Does not refer to wishes or dreams  Law of Demand – the more it costs, the less you buy, the less it costs the more you buy  Inverse relationship  Quantity Demanded –how much of a given product someone buys given their income and preferences at any specific price I Want That! GA

 Demand refers generally to the whole range of quantities that a person, with a given income and preferences, is willing and able to buy at various prices generally  Quantity Demanded (QD) refers specifically to a person’s demand at an exact price given other factors

 Diminishing marginal utility explains the law of demand  As a person consumes more of a good, the satisfaction gained from each additional unit decreases  Thus, the less satisfaction you get from something, the lower the price you are willing to pay  Consequently, as more units of a good are consumed and utility decreases, a consumer is only willing to purchase more at a lower price

 Perhaps the prices of Disney tickets also depends on quantity demanded.  Consider this price schedule One day ticket --$63 Two day ticket --$85 Three day ticket--$109 Four day ticket --$129 Five day ticket --$139  What pattern do you see? Is there an explanation?

2 Occurrences: 1. Substitution Effect – switching to similar products because of prices. 2. Income Effect – rising prices cause people on a fixed income to buy less as more of your income goes to purchasing something with a higher price

 Demand Schedule – table that lists the quantity of a good that a person will purchase at each price in the market. Price of a slice of Pizza Quantity Demanded.505 $1.004 $1.503 $2.002 $2.501 $3.000

 MDS – shows the quantities demanded at each price by ALL consumers in the market  It is the sum of all the individual demands in a given market Price of a slice of pizza Quantity demanded per day $ $ $ $ $3.0050

 Demand graph – graphic representation showing the relationship between price and quantity demanded.  Also called Demand Curve  Slopes downward illustrating the Law of Demand

 2 things change demand: prices and everything else  If prices change you move along the curve  If something else happens to alter the quantity demanded, or how much of something you would buy at any given price —demand shifts  Changes in price don’t shift the curve, but other factors do  This is called a “change in demand”

 Income – more income, consumers purchase more  Increase in demand – shift to right  Decrease in demand – shift to left  Normal goods – goods consumers demand more of as income increases  Inferior goods – increase in income causes a decrease in demand

 Consumer Expectations – expectations about the future affects today’s demand  Population – greater population demands more goods and services  Tastes & Advertising – social trends, marketing  Price of Related Goods –  Compliments – two goods bought and used together (pizza and soda)  Substitutes – goods used in place of each other.

 Elasticity of demand – how drastically buyers cut back or increase their demand for a good when the price changes.  Inelastic – demand does not change when price does  Elastic – great change in demand when price changes ws/cool/

 Availability of substitutes – can you you substitute?  Time Horizon—short run versus long run  Necessities vs. Luxuries – what do you need vs. what do you want?  Changes over time – habits, styles, trends, advertising  Definition of the Market—broad or narrow?  Percentage of Income Spent

 Total revenue – the amount of $$$ a company receives for selling its goods  (price X quantity sold)  Elastic Demand – buyers will noticeably change their buying habits based on price changes  total revenue and prices move in opposite directions As the price falls Total Revenue rises Total Revenue falls As the price rises

 Inelastic Demand – buyers either only slightly or do not change their purchasing habits based on price changes  Total revenue and prices move in the same direction As the price falls Total Revenue falls As the price rises Total Revenue rises