1. Chapter 4 Demand

2. Section 1- Understanding Demand
Law of Demand- Consumers buy more of a good when its price decreases and less when its price increases

3. Substitution Effect- When consumers react to an increase in a good’s price by consuming less of that good and more of other goods

4. Income Effect- the change in consumption resulting from a change in real income
If you get a raise you buy more, if you get fired you buy less

5. Demand Schedule
Price
.50
1.00
1.50
2.00
2.50
3.00
Quantity 5 4 3 2 1

6. Demand Curve- graphic representation of a demand schedule
Note: Increase is always to the right & decrease is always to the left

7. Section 2 : Shifts in Demand
Ceteris Paribus- All other things held constant…

8. What causes a shift?
1. Income
Normal goods- items consumers demand more of when income increases
Steaks, Jewelry, etc.
Inferior goods- goods consumers demand less of when income increases
Hot dogs, ramen noodles, generic brands

9. Shifts in Demand Continued
2. Consumer Expectations
Future prices vs. present prices
3. Population
Changes in size or demographics
4. Consumer tastes & advertising
Ads effect what we buy
Tastes change over time

10. Prices of Related Goods
Complements- two goods bought & used together
Peanut butter & Jelly
Oreo cookies and milk
Substitutes- goods used in place of one another
Butter & margarine
Cars & motorcycles

11. Section 3: Elasticity of Demand
Inelastic demand- when you will still buy a good despite a rise in the price
Gasoline
Milk
Necessities

12. Elastic demand- when you will buy much less of a good after a small price increase
Designer clothes
DVD/Blu-ray movies
Luxury items

13. What Affects Elasticity
Availability of substitutes
Fewer substitutes = more inelastic (ex: Life saving drug)
Importance
The more important the item the more inelastic

14. Necessity vs. Luxury Change over time
Necessity = inelastic, luxury = elastic
Change over time
Elasticity of Demand is usually greater in the long run

15. Calculating Elasticity
Percentage change= Original Number- New Number
Original Number
Elasticity= % change in quantity demanded
% change in price
Demand Price

16. Elastic Demand
Greater then 1
Inelastic Demand
Less then 1
Unitary Demand
= to 1

17. Examples
1. Demand Price Demand Price

18. Practice: Find the Elasticity
1. Demand Price Demand Price Demand Price
4. Demand Price Demand Price Demand Price

19. Answers
1) 3.75
2) .143
3) 1
4) 2 5)
6) 1.43