1. If all resources are devoted to the production of food, Alpha can produce ___________pounds of food. In order to produce 1,500 WMD, the opportunity cost in terms of food is_________ pounds.

2. Chapter 4
The Law of Demand

3. What is Demand?
Quantity demanded of a product or service is the number that would be bought by the public at a given price.

4. The Law of Demand
When a good’s price is lower, consumers will buy more of it.
When a good’s price is higher, consumers will buy less of it.
What are some reasons why demand would increase?

5. The Law of Demand
The Law of Demand is called a “law” because it has proven true after repeated studies and tests, and it is consistent with common sense and observation.

6. Demand Schedule
A demand schedule shows the likely number of purchases based on a series of arbitrarily chosen prices.

7. Demand Schedule

8. Demand Schedule › Demand Curve

9. Demand Curve
Individual demand curve shows the price and quantity of a product demanded by an individual.
A market demand curve shows the quantities of a product demanded by everyone who is interested in purchasing it at all possible prices.

10. Individual & Market Demand Curves

11. Answer the following questions
1. Exchanging the use of one thing for another.
2. Study of choices.
3. Limited resources, unlimited wants.
4. All combinations of goods and services that can be produced from a fixed amount of resources in a given period of time
5. Value of the next best alternative.

12. Demand and Marginal Utility
Marginal utility is the extra satisfaction or additional usefulness obtained by acquiring multiple units of a product.
As we use more and more of a product, the extra satisfaction we get from using additional quantities begins to decline; this is known as diminishing marginal utility.
Because of diminishing marginal utility, people are not usually willing to pay as much for the second, third, or fourth unit as they did for the first unit.

13. Marginal Utility & Diminishing Marginal Utility

14. Consumer tastes change.
A Shift in Demand
When a shift in demand occurs, the entire demand curve shifts to the left or right. This occurs when:
A change in total consumer income affects how much of a product consumers buy at all possible prices.
Consumer tastes change.
An increase in the price of a product causes an increase in demand for substitute products and a decrease in demand for the product’s complements.
Changes in Consumer expectations.
A change in the total number of consumers 14

15. A Change (Shift) in Demand
If one of the other factors changes, the entire demand curve will shift to the left or right.
The curve does NOT shift if the price of the good is the only change.

16. The Substitution Effect
As the price for one good rises compared to a similar good, consumers will substitute the similar good for their purchases.
A shift in relative prices may cause a substitution effect, in which consumers substitute an alternative less expensive product for one that has become more expensive.

17. Substitution Effect

18. The Income Effect
The income effect is a change in quantity demanded because of a change in price that makes consumers feel richer or poorer.
As prices go up, your money becomes worth less than it was worth before
People are less likely to buy the good now

19. A Change in Demand (Graph)

20. A Change in Quantity Demanded (Graph)

21. Income When people’s income changes, demand shifts accordingly
Normal Goods –
Higher income = higher demand
Lower income = lower demand

22. Income When people’s income changes, demand shifts accordingly
Inferior Goods –
Higher income = lower demand
Lower income = higher demand

23. Consumer Expectations
If consumers expect a price to rise in the future, current demand increases.
If consumers expect a price to fall in the future, current demand decreases.

24. The number of consumers
When one sector of the population grows, demand increases for products that sector uses.
Fastest growing sector of the population today?
Old People

25. Consumer Tastes and Advertising
Increased advertising can increase consumer demand.
Bad news about a product can decrease demand.

26. Price of Related Goods
Complimentary Goods – goods that are bought and used together.
Higher Complementary Price = decrease in demand
Lower Complementary Price = increase in demand

27. Price of Related Goods
Substitute Goods – goods that are used in place of one another
Higher Substitute Price = increase in demand
Lower Substitute Price = decrease in demand

29. Elasticity of Demand
Elasticity refers to how responsive the quantity demanded is to a change in prices

30. Elasticity of Demand
An inelastic good will still sell about the same quantity even if the price goes up or down

31. Elasticity of Demand
An elastic good will have a higher change in Qd when there is a price change

32. Calculating Elasticity
% change in quantity demanded
__________________________
% change in price

33. Examples of Inelastic Goods
Gas/Oil - Need it to power most cars, a very large increase in price would be needed to actually reduce our quantity demanded
Salt - Few alternatives and a small amount is purchased and lasts quite a while. We probably wouldn’t even notice a price increase.
Goods produced by monopoly - No/few alternatives, if we need it, we don’t have a choice. If we only want it, it will be more elastic.
Tap Water - No alternatives
Cigarettes - Addiction factor
Inelastic Goods
Elastic Goods 33

34. Inverse Relationship of Demand
Law of demand states the quantity demanded
varies inversely with its price.

35. Change in Quantity Demanded
A Shift in Demand vs. A Change in Quantity Demanded
Shift in Demand
Change in Quantity Demanded
Change total consumer income
Price Change
change in taste
substitute and compliment products
Change in expectations
Change in total number of consumers 35

36. Calculating Elasticity
If Elasticity is < 1, the good is inelastic
If Elasticity is > 1, the good is elastic
If Elasticity = 1, the good has a unitary elastic demand

37. Factors Affecting Elasticity
Availability of Substitutes – if you have no other options, demand is inelastic.

38. Factors Affecting Elasticity
Availability of Substitutes – if you have equally appealing options, demand is highly elastic

39. Factors Affecting Elasticity
Relative Importance – what percentage of your budget is spent on the good?
If it is low, price changes will not alter demand
If it is high, even small price changes can greatly affect demand

40. Factors Affecting Elasticity
Necessities vs. Luxuries – consumption of milk might stay the same with price changes, while consumption of lobster would greatly change with price changes

41. Factors Affecting Elasticity
Change over time – price changes may produce inelastic demand in the short term, but elastic demand long term
1970s fuel crisis – people still bought the same amount of gas at first, but eventually started buying smaller cars

42. Elasticity and Revenue
Total Revenue – the amount of money a company receives by selling its good or service
With elastic demand, revenue will decrease greatly with price increases

43. Elasticity and Revenue
With Inelastic demand, price increases will increase revenue