1. Chapter Four - Demand

2. Section One – What is Demand
An Introduction to Demand
i. Demand must coincide with a willingness and ability to pay for it
ii. Microeconomics – Behavior and Decision making in small units
a. Demand Illustrated
i. How can you determine demand?
b. The Individual Demand Schedule
i. A listing that shows the various quantities demanded of a product at all prices that might prevail in a marketplace
ii. Generally willing to buy more at lower prices
c. The Individual Demand Curve
i. Plotting the individual demand schedule onto a graph creates an individual demand curve

3. II. The Law of Demand – The quantity demanded of a good or service varies inversely with it’s price. Price goes Up = Demand goes Down, Price goes Down = Demand goes Up
a. Foundations of the Law of Demand
i. It’s been observed again and again in any study produced
ii. This is how people behave in everyday life.
b. The Market Demand Curve
i. Quantities demanded by everyone who is interested in purchasing the product
ii. Simply add the individual demand curves to get the market demand curve
iii. It shows all consumers in the market.

4. Demand and Marginal Utility
i. The extra usefulness or satisfaction a person gets from acquiring or using one more unit of a product.
ii. We buy products because we think they are useful
iii. Law of diminishing marginal utility – the extra satisfaction we get from using additional quantities of the product begin to diminish
iv. When you reach the point where the marginal utility is less than the price you stop buying

5. Section Two – Factors Affecting Demand
Change in Quantity Demanded
i. A movement from one point to another shows a change in quantity demanded
ii. Change in quantity purchased based on a change in price
a. The Income Effect
i. Consumers have a tendency to replace a more costly item with a less costly one
ii. The change in quantity demanded because of a change in price that alters consumers real income
b. The Substitution Effect i. The change in quantity demanded because of the change in relative price of the product
ii. The demand curve itself does not change

6. Change in Demand
i. When people are willing to buy different amounts of the product at the same prices
ii. The entire demand curve will move left or right
a. Consumer Income
i. When income goes up people can buy more (shifts right)
ii. When income goes down people can buy less (shifts left)
b. Consumer Tastes
i. Advertising, changes in seasons, news, trends

7. c. Substitutes – Products that can be used in the place of another
i. Demand for a product will increase if the price of its substitute goes up
ii. Demand for a product will decrease if the price of its substitute goes down
c. Compliments – The use of one good increases the use of another
I. Demand for a product will increase if the price of its compliment goes down
ii. Demand for a product will decrease if the price of its compliment goes up
d. Change in Expectations
i. Buy more now if expectations are bad (weather-crops)
ii. Buy less now if expectations are good (new phones)
e. Number of Consumers
i. More consumers = higher prices, less consumers = lower prices

8. Section Three – Elasticity of Demand
Demand Elasticity – The extent to which a change in price causes a change in the quantity demanded
a. Elastic Demand – When a given change in price causes a relatively larger change in quantity demanded (fresh fruits and vegetables) 10% change in prices causes a 20% change in demand
b. Inelastic Demand – When a given change in prices causes a relatively small change in quantity demanded (table salt, sometimes inexpensive products) 10% change in prices causes a 2% change in demand
c. Unit Elastic Demand – When a given change in price causes a proportional change in quantity demanded. 10% change in price causes a 10% change in demand

9. II. The Total Expenditures Test – Useful to look at the impact of a price change on total expenditures
a. Determining Total Expenditures – Multiply the price of a product by the quantity demanded for any point along the curve.
b. Three Results
i. Elastic demand – When prices goes down, total revenue goes up ii. Inelastic demand – When prices go down, total revenue goes down
iii. If the chance in price and revenue move in opposite directions the demand is elastic.
iv. If they move in the same direction demand is inelastic
v. If they move proportionally demand is unit-elastic
c. Elasticity and Profits –Vital for pricing in industries

10. Determinants of Demand Elasticity
i. What makes a product elastic or inelastic?
a. Can the Purchase be Delayed?
i. The persons need for the product (insulin for diabetics, tobacco)
ii. People could delay food purchases or a vacation
iii. If you can delay a purchase it will have elastic demand, if you can’t it has inelastic demand
b. Are Adequate Substitutes Available?
i. (Beef-Chicken) (Butter-Margarine)
ii. The fewer the substitutes the more inelastic the demand becomes

11. c. Does the Purchase Use a Large Portion of Income
i. If the purchase uses a large portion of income the demand tends to be elastic
ii. If the purchase uses a smaller portion of income the demand tends to be inelastic