1. Demand

2. Chapter 4: Demand KEY CONCEPT WHY THE CONCEPT MATTERS
Demand is the willingness to buy a good or service and the ability to pay for it.
WHY THE CONCEPT MATTERS
The concept of demand is demonstrated every time you buy something. Think of five goods or services that you have purchased. Which of them would you stop buying if the price rose sharply?

3. What is Demand? The Law of Demand KEY CONCEPTS
Demand—the desire for an item and the ability to pay for it
Law of demand
when price of good or service goes up, quantity demand goes down
when price of good or service goes down, quantity demand goes up

4. The Law of Demand EXAMPLE: Price and Demand
Law of demand explains consumer behavior as well as economic concept
Cheryl decides to spend $45 on DVDs
at $15 each, Cheryl demands three DVDs
at $5 each, she demands seven DVDs

5. Demand Schedules KEY CONCEPTS
Demand schedule—a table that summarizes one consumer’s behavior
lists how much of an item an individual will buy at each price
Market demand schedule—a table that summarizes all consumers’ behavior
lists how much of an item all consumers will buy at each price

6. Demand Schedules EXAMPLE: Individual Demand Schedule
Demand schedule is a two-column table
left-hand column lists various prices of a good or service
right-hand column gives quantity demanded at each price
Cheryl’s DVD Demand Schedule
quantity demanded and price have an inverse relationship

7. Demand Schedules EXAMPLE: Market Demand Schedule
Business owners need information about consumer demand
helps them price goods to get the most sales
Market research—gather and evaluate data about customer preferences
Market demand schedule similar to individual demand schedule
except quantities demanded are larger (More People)
market demand also depends on price

8. Demand Curves KEY CONCEPTS
Demand curve—a graph that shows amount of an item a consumer will buy at each price
Market demand curve—amount all consumers will buy at each price
Demand curves graphically show information found on demand schedules

9. Demand Curves EXAMPLE: Individual Demand Curve
Demand curve is visual representation of law of demand
assumes all economic factors except price stay the same (No change in resources, labor or technology)
Vertical axis shows prices
Horizontal axis shows quantities demanded
Demand curves slope down from upper left to lower right
Look at where the intersections are with price and quantity demanded.

10. Demand Curves EXAMPLE: Market Demand Curve
Market demand curve constructed same way as individual demand curve
Market demand curve includes all consumers of a product
quantities demanded are much larger than on individual demand curve
Illustrates inverse relationship between price and quantity demanded
assumes all economic factors constant except price

11. Vera Wang: Designer in Demand
Responding to Demand
Sophisticated wedding gowns not available for career women
Wang created line of wedding gowns to meet demand
Style became popular; other designers imitated
Wang created more demand for her style by designing other products

12. Reviewing Key Concepts
Explain the differences between the terms in each of these pairs:
demand and law of demand
demand schedule and demand curve
market demand schedule and market demand curve

13. More About Demand Curves
What Factors Affect Demand?
More About Demand Curves
KEY CONCEPTS
Law of diminishing marginal utility
marginal benefit of each additional unit declines as each unit is used
Income effect
amount people buy changes as purchasing power of their income changes
Substitution effect
amount people buy changes as they buy substitute products

14. Change in Quantity Demanded
KEY CONCEPTS
Change in quantity demanded
change in amount consumers buy because of change in price
each change shown by new point on demand curve
does not shift the demand curve itself
Page 108 in your book has a good example. Figure 4.7

15. Change in Quantity Demanded
EXAMPLE: Changes Along a Demand Curve
Individual demand curve
change in quantity demanded shown by movement to right or left along the curve
Market demand curve
shows similar information for entire market

16. Change in Demand KEY CONCEPTS
Change in demand is caused by a change in the marketplace
prompts people to buy different amounts at every price
also called shift in demand
Six factors can cause change in demand
You will need to know all 6 for your midterm so pay attention!

17. Change in Demand FACTOR 1 Income
A person’s ability to buy goods changes as his or her income changes
As incomes of most consumers in a market change, so does total demand
normal goods—demanded more when consumers’ incomes rise
Brand name goods, higher priced items.
inferior goods (Not as good)—demanded less when consumers’ incomes rise
Discount stores for clothes, generic brand food

18. Change in Demand FACTOR 2 Market Size
As number of consumers in an area changes, so does market size
Demand for most goods changes as market size changes
rise in population leads to increased demand
decrease in population leads to decreased demand
A good example is China/India and their demand for good throughout the world.

19. Change in Demand FACTOR 3 Consumer Tastes
Consumer tastes change; products gain and lose popularity
Consumers demand a greater amount of popular items at every price
Sellers advertise to create demand for products

20. Change in Demand FACTOR 4 Consumer Expectations
Expectations about future price of items affect individual behavior
expected rise or fall in price can decide whether to buy now or wait
Expectations of all consumers in a market affect demand
example: because cars go on sale at end of summer, demand goes up then

21. Change in Demand FACTOR 5 Substitutes
Substitutes—products used in place of each other
if price of substitute drops, people buy it instead of original item
if price of original item rises, people will buy substitute

22. Change in Demand FACTOR 6 Complements
Complements—goods that are used together
Rise in demand for one increases the demand for the other
If price of one product changes, demand for both changes in same way
if price of one rises, demand for both will drop

23. Reviewing Key Concepts
Explain the differences between the terms in each of these pairs:
change in quantity demanded and change in demand
income effect and substitution effect
normal goods and inferior goods
substitutes and complements

24. Chapter 4 Section 1 & 2 Questions 1-5 Typed Due June 25th
Homework
Chapter 4 Section 1 & 2 Questions 1-5 Typed Due June 25th

25. What is Elasticity of Demand?
KEY CONCEPTS
Buying habits affected by type of product and importance to consumer
Elasticity of demand
measure of how responsive consumers are to price changes
Elastic—quantity demanded changes greatly as price changes
Inelastic—quantity demanded changes little as price changes

26. Elasticity of Demand
EXAMPLE: Elasticity of Demand for Goods and Services
Goods with substitutes have elastic demand since choices are available
Needed goods without substitutes have inelastic demand
Elasticity changes if substitutes created or goods taken off market
Unit elastic—same percentage change in price and quantity demanded
useful concept for determining elasticity of demand

27. What Determines Elasticity?
KEY CONCEPTS
Three factors affect elasticity of demand
availability of substitutes
proportion of income spent on good or service
whether product is a necessity or luxury

28. What Determines Elasticity?
FACTOR 1 Substitute Goods or Services
If no substitute for a product, demand tends to be inelastic
when price of insulin goes up, diabetics still need the same amount
If there are substitutes for a product, demand tends to be elastic
when price of beef goes up, consumers can buy other meats

29. What Determines Elasticity?
FACTOR 2 Proportion of Income
Demand for expensive items tends to be elastic
if percentage of income needed to buy item increases, demand decreases. (If the price of a good increases drastically)
Luxury Items
Demand for inexpensive items tends to be inelastic
rise in price requires small additional part of income
Rise in income can lead to greater demand for some goods or services

30. What Determines Elasticity?
FACTOR 3 Necessity or Luxury
Necessity—something needed for life
demand for necessities is inelastic
Luxury—something desired but not essential
demand for luxuries tends to be elastic

31. Calculating Elasticity of Demand
KEY CONCEPTS
Knowing elasticity of demand tells sellers whether to cut prices
if demand is elastic, price cuts might increase earnings
if demand is inelastic, price cuts will not increase earnings
formulas used to calculate elasticity
Is change in quantity demanded greater than change in price?

32. Total Revenue Test KEY CONCEPTS
Total revenue—amount of money company gets for selling its products
Formula: TOTAL REVENUE = P (price) x Q (quantity sold)
Total revenue test—shows total revenue from item at various prices
if total revenue increases after price drops, demand is elastic
if total revenue decreases after price drops, demand is inelastic

33. Total Revenue Test EXAMPLE: Revenue Table
Revenue table shows elasticity of demand by listing
prices at which item can be sold
quantity of item demanded at each price
total revenue received from sale of item at each price

34. Reviewing Key Concepts
Use each of these terms in a sentence that gives an example of the term:
elastic
inelastic
total revenue

35. Case Study: Fueling Automobile Demand
Background
Demand for automobiles and all services connected with them is high
Car dealers want to sustain and increase demand for their product
What’s the Issue
How does demand affect your selection of a vehicle?
Thinking Economically
How would the demand for automobiles be affected by information presented in each of these documents? Support your answer with examples from the documents.
Identify and discuss the factors that affect elasticity of demand illustrated in these documents.
Explain how Documents B and C illustrate a cause and effect relationship in the demand for SUVs. Use evidence from these documents to support your answer.