Chapter 4: DEMAND

1. Chapter 4: DEMAND

2. Objectives • Describe & illustrate the concept of demand. • Explain how demand & utility are related. • Explain what causes a change in quantity demanded • Describe the factors that can cause a change in demand. • Define & analyze the elasticity of demand for a product.

3. Ch 4 Key Terms • demand demand schedule • demand curve Law of Demand • marginal utility • diminishing marginal utility • change in quantity demanded • income effect substitution effect • change in demand substitutes • complements elasticity • demand elasticity elastic • inelastic unit elastic

4. What is demand? • Demand is NOT just the desire to have or own a certain product • DEMAND is the DESIRE, ABILITY, and WILLINGNESS to BUY a product • When I want or need something, do I demand it? • No, I must buy it.

5. Analyzing Demand • A demand schedule is a listing that shows the number demanded at different prices (table form)

6. A demand curve shows the quantity demanded at each & every possible price that may prevail in the market (line graph form) • The line is ALWAYS downward sloping • Lower quantity will be demanded at higher prices • Higher quantity demanded at lower prices • A change in price reflects movement along the curve (change in quantity demanded)

7. The Law of Demand • There is an inverse relationship between price & quantity demanded • If price increases, demand decreases • If price decreases, demand increases

8. Demand and Marginal Utility • Utility is the amount of usefulness or satisfaction someone gets from the use of a product • Marginal utility is the extra satisfaction one gets from getting one more unit of the product • Diminishing marginal utility is the decreasing satisfaction as additional units of a product are acquired

9. CHANGE IN QUANTITY DEMANDED VS. CHANGE IN DEMAND

10. Change in Quantity Demanded • A change in price will cause a change in the quantity demanded, which is represented by movement along the demand curve • This may occur because of 2 reasons: • The Income Effect: change in price alters consumers’ real income (prices drop, you have more income to spend) • The Substitution Effect: change in the relative price of the product (as compared with prices of other products) • Together, they explain why consumers increase consumption when prices drop

11. If a change in demand is NOT caused by a change in PRICE, the entire demand curve will shift = CHANGE IN DEMAND

12. Change in Demand • People are now willing to buy different amounts of the product at the same prices • Entire demand curve shifts • To the RIGHT shows an increase in demand • To the LEFT shows a decrease in demand • Change in demand results in an entirely new curve

13. Factors that cause a change in demand (other than price): Write at least 3 facts for each. • Consumer Income • Consumer Tastes • Prices of Related Goods • Substitute Goods • Complementary Goods • Change in Expectations • Number of Consumers

14. Elasticity of Demand

15. Elasticity is an important cause-and-effect relationship in economics • Demand elasticity is the extent to which a change in price causes a change in the quantity demanded • Will a change in price cause a relatively larger, a relatively smaller, or a proportional change in quantity demanded?

16. Demand is ELASTIC: a change in price causes a relatively larger change in quantity demanded • Demand is INELASTIC: a change in price causes a relatively smaller change in quantity demanded • Demand is UNIT ELASTIC: a change in price causes a proportional change in quantity demanded

17. What determines demand elasticity? • Can the purchase be delayed? • Yes: tends to be elastic • No: tends to be inelastic • Are adequate substitutes available? • Yes: tends to be elastic • No: tends to be inelastic • Does the purchase use a large portion of income? • Yes: tends to be elastic • No: tends to be inelastic