Ch. 4: Demand. Section 1: Understanding Demand Consumers shape markets through their demands

Ch. 4: Demand

Section 1: Understanding Demand

• Consumers shape markets through their demands.

Demand

• Demand: the desire to own something and ability/willingness to pay for it.

• Consumer demand dictates what is produced.

Law of Demand

• Law of demand: when a good’s price is lower, consumers will buy more. When the price is higher, consumers will buy less.

Cost CostDemand Demand

Substitution Effect

• Substitution effect is when consumers react to an increase in price by purchasing more alternative (cheaper) products.

• If pizza goes up in price, people buy more hamburgers and less pizza.

Income Effect

• Income effect is when consumers demand less because of a change in real income.

• If all clothing prices rise, and your income does not, you will consume/demand less clothing.

Demand Schedule

• Economists chart demand by creating a demand schedule: a table that lists demand levels at different prices.

Price of a slice of pizza Quantity of slices demanded

$.50 5

$1.00 4

$1.50 3

$2.00 2

$2.50 1

Market Demand Schedule

• A market demand schedule charts demand levels for an entire economy.

Price of a slice of pizza Quantity of slices demanded

$.50 5 million

$1.00 4 million

$1.50 3 million

$2.00 2 million

$2.50 1 million

Demand Curve• Demand curves plot the data from demand

schedules onto a graph.

0 2 3 4 50

0.5

1

1.5

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3.5

Series 1Column2Column1

Slices of Pizza Demanded

$ Pr

ice

of P

izza

Slic

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Creating our own demand schedule

How much are you willing to pay for an ipad?

Thinking about demand

• Why might the law of demand only apply in a free market economy?

• What about a centrally planned economy?

Section 2: Shifts in the Demand Curve

• Demand Curves can change as the result of many different circumstances.

Why does demand change?

Excluding price, what kind of circumstances, events, or environments might cause demand to shift?

Why does demand change?

• Factors that can shift demand…– Economic projections– Popularity – Weather– Consumer taste– Advertising – Changes in income

Ceteris Paribus• Ceteris paribus: Latin for, “all other things held

constant.”• Demand curves take only price into account, holding

all other things constant.– Many other factors, beside price, affect demand.

Shifts along the curve

• Shifts along the curve happen as a result of price

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Slices of Pizza Demanded

$ Pr

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Shifting the curve

• Factors beyond cost, however, can cause the entire curve to shift (greater or less demand at every price).

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0.51

1.52

2.53

3.54

4.5

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Slices of Pizza Demanded

$ Pr

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Curve Shifts

• The curve can shift out (right/up) with increased demand at all prices, or back (left/down) with decreased demand.

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Slices of Pizza Demanded

$ Pr

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Types of goods

• Normal goods: goods consumers demand more of when their income increases

• Inferior goods: goods that consumers demand less of when their income increases– Examples?

Changes in demand

• Thousands of simultaneous factors influence demand.– Consumer expectations: economic forecasts, perception of value

changes– Populations: Baby boomers– Consumer tastes and advertising: what is “in”?

Related Goods

• Complements: two goods that are used together.• Substitutes: goods that are used in place of one another.

– Examples?

Section 3: Elasticity of Demand

• Price changes affect demand for some goods/services more than others.

Elasticity of demand

• Elasticity measures how consumers react to changes in price.

Cost/Demand

What would you still demand, regardless of price change?

What would you quickly stop demanding, with even a small price change?

Inelastic Demand

• Inelastic demand is relatively unresponsive to a change in price (demand does not stretch).

• Examples: food, fuel, electric, clothing, healthcare

Elastic Demand

• Elastic demand is very sensitive to a change in price (demand stretches).

• Examples: nonessential products

Demand Curve for Elastic Good

• An elastic curve is flatter, since demand is more responsive to cost.

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Elastic DemandColumn2Column1

Slices of Pizza Demanded

$ Pr

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Demand Curve for Inelastic Good

• An inelastic demand curve is steep, because the demand isn’t as responsive to cost

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0.51

1.52

2.53

3.54

4.5

Elastic DemandInelastic DemandColumn1

Slices of Pizza Demanded

$ Pr

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Slic

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Necessities vs. Luxuries

• Is this good/service a necessity to survive, or a luxury?

Availability of Substitutes

• Are there easy, available substitutes for this product?

How elastic is the demand for…

• Rank the elasticity for the following things…

Elasticity and Revenue

• Total Revenue: amount of money a company receives for selling their goods/services.

• Revenue is impacted by the elasticity of demand

Price of a slice of pizza

Quantity of slices demanded

Total Revenue

$.50 300 $150

$1.00 250 $250

$1.50 200 $300

$2.00 150 $300

$2.50 100 $250

$3.00 50 $150

Elasticity of Revenue

• If demand is elastic, raising the price will decrease total revenue (and vice-versa).

• If demand is elastic, raising the price will increase total revenue (and vice-versa).

Price Revenue Price Revenue

Inelastic DemandElastic Demand