Chapter 4 Demand Contents CHAPTER INTRODUCTION SECTION 1What Is Demand? SECTION 2Factors Affecting Demand SECTION 3Elasticity of Demand CHAPTER SUMMARY

Chapter 4Demand

ContentsContentsCHAPTER INTRODUCTION

SECTION 1 What Is Demand?

SECTION 2 Factors Affecting Demand

SECTION 3 Elasticity of Demand

CHAPTER SUMMARY

CHAPTER ASSESSMENT

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Chapter Introduction 1Chapter Introduction 1In Chapter 4, you will learn that demand is more than a desire to buy something: it is the ability and willingness to actually buy it.

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Key Terms

– microeconomics

– demand schedule

– demand curve

– Law of Demand

– market demand curve

– marginal utility

– diminishing marginal utility

– demand

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• People sometimes think of demand as the desire to have or to own a certain product.

• In this sense, anyone who would like to own a swimming pool could be said to “demand” one.

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• In order for demand to be counted in the marketplace, however, desire is not enough; it must coincide with the ability and willingness to pay for it.

• Only those people with demand—the desire, ability, and willingness to buy a product-can compete with others who have similar demands.

• Demand, like many other topics in Unit 2 is a microeconomic concept.

• Microeconomics is the area of economics that deals with behavior and decision making by small units, such as individuals and firms.

• Collectively, these concepts of microeconomics help explain how prices are determined and how individual economic decisions are made.

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• Demand is the desire, ability, and willingness to buy a product.

• An individual demand curve illustrates now the quantity that a person will demand varies depending on the price of a good or service.

• Economists analyze demand by listing prices and desired quantities in a demand schedule (chart). When the demand data is graphed, it forms a demand curve with a downward slope.

Figure 4.1The Demand for Compact DiscsFigure 4.1The Demand for Compact Discs

Figure 4.1The Demand for Compact DiscsFigure 4.1The Demand for Compact Discs



• The Law of Demand states that the quantity demanded of a good or service varies inversely with its price. When price goes up, the quantity demanded goes down; when price goes down, the quantity demanded goes up.

• A market demand curve illustrates how the quantity that all interested persons (the market) will demand varies depending on the price of a good or service.

Why is price a consumer’s obstacle to buying?

Answers will vary, but may include that a consumer’s money is limited, and the price of a product forces the consumer to determine how much his or her demand is for the product.

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The Law of Demand (cont.)Figure 4.2

Individual and Market Demand CurvesFigure 4.2Individual and Market Demand Curves



• Marginal utility is the extra usefulness or satisfaction a person receives from getting or using one more unit of a product.

• The principle of diminishing marginal utility states that the satisfaction we gain from buying a product lessens as we buy more of the same product.

Describe the relationship between the demand schedule and demand curve.

Both provide information about demand–the schedule in the form of a table and the curve in the form of a graph.


Describe how the slope of the demand curve can be explained by the principle of diminishing marginal utility.

Diminishing marginal utility says that as we use more of a product, we are not willing to pay as much for it. Therefore, the demand curve is downward sloping. People will not pay as much for the second and third product as they will for the first.


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Key Terms

– income effect

– substitution effect

– change in demand

– substitutes

– complements

– change in quantity demanded


• The demand curve is a graphical representation of the quantities that people are willing to purchase at all possible prices that might prevail in the market.

• Occasionally something happens to change people’s willingness and ability to buy.

• These changes are usually of two types: a change in the quantity demanded, and a change in demand.


• In 1983, the first audio compact discs were introduce to U.S. consumers. Within five years, record companies had begun to phase out the vinyl albums on which music was traditionally played because sales figures had shown that consumers preferred CD technology.




• The change in quantity demanded shows a change in the amount of the product purchased when there is a change in price.

• The income effect means that as prices drop, consumers are left with extra real income.

• The substitution effect means that price can cause consumers to substitute one product with another similar but cheaper item.

Figure 4.3Figure 4.3Figure 4.3A Change in Quantity DemandedFigure 4.3A Change in Quantity Demanded

Imagine you have a weekly budget for groceries. When you shop one week, certain items you needed were on sale, and after you paid the cashier, you had $20 left. What would you do with the extra money?

Answers will vary. Students should explain how their responses illustrate the income effect.




• A change in demand can be caused by a change in income, tastes, a price change in a related product (either because it is a substitute or complement), consumer expectations, and the number of buyers.

• A change in demand is when people buy different amounts of the product at the same prices.

Change in Demand (cont.)

Figure 4.4A Change in DemandFigure 4.4A Change in Demand SectionSection

Main Idea How does the income effect explain the change in quantity demanded that takes place when the price goes down?

Because of the decrease in price, consumers have more real income, leading to an increase in the quantity demanded of a product.


Describe the difference between a change in quantity demanded and a change in demand.

A change in quantity demanded reflects a change in the quantity of the product purchased in response to a change in price. A change in demand reflects a willingness to buy different amounts of the product at the same price.



Key Terms

– demand elasticity

– elastic

– elasticity


ObjectivesAfter studying this section, you will be able to:

– Explain why elasticity is a measure of responsiveness.

– Analyze the elasticity of demand for a product.

– Understand the factors that determine demand elasticity.

– inelastic

– unit elastic

• Cause-and-effect relationships are important in the study of economics.

• An important cause-and-effect relationship in economics is elasticity, a measure of responsiveness that tells us how a dependent variable such as quantity responds to a change in an independent variable such as price.


• For example, we often ask, “if one thing happens, how will it affect something else?”

• Elasticity is also a very general concept that can be applied to income, the quantity of a product supplied by a firm, or to demand.




• Elasticity measures how sensitive consumers are to price changes.

• Demand is elastic when a change in price causes a large change in demand.

• Demand is inelastic when a change in price causes a small change in demand.

• Demand is unit elastic when a change in price causes a proportional change in demand.



• Price times quantity demanded equals total expenditures.

• Changes in expenditures depend on the elasticity of a demand curve—if the change in price and expenditures move in opposite directions on the curve, the demand is elastic, if they move in the same direction, the demand is inelastic; if there is no change in expenditures, demand is unit elastic.

• Understanding the relationship between elasticity and profits can help producers effectively price their products.

The Total Expenditures Test (cont.)

Figure 4.5The Total Expenditures Test for Demand ElasticityFigure 4.5The Total Expenditures Test for Demand Elasticity



• Demand is elastic if the answer to the following questions are “yes”.

– Can the purchase be delayed? Some purchases cannot be delayed, regardless of price changes.

– Are adequate substitutes available? Price changes can cause consumers to substitute on product for a similar product.

– Does the purchase use a large portion of income? Demand elasticity can increase when a product commands a large portion of a consumer’s income.

Determinants of Demand Elasticity (cont.)

Figure 4.6Estimating the Elasticity of DemandFigure 4.6Estimating the Elasticity of Demand

Describe the three determinants of demand elasticity.

Can the purchase be delayed? Are adequate substitutes available? Does the purchase use a large portion of income?


Continued on next slide.

Explain why the demand for insulin is inelastic.

There is a lack of adequate substitutes for insulin.



Section 1: What Is Demand?


• Microeconomics is the area of economic study that deals with individual units in an economy, such as households, business firms, labor unions, and workers.

• You express demand for a product when you are both willing and able to purchase it.

• Demand can be summarized in a demand schedule, which shows the various quantities that would be purchased at all possible prices that might prevail in the market.

• Demand can also be shown graphically as a downward sloping demand curve.

Chapter Summary 2Chapter Summary 2


• The Law of Demand refers to the inverse relationship between price and quantity demanded.

• Individual demand curves for a particular product can be added up to get the market demand curve.

• Marginal utility is the amount of satisfaction an individual receives from consuming one additional unit of a particular good or service.

• Diminishing marginal utility means that with each succeeding unit, satisfaction decreases.



• Demand can change in two ways–a change in quantity demanded or a change in demand.

• A change in quantity demanded means people buy a different quantity of a product if that product’s price changes, appearing as a movement along the demand curve.

• A change in demand means that people have changed their minds about the amount they would buy at each and every price. It is represented as a shift of the demand curve to the right or left.

• A change in consumer incomes, tastes and expectations, and the price of related goods causes a change in demand.



• Related goods include substitutes and complements. A substitute is a product that is interchangeable in use with another product. A complement is a product that is used in conjunction with another product.

• The market demand curve changes whenever consumers enter or leave the market, or whenever an individual’s demand curve changes.



• Elasticity is a general measure of responsiveness that relates changes of a dependent variable such as quantity to changes in an independent variable such as price.

• Demand elasticity relates changes in the quantity demanded to changes in price.

• If a change in price causes a relatively larger change in the quantity demanded, demand is elastic.

• If a change in price causes a relatively smaller change in the quantity demanded, demand is inelastic.



• When demand is elastic, it stretches as price changes. Inelastic demand means that price changes have little impact on quantity demanded.

• Demand is unit elastic if a change in price causes a proportional change in quantity demanded.

• The total expenditures test can be used to estimate demand elasticity.

• Demand elasticity is influenced by the ability to postpone a purchase, by the substitutes available, and by the proportion of income required for the purchase.


___ the desire, ability, and willingness to buy a product

___ a movement along the demand curve showing that a different quantity is purchased in response to a change in price

___ a statement that more will be demanded at lower prices and less at higher prices

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Chapter Assessment 1Chapter Assessment 1Match the letter of the term best described by each statement.

B

F

G

A. demand schedule E. demand curveB. demand F. change in quantity

demandedC. microeconomics G. Law of DemandD. change in demand H. elastic demand

Chapter Assessment 2 Chapter Assessment 2


Match the letter of the term best described by each statement.

___ a listing in a table that shows the quantity demanded at all possible prices in the market at a given time

___ a principle illustrating that consumers demand different amounts at every price, causing the demand curve to shift to the left or the right

___ the field of economics that deals with behavior and decision making by individuals and firms



A

D

C

Chapter Assessment 3 Chapter Assessment 3


Match the letter of the term best described by each statement.

___ a principle illustrating that a relatively small change in price causes a relatively large change in the quantity demanded

___ a graph that shows the quantity demanded at all possible prices in the market at a given time

H

E



Chapter Assessment 7Chapter Assessment 7


Identify the five factors that can cause a change in market demand.

The five factors that can cause a change in market demand are:

– consumer income– consumer tastes– substitutes and complements– change in expectations– number of consumers

Chapter Assessment 8Chapter Assessment 8


Describe the difference between elastic demand and inelastic demand.

When demand is elastic, there is a relatively large change in quantity demanded when the price changes, giving the demand curve a flat slope. The change in quantity demanded is much smaller for inelastic demand, making the slope of the demand curve steeper.


Documents

Chapter 4 Demand Contents CHAPTER INTRODUCTION SECTION 1What Is Demand? SECTION 2Factors Affecting Demand SECTION 3Elasticity of Demand CHAPTER SUMMARY