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Chapter 4Demand

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Chapter Introduction 1

Economics and YouIn 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.

Click the Speaker button to listen to Economics

and You.

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Chapter Objectives

• Describe and illustrate the concept of demand.

• Explain how demand and utility are related.

Section 1: What Is Demand?

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Chapter Objectives

• Explain what causes a change in quantity demanded.

• Describe the factors that could cause a change in demand.

Section 2: Factors Affecting Demand

Click the mouse button or press the Space Bar to display the information.

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Chapter ObjectivesSection 3: Elasticity of Demand


• Explain why elasticity is a measure of responsiveness.

• Analyze the elasticity of demand for a product.

• Understand the factors that determine demand.

End of Chapter Introduction

Click the mouse button to return to the Contents slide.

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Section 1-1

Study GuideMain Idea

Demand is a willingness to buy a product at a particular price.

Click the mouse button or press the Space Bar to display the information. Section 1 begins on page 89 of your textbook.

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Section 1-4

• 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.


Introduction

• 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.

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Section 1-5

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

Introduction (cont.)

• 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.

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Section 1-5


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

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Section 1-5

Did You Know?• In the summer 1999, the American

Automobile Association announced that gasoline prices in Illinois had reached a 20-month high. A spokesperson for the gasoline industry explained that this rise in prices had several causes, including unexpected problems at refinery plants and decisions from oil-producing countries to cut back on production. Regardless of the reasons, it was expected that people living in Illinois would respond to the higher prices by limiting the time they spent driving, thus reducing their demand for gas.

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Section 1-6


• 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.

An Introduction to Demand

• 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.

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Section 1-9

An Introduction to Demand (cont.)

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

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Figure 4.1b

An Introduction to Demand (cont.)

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

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Section 1-Assessment 1

Discussion Question

Think about something you have been wanting to buy. What is its price? At what price would you be willing to buy the item?

Answers will vary, but students should demonstrate an understanding of the concept of demand.

Click the mouse button or press the Space Bar to display the answer.

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Section 1-11


• 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.

The Law of Demand

• 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.

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Discussion Question

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.


Figure 4.2

The Law of Demand (cont.)

Figure 4.2Individual and Market Demand CurvesFigure 4.2Individual and Market Demand Curves

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Section 1-15


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

Demand and Marginal Utility

• 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.

End of Section 1


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Section 2-3

Click the Speaker button to listen to the Cover Story.

ObjectivesAfter studying this section, you will be able to:

– Explain what causes a change in quantity demanded.

– Describe the factors that could cause a change in demand.

Study Guide (cont.)


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Section 2-4

• 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.


Introduction

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Section 2-4

• 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.


Did You Know?

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Section 2-5


• 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.

Change in Quantity Demanded

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

Figure 4.3

Change in Quantity Demanded (cont.)

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

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Section 2-9


• 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

Section 2-10

Change in Demand (cont.)

Figure 4.4A Change in DemandFigure 4.4A Change in Demand

End of Section 2


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Section 3-2

Study Guide (cont.)


Objectives

After 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.

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Section 3-3

Click the Speaker button to listen to the Cover Story.

Section 3 begins on page 101 of your textbook.

Applying Economic ConceptsElasticity of Demand What are you willing to pay to see a popular movie? Read to find out about the elasticity of demand for a product and what factors influence your willingness and ability to pay for a product.

Study Guide (cont.)

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Section 3-4

• 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.


Introduction

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

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Section 3-4

• 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.



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Section 3-4

• The drugs needed to get or stay well can take a large portion of a consumer’s income, especially if that income is fixed. However, the use of generic drugs had offered consumers a cheaper alternative to drugs with brand names. After the founding drug company’s patent on a brand-name drug has expired, another drug company can create a generic drug.


Did You Know?

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Section 3-5


• Elasticity measures how sensitive consumers are to price changes.

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

Demand Elasticity

• 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.

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Discussion Question

What are examples of items for which an increase in price would cause you or your family to reconsider buying them?

Answers will vary but should illustrate an understanding of price elastic demand.


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Section 3-9


• 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.

The Total Expenditures Test

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

Section 3-9

The Total Expenditures Test (cont.)

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

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Discussion Question

What are examples of items for which a drop in price would not encourage you to buy more of an item?


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Section 3-14


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

Determinants of Demand Elasticity

– 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.

Section 3-15

Determinants of Demand Elasticity (cont.)

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

End of Section 3


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Chapter Summary 1

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.

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Chapter Summary 2


Section 1: What Is Demand? (cont.)

• 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.

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Chapter Summary 3


Section 2: Factors Affecting Demand• 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.

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Chapter Summary 4


Section 2: Factors Affecting Demand (cont.)

• 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.

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Chapter Summary 5


Section 3: Elasticity of Demand• 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.

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Chapter Summary 6


Section 3: Elasticity of Demand (cont.)

• 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.

End of Chapter Summary


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___ 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

Click the mouse button or press the Space Bar to display the answer. The Chapter Assessment is on pages 110–111.

Chapter Assessment 1

Identifying Key TermsMatch 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

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Identifying Key Terms (cont.)

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

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Identifying Key Terms (cont.)

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



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Describe a demand schedule and a demand curve. How are they alike?

A demand schedule is a list that shows the quantities demanded for a product at all prices that prevail in the market. A demand curve shows the same data in graphic form.

Reviewing the Facts

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Explain how the principle of diminishing marginal utility is related to the downward-sloping demand curve.

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

Reviewing the Facts (cont.)

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Describe the difference between the income effect and the substitution effect.

The income effect is the change in quantity demanded due to a change in price that alters consumers’ real income. The substitution effect is the change in quantity demanded due to the change in the relative price of the product.


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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


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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.


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Explain how the total expenditures test can be used to determine demand elasticity.

By observing the change in total expenditures when the price changes, you can determine demand elasticity. If expenditures and price move in opposite directions, demand is elastic, If they move in the same direction, demand is inelastic. If expenditures do not change, demand is unit elastic.


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Making Generalizations Do you think the Law of Demand accurately reflects most people’s behavior regarding certain purchases? Explain.

Answers will vary, but most will note that when prices fall, consumers tend to demand more of a product.

Thinking Critically

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Drawing Conclusions What would normally happen to a product’s market demand curve in a growing and prosperous community if consumer tastes, expectations, and the prices of related products remained unchanged?

An increase in the number of consumers would shift the market demand curve to the right.

Thinking Critically (cont.)

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Demand Why do you think a knowledge of demand would be useful to an individual like yourself? To a businessperson like Keith Clinkscales (cover story, page 89)?

Knowledge of demand will help an individual make more informed decisions as a consumer. Business people need such knowledge in order to run their businesses effectively.

Applying Economic Skills

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Applying Economic Skills (cont.)

Demand How do you think the market demand curve for pizza would be affected by (1) an increase in everyone’s pay, (2) a successful pizza advertising campaign, (3) a decrease in the price of hamburgers, and (4) new people moving into the community? Explain your answers.

(1) Demand would increase since more people could afford to buy pizza. (2) Demand would increase as more people became aware of pizza. (3) Demand would decrease since people would buy more hamburgers. (4) Demand would increase as more consumers would buy pizza.

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Demand Elasticity How would you, as a business owner, use your knowledge of demand elasticity to determine the price of your product?

If demand is elastic, lower the price to increase total business revenues. If demand is inelastic, raise the price to increase business revenues.


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How would a successful advertising campaign affect the elasticity of demand for the advertised product? Explain.

It would make demand more inelastic. Some people would be influenced by the advertising and would demand the advertised product rather than buy a substitute.



End of Chapter Assessment


Extra Credit Project

Research and write a report about a product or service for which you believe there will be a high demand in the twenty-first century.

– Explain why you think such a high demand will exist.

– Use the Internet and financial magazines to make predictions about the product or service’s potential growth.

– Create charts and graphs to support your position.

Economics Online

Explore online information about the topics introduced in this chapter.

Click on the Connect button to launch your browser and go to the Economics: Principles and Practices Web site. At this site, you will find interactive activities, current events information, and Web sites correlated with the chapters and units in the textbook. When you finish exploring, exit the browser program to return to this presentation. If you experience difficulty connecting to the Web site, manually launch your Web browser and go to http://epp.glencoe.com/sec/socialstudies/economics/econprinciples2005/index.php

http://www.glencoe.com/sec/socialstudies/economics/econprinciples2005/index.php

BusinessWeek Online

Explore online information about the topics introduced in this chapter.

Click on the Connect button to launch your browser and go to the BusinessWeek Web site. At this site, you will find up-to-date information dealing with all aspects of economics. When you finish exploring, exit the browser program to return to this presentation. If you experience difficulty connecting to the Web site, manually launch your Web browser and go to http://www.businessweek.com

http://www.businessweek.com/

Infobyte 1

Housing Starts The number of housing starts shows the demand for new homes. Economists forecast housing starts by using the current month’s permits as a predictor. Building permits tend to move in tandem with starts on a month-to-month basis. They are also considered to be a leading indicator of the economy in general. Increases in building permits and starts are common during periods following a drop in mortgage rates.

Global Economy 2

Finland is becoming the leader in cell-phone technology. Some 58 percent of all Finns own a cell phone; by the year 2004, the devices will outnumber Finland’s population of five million people.

Trading Gold for Salt Just as gold and salt were necessary trading commodities in some parts of Africa, so are oil and iron ore in some regions of the world today. The Japanese, for example, produce automobiles. They must trade with other countries, however, to obtain the raw materials needed to produce those automobiles.

Global Economy 3

The demand for some products has become more elastic because of technological innovations. VCRs, for example, have allowed consumers to substitute home viewing of movies for going to a movie theater. As a result, demand for tickets to movie theaters has become more elastic.

FYI 3

College Textbooks

Online Shopping

Cybernomics 3.1

Click on a hyperlink to choose that topic.

Companies now sell college textbooks over the Internet. Universities enroll online and provide the required reading lists for their classes. Students can buy new and used textbooks from these lists, saving up to 40 percent on the cost of books. There is an economic incentive for colleges to use these Internet companies: the colleges receive a share in the revenue.

Cybernomics 3.2

More About … Online Shopping E-commerce is finally becoming a popular method of shopping. Although there has been no significant change in the technology, sales over the Internet are increasing due to the confidence level of the consumer. In 1998, more than half of Web users had been online for over a year. More people are comfortable with navigating the Internet and using it for information.

Cybernomics 3.3

Continued on next slide.

Other factors have led to increased usage of the Web for shopping. Safety features have improved, so there is diminishing fear of hackers stealing credit card numbers. Web sites are better, too, and are often interactive, colorful, and informative. Many people find that the Internet allows them to save money because it is convenient for quick price comparisons.

Cybernomics 3.4

There are drawbacks to shopping on the Internet, however. If you know what you want to buy, electronic shopping is almost always faster than traditional shopping. If you don’t know, it can become tedious waiting for images to download. If a site doesn’t take credit cards, you must print out an order sheet and order the items again.

Cybernomics 3.4

For many people, though, the benefits of being able to shop in your pajamas at any time of the day outweigh the drawbacks of online shopping. Have students discuss if they believe online shopping will make traditional shopping obsolete.

Cybernomics 3.4

BW Newsclip 1


McDonald’s opened its first restaurant in Des Plaines, Illinois, in 1955. In 1967 McDonald’s opened its first restaurants in cities in other countries. Today, the company operates nearly 25,000 McDonald’s restaurants in 115 countries on six continents.

Read the BusinessWeek Newsclip article on page 100 of your textbook. Read to find out how McDonald’s must adapt its menu to local tastes.

Holding the Fries “At the Border”

This feature is found on page 100 of your textbook. Click the Speaker button to listen to an audio introduction.


BW Newsclip 2


Understanding Cause and Effect Why did McDonald’s change its menu in Indonesia?

The collapse of the rupiah made the cost of imports such as potatoes quintuple in price. Since people could not afford to pay for potatoes, McDonald’s was forced to find a substitute product, rice, which could be used instead.

Click the mouse button or press the Space Bar to display the answer. This feature is found on page 100 of your textbook.



Synthesizing Information Did McDonald’s introduce rice to its Indonesian menu in response to a change in consumer tastes? Explain your reasoning.

Answers will vary but should reflect knowledge of consumer tastes and substitutes.


BW Newsclip 3


Making Predictions What will happen if the change in the menu increases demand? Explain your answer.


BW Newsclip 4

If the change in menu increases demand, more rice will be produced, stimulating the Indonesian economy. Prices might increase as well.

Economic Concepts 1

Focus Activity 1.1


Focus Activity 1.2

Focus Activity 2.1


Focus Activity 2.2

Focus Activity 3.1


Focus Activity 3.2

NBR 1.1

• Explain the Law of Demand.

• Differentiate between elastic and inelastic demand.

After viewing What Is Demand?, you should be able to:

Economics and YouVideo 5: What Is Demand?

Click the mouse button or press the Space Barto display the information.


NBR 1.2

Side 1Disc 1

Chapter 5Click the Videodisc button anytime throughout this section to play the complete video if you have a videodisc player attached to your computer.

Click the Forward button to view the discussion questions and other related slides.



Click inside the box to play the preview.

NBR 1.3


How does inelastic demand differ from elastic demand?

When demand for a product or service does not change in reaction to price changes, the demand is inelastic.

Side 1Disc 1

Chapter 5


CTS 1


Understanding cause and effect involves considering why an event took place. A cause is the action or situation that produces an event. What happens as a result of a cause is an effect.

This feature is found on page 108 of your textbook.

Understanding Cause and Effect

CTS 2


Learning the Skill


– Identify two or more events or developments.

– Decide whether one event caused the other. Look for “clue words” such as because, led to, brought about, produced, as a result of, so that, since, and therefore.

– Look for logical relationships between events, such as “She overslept, and then she missed her bus.”

Click the mouse button or press the Space Bar to display the information. This feature is found on page 108 of your textbook.

To identify cause-and-effect relationships, follow these steps:

CTS 3


Learning the Skill (cont.)


– Identify the outcomes of events. Remember that some effects have more than one cause, and some causes lead to more than one effect. Also, an effect can become the cause of yet another effect.


CTS 4



Practicing the SkillAnalyze the following statements. Then, identify the causes and effects found in each statement.

1. Historically, prices have shown their greatest fluctuations in times of war.

2. The government also is confronted with scarcity, and must make choices.

Click the mouse button or press the Space Bar to display the answers. This feature is found on page 108 of your textbook.

cause: war; effect: greater price fluctuation

cause: scarcity; effect: government must make choices




3. Because of scarcity, people, businesses, and the government must all make trade-offs in choosing the products they want the most.

4. When a choice is made, an opportunity cost is paid.


cause: scarcity; effect: trade-offs

cause: making a choiceeffect: paying an opportunity cost

CTS 5




5. It is impossible for us to produce all the products we would like to have because the factors of production exist in limited quantities.


cause: limited factors of production effect: impossible to produce all wanted products

CTS 6




6. Because consumers don’t always want the same things, items that are popular now may not sell in the future.

7. If income increases, people can afford to buy more products.


cause: consumers’ changing wantseffect: popular items may not sell in the future

cause: income increases effect: people can buy more products

CTS 7



8. If the price of butter goes up, more people would buy margarine instead.


cause: price of butter goes upeffect: demand for margarine goes up

CTS 8

Profiles in Economics 1.1


Wealth and Influence:Oprah Winfrey

(1954–)


Click the picture to learn more about Oprah Winfrey. Be prepared to answer the questions that appear on the next two slides.


Drawing Conclusions Why is Oprah Winfrey considered one of the most powerful women in America?

You might equate power with influence. Winfrey’s influence stems from the popularity of her television show, her wealth (and what she has done with it), and the programs in which she has participated.



(1954–)


For Further Research Make an annotated time line of Winfrey’s career, highlighting her major achievements.

1971 became newscaster at WVOL1973 became reporter/anchor at WTVF1976 became co-host of People Are Talking1984 became host of AM Chicago1986 The Oprah Winfrey Show went into

national syndication



(1954–)


End of Custom Shows

End of Custom ShowsWARNING! Do Not Remove

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shows and return to the main presentation.

End of Slide Show


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