chapter 4 demand section 1 understanding demand. demand the desire to own something, the ability to...
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Chapter 4 Demand
Section 1
Understanding Demand
Demand
• The desire to own something, the ability to pay for it, and the willingness to purchase it.
• Each individual point on a demand curve is a quantity demanded. The whole curve is Demand Price
Quantity
Changes in Quantity Demanded
• We hold all other factors affecting your buying habits constant (Ceteris paribus).
• We then look at how consumers react to changes in prices.
• This is shown graphically by a movement along the curve to a different quantity.
The Law of Demand
• The Law of Demand says that:
– when a good’s price is lower, consumers will buy larger quantities.
– when a good’s price is higher, consumers will buy smaller quantities.
Increase in Quantity Demanded
$3.00
$2.50
$2.00
$1.50
$1.00
$.50
Price
1 2 3 4 5 6
.
.
Decrease in Quantity Demanded
$3.00
$2.50
$2.00
$1.50
$1.00
$.50
Price
1 2 3 4 5 6
..
The Law of Demand
As prices go down…….
Quantity demanded goes
up.
The Law of Demand
Quantity demanded goes
down.As prices go up…….
Law of Demand Explained
• Law of Demand is a result of two behavior patterns:– The substitution effect
– The income effect
The Substitution Effect
• Consumers react to an increase in a good’s price by consuming less quantities of that good and more of other goods.
• Example: As the price of beef goes up, people will purchase more chicken.
The Income Effect
• The change in consumption resulting from a change in purchasing power.
• Higher price decrease our purchasing power, decreasing the quantities that we buy.
• Example: $2.50 a gallon gas compared to $3.50 a gallon gas
Demand Schedules
• A table that lists the quantity of a good consumers will buy at each and every price in the market.
Individual versus Market Demand Schedules
• chart that lists the quantity of a good an individual consumer will buy
• chart that lists the quantity of a good all consumers in a market will buy.
Example of a Demand Schedule
Demand Schedules for PizzaIndividual Demand Schedule Market Demand Schedule
Price per slice
Quantity Demanded per
day
Price per slice
Quantity Demanded per
day
$.50
$1.00
$1.50
$2.00
$2.50
$3.00
5
4
3
2
1
0
$.50
$1.00
$1.50
$2.00
$2.50
$3.00
300
250
200
150
100
50
Example of a Demand Schedule
Demand Schedules for PizzaIndividual Demand Schedule Market Demand Schedule
Price per slice
Quantity Demanded per
day
Price per slice
Quantity Demanded per
day
$.50
$1.00
$1.50
$2.00
$2.50
$3.00
5
4
3
2
1
0
$.50
$1.00
$1.50
$2.00
$2.50
$3.00
300
250
200
150
100
50
Demand Curves
• A graphical representation of the demand schedule.
• Each price is plotted on the vertical axis and each quantity is plotted on the horizontal axis.
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
0 1 2 3 4 5
Quantity
Pri
ce
Individual Demand Curve for Pizza
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
0 50 100 150 200 250 300
Quantity
Pri
ce
Market Demand Curve for Pizza
Facts about a Demand Curve• Shows the relationship between the
price of the good and the quantity a person will purchase of that good.
• The curve slopes downward to the right. (Inverse relationship)
• Assumes other factors remain constant. (quality of the good, consumer incomes, prices of other goods)
Section 1 Assignment
• Ch. 4 Demand Section 1 Questions– Key Concept Questions pp. 79, 80, 81, 82, and 83– Section Review Question p. 83 #6
Chapter 4 Demand
Section 2
Shifts of the Demand Curve
Changes in Demand
• We allow factors other than price to change (no Ceteris paribus).
• Consumers buy a different quantity than before at all prices.
• This is shown graphically by a shift of the demand curve to a new position.
Increase in Demand
$3.00
$2.50
$2.00
$1.50
$1.00
$.50
Price
1 2 3 4 5 6
. .
Decrease in Demand
$3.00
$2.50
$2.00
$1.50
$1.00
$.50
Price
1 2 3 4 5 6
..
What Causes a Shift?
• When a factor other than price changes, the demand curve will shift.
• Changes in these “non-price determinants” of demand create a new level of demand at all prices.
“TIMER”
• Taste of consumers• Income of consumers• Market size (number of consumers)• Expectations of future prices• Related good prices
Taste and Preference of Consumers (Direct for all goods)
As consumer taste increases…….. Demand for a good
will increase.
Taste and Preference of Consumers (Direct for all goods)
As consumer taste decreases…….. Demand for a good
will decrease.
Income of Consumers (Direct for normal goods)
As consumer income increases…….. Demand for
normal goods will increase.
Income of Consumers (Direct for normal goods)
As consumer income decreases…….. Demand for
normal goods will decrease.
Income of Consumers (Indirect for inferior)
As consumer income increases……..
Demand for inferior goods will decrease.
Income of Consumers (Indirect for inferior)
As consumer income decreases……..
Demand for inferior goods will increase.
Market size (Direct)
As market size increases…….. Demand for the
good will increase.
Market size (Direct)
As market size decreases…….. Demand for the
good will decrease.
Expectations of Consumers (Direct)
If consumers expect prices to increase…….. Demand for the
good will increase now.
Expectations of Consumers (Direct)
If consumers expect prices to decrease……..
Demand for the good will decrease.
Related Good Prices (Direct for substitutes)
Butter/Margarine
If the price of a substitute good increases……..
Demand for the original good will increase.
If the price of a substitute good decreases……..
Demand for the original good will decrease.
Related Good Prices (Direct for substitutes)
Butter/Margarine
Related Good Prices (Indirect for complements)
Hot Dogs/Buns
If the price of complementary
good increases……..
Demand for the original good will decrease.
If the price of complementary
good decreases……..
Demand for the original good will increase.
Related Good Prices (Indirect for complements)
Hot Dogs/Buns
Chapter 4 Demand
Section 3
Elasticity of Demand
Section 3 Objectives
• Explain how to calculate elasticity of demand.
• Identify factors that affect elasticity.
Elasticity of Demand
• A measure of how drastically buyers will increase or decrease their quantity demanded of a good when the price rises or falls.
Inelastic Demand
• Consumers are not very sensitive to price changes and do not adjust their quantities demanded by very much.
• Examples: Medicine, gasoline, cigarettes, electricity.
Elastic Demand
• Consumers are highly sensitive to price changes and adjust their quantities demanded by a large amount.
Calculating Demand Elasticity
Original – New
OriginalX 100Percentage Change =
Elasticity of Demand
$3.00
$2.50
$2.00
$1.50
$1.00
$.50
Price
1 2 3 4 5 6
.
.
Calculating Demand Elasticity
• Elasticity is determined using the following formula:
Elasticity = Percentage change in quantity demanded
Percentage change in price
Values of Elasticity
• If elasticity of demand is < 1, demand is inelastic.
• If elasticity of demand is > 1, demand is elastic.
Factors Affecting Elasticity
• Availability of substitutes goods.
• % of budget spent on good.
• Perception of good as a luxury or necessity.