Chapter 4Demand

Free Enterprise Economy

• In the United States producers make and sell goods at the highest possible price.

• Buyers buy goods at the lowest possible price

• Forces of demand help set these prices

Definition of Demand

• Demand – desire to have some good or service and the ability to pay for it.

• If you cant afford something you have no real demand for it. Even though you may want it.

• Law of demand – the price of a good or service goes up people usually buy less of it.

• So quantity demanded and price have an inverse relationship.

Demand ScheduleShows the law of demand in a chart form.

Demand Curve Shows the laws of demand in a graph form.

Factors That Affect Demand

• Law of Diminishing Marginal Utility – the marginal benefit of using each additional unit of a product during a given period will decline.

• Remember when using the term marginal we are referring to one more of something.

Do you think the 50th hot dog Joey Chestnut ate tasted as good as the first?

• Substitute effect – consumers react to a change in the price of a good or service by buying a substitute product.

• Income effect - change in the amount of a product a person will buy because of the purchasing power of their income has changed.

6 Factors that change Demand(exam)

• Income• Market Size• Consumer Tastes• Consumer Expectations• Substitute Goods• Complementary Goods

• Income – change in income will cause buyer to buy less or more

• Market Size – if the market gets bigger products within that market have a higher demand

• Consumer Tastes – higher the popularity the more demand of that product

• Consumer Expectations – if the buyer expects a change in price that will determine when the buyer buys

• Substitute Goods – if a good can be used in place of another then that good will be purchased if it is cheaper.

• Complementary Goods – an increase in demand for one good, will cause an increase in demand for another

Change in Demand vs. Change in Quantity Demanded

• Change in quantity demanded is just the change in demand due to the change in price.

• On a curve it is the movement from one point to another.

• Change in demand is an actual shift in the demand curve. This would mean the actual market changes affecting demand.

• On a curve this is the entire line moving either to the left or right.

Elasticity of Demand

• Elasticity of demand – a measure of how responsive consumers are to changes in price

• Demand is either elastic or inelastic

Elastic

• Elastic – if demand is elastic then a change in price either up or down will lead to a large change in quantity demanded.

• Examples of these types of products would be???

Inelastic

• Inelastic – change in price leads to a small change in quantity demanded.

• Examples of these products would be???

How can a product become more elastic?

Determinates of Elasticity

• 1. Substitute goods – if there are no substitute goods for that product, the demand is inelastic.

• If the price of your medication goes up what are you going to do?

• If the price of Arizona Ice Tea goes up what are you going to do?

• 2. Proportion of Income – if you spend very little on an item and the price of that item goes up, you will still buy that item at relatively the same rate

• Examples – candy, pencils, q-tips• These examples would be inelastic

• Examples of elastic products in proportion of income is…

• Xbox games, another xbox controller, xbox live.• If the price of these products go up it is a

higher percentage of your income that goes towards buying them, so demand will go down.

• 3. Necessity vs. Luxuries – milk might be a necessity for some, so an increase in price will result in a small change in quantity demanded, so the demand is inelastic since change in quantity demanded is smaller than change in price

• Ice cream on the other hand is a luxury so an increase in price will result in a large change in quantity demanded, so the product is elastic.

Total Revenue

• Total Revenue – the amount of money a company gets from selling its products