DemandDr. T. D. MitchellBonneville High SchoolIdaho Falls, Idaho

What is Demand?

• Concept Review• Microeconomics is the study of the economic behaviors and

decisions of small units, such as individuals and businesses.

• Chapter 4 Key Concept• Demand is the willingness to buy a good or service and the

ability to pay for it.

• Chapter Objective• Explain the Law of Demand and describe the factors that affect

changes in demand.

Economics: concepts and choices, 2011. Holt McDougal

Define demand and outline what the law of demand says.

Explain how to interpret and create demand schedules and describe the role of market research in this process.

Explain how to interpret and create demand curves.

Section 1 Objectives

The Law of Demand• As the price of a good rises, the

demand will decrease. As the price of a good decreases, the demand for the good increases.

Economics: concepts and choices, 2011. Holt McDougal

Economics: concepts and choices, 2011. Holt McDougal

Demand Schedules

Economics: concepts and choices, 2011. Holt McDougal

Demand Curves

Economics: concepts and choices, 2011. Holt McDougal

Reviewing Key Concepts

• Why does the demand curve slope downward?

• How are price and quality demanded related?

• List three products that you are familiar with the approximate price of each. Which of the products, if any, do you have a demand for? Consider the two requirements of demand as you answer the question.

• Does quantity demanded always fall if the price rises? List several goods or services that you think would remain in demand even if the price rose sharply. Why does demand for those items change very little?

Determine a change in quantity demanded.Explain the difference between change in quantitydemanded and change in demand.Determine a change in demand.Analyze what factors can cause change in demand.

Section 2 Objectives

Economics: concepts and choices, 2011. Holt McDougal

What Factors Affect Demand?

• Law of diminishing marginal utility.

• The income effect

• The substitution effect

Economics: concepts and choices, 2011. Holt McDougal

Demand and Supply Example: College Costs

Economics: concepts and choices, 2011. Holt McDougal

Economics: concepts and choices, 2011. Holt McDougal

What Factors Affect Demand?

• Change in quantity demanded• Changes along the curve

• A change in price.

• Change in Demand• Income• Normal goods• Inferior goods

• Market Size

• Consumer Tastes

• Consumer Expectations

• Substitute Goods

• Complementary Goods

Economics: concepts and choices, 2011. Holt McDougal

Critical Thinking

• What features of demand curves is explained by the law of diminishing returns?

• How does the income effect influence consumer behavior when prices rise?

• Why might an increase in income result in a decrease in demand?

• The U. S. government has been used many strategies to reduce smoking. It banned television ads for cigarettes, ran public service messages about the health risks of smoking, and imposed taxes on cigarettes. Which factors that affect demand was the government trying to influence?

Define elasticity of demand.Identify the difference between elastic and inelastic

demand.Define unit elastic.Determine how total revenue is used to identify elasticity.

Section 3 Objectives

What is Elasticity of Demand?

• Elasticity of Demand• Elastic

• Inelastic

• Unit elastic

Economics: concepts and choices, 2011. Holt McDougal

What Determines Elasticity?

SubstituteGoods

and Services

Proportion of Income

Necessities versus Luxuries

Economics: concepts and choices, 2011. Holt McDougal

Estimating Elasticity

Table Salt

Ice Cream

Sports Car Gasoline Insulin Braces

on Teeth

Are there good substitutes? No Yes Yes No No No

What proportion of income does it

use?Small Small Large Small Small Large

Is it a necessity or a luxury? Necessity Luxury Luxury Necessity Necessity Luxury

Conclusion Inelastic Elastic Elastic Inelastic Inelastic Elastic

Economics: concepts and choices, 2011. Holt McDougal

Calculating Elasticity of Demand

Economics: concepts and choices, 2011. Holt McDougal

Total Revenue Test

• Elasticity of demand influences the amount of revenue businesses earn.

• Total Revenue = P X Q

• If total revenue increases after the price of a product drops, then the demand is elastic.

• If total revenue decreases after the price is lowered, demand is considered inelastic.

Economics: concepts and choices, 2011. Holt McDougal

Total Revenue and Price Elasticity

Economics: concepts and choices, 2011. Holt McDougal

Calculating Elasticity of Demand

Economics: concepts and choices, 2011. Holt McDougal

Let’s Practice