Transcript Economics Chapter 4

Economics Chapter 4
Demand
Demand


Demand is the desire, ability
and willingness to buy a
product.
Demand is a microeconomics
concept. Microeconomics is the
area of economics that deals
with behaviors and decisions
made by small units such as
individuals and firms.
Demand Schedule

A demand
schedule is a
listing that
shows the
various
quantities
demand of a
particular
product at all
prices that
might prevail in
a market.
Demand curve for Snuggies
Price
$50
$20
$15
$10
$5
Qty.
Demanded
0
5
10
27
47
Demand Curve

A demand
The demand curve goes
DOWN!
curve is a
graph showing
the quantity
demanded at
each and
every price
that might
prevail in a
market.
Law of Demand

The Law of Demand states that
the quantity demanded of a
good or service varies inversely
with its price.
Market Demand Curve

A market demand curve shows
the quantity demanded by
everyone who is interested in
purchasing the product.
Marginal Utility

Marginal utility is the extra
usefulness or satisfaction that a
person gets from acquiring or
using one more unit of a
product.
Extra
lollipops bring
Erick extra
utility!
Diminishing Marginal Utility

The principle of diminishing
marginal utility states that the
extra satisfaction we get from
using additional quantities of the
product begins to diminish.
Think of eating contests or
block days at KHS!
Section 2
When there is a change in a
people’s willingness and ability
to buy, it typically falls in one of
two categories –
Change in QUANTITY
DEMANDED OR CHANGE IN
DEMAND

Change in Quantity
Demanded

A change in quantity demanded
is a movement ALONG the
demand curve that shows a
change in the quantity of the
product purchased in response
to a change in PRICE.
Income Effect and Substitution
Effect

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The income effect is a change in
quantity demand (movement ON the
line) because a change in price
alters consumers’ real income.
The substitution effect is the change
in quantity demanded because of a
change in the relative price of an
item. (Example – Substituting
substituting a concert ticket for a CD)
Change in Demand


A change in demand occurs
because people are now willing
to buy different amounts of the
product at the same prices.
A CHANGE IN DEMAND WILL
RESULT IN AN ENTIRELY
NEW DEMAND CURVE. (oh
shift!)
What Changes Demand?
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Consumer income
Consumer tastes
Substitutes
Complements (you look nice
today!)
Change in expectations
Change in the number of
consumers
Consumer Income


Changes in consumer income
can cause a change in demand.
Example – you get a raise or
you lose your job
Consumer Tastes
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Consumers
do not always
want the
same thing.
Example –
change in
fashion, style,
the
development
of new
products
More on Changing Tastes…

Changing tastes
shift demand
curves (and can
actually be quite
amusing after a
few years!).
Substitutes


A change in
the price of
related
products can
cause a
change in
demand.
Substitutes
can be used
in place of
other
products.
Complements


Related goods
are known as
complements
because the use
of one increases
the use of the
other.
Example –
peanut butter
and jelly,
hotdogs and
hotdog buns
Elasticity

Elasticity is the
measure of
responsiveness
that tells us how
a dependent
variable such as
quantity
responds to a
change in an
independent
variable such as
price.
Demand Elasticity

Demand Elasticity is the extent
to which a change in price
causes a change in the quantity
demand
Elastic

“Elastic” is
when a
given
change in
price
causes a
relatively
larger
change in
quantity
demanded.
Perfectly Elastic Product
Inelastic Demand

Inelastic means that a given
change in price causes a
relatively smaller change in the
quantity demanded.
Perfectly INELASTIC Demand Curve
Unit Elastic Demand

Unit elastic means that a given
change in price causes a
proportional change in the
quantity demanded.
Selected Elasticities
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Cigarettes
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-0.3 to -0.6 US population
-0.6 to -0.7 US children
Airline travel
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-0.3 First Class US
-0.4 Unrestricted Coach US
-0.9 Discount
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Local newspapers
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Oil -0.4 World
Rice
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-0.1
-0.47 Austria
-0.8 Bangladesh
-0.8 China
-0.25 Japan
-0.55 US
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Beef
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Legal gambling
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-1.6 US
-1.9 US
-0.80 to -1.0 Indiana/Kentucky
Movies
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-0.87 US
-0.2 Teenagers US
-2.0 Adults US
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Medical insurance
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Bus travel
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Insulin
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Ford compact automobile
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Coke
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Mountain Dew
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-0.31 US
-0.20 US
-0.01 daily users US
2.8
3.8
4.4
What determines demand
elasticity?
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Can the purchase be delayed?
Are adequate substitutes
available?
Does the purchase use a large
portion of income?