Transcript Chapter 3 Section 2/3

Chapter 4
Changes in Demand
Demand Shifts
Determinants of Demand – factors that shift
our demand curve – to the right or to the left
 Shift to the right = increase in demand by
the consumers
 Shift to the left = decrease in demand by the
consumers
 5 determinants of demand
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Determinants of Demand
Consumer tastes and preferences
 Market size
 Income
 Prices of related goods
 Consumer expectations
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Substitute Goods
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Goods that can be
used to replace the
purchase of similar
goods when prices rise
Complementary Goods
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Goods that are
commonly used with
other goods.
Example – peanut
butter and jelly
Elasticity of Demand
Chapter 4
Elasticity of Demand
The degree to which changes in a goods
price affect the quantity demanded by
consumers.
 The demand for a product can be either
inelastic or elastic.

Elastic Demand

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Exists when a small
change in a goods
price causes a major,
opposite change in the
quantity demanded.
Not necessary
Available substitute
goods
expensive
Inelastic Demand

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Exists when a change
in a goods price has
little impact on the
quantity demanded.
Necessary good
Few substitute goods
available
inexpensive
Measuring Elasticity
Easy way to measure the elasticity of an
item is through the total revenue test.
 Total Revenue – By measuring the total
revenue of a business before and after
changes in the price, you can determine the
elasticity of demand for that product.

Measuring Elasticity

% change in QD
%change in P
Calculate % change by
taking the difference
of the two numbers
and divide it the
original starting
number!
Example – if QD
changes from
12million to 14million
and Price changes
from 5 dollars to 3
dollars.
2/12 = .167 = .4175
2/5
.4
What does your answer mean?
x>1 = elastic
 x<1= inelastic
 x=1= unit elastic
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