7758 ch04 100-129 12/5/03 5:33 pm page 100 4 demand 12/5/03 5:33 pm page 100 objectives explain the...

Why are newspapers sold invending machines that allow

you to take more than onecopy?

How much do you eatwhen you can eat all youwant?

What cures spring fever?

What economic princi-ple is behind thesaying, “Been there,done that”?

Why do higher cigarettetaxes cut smoking byteenagers more than by

other age groups?

C o n s i d e r

P O I N T Y O U R B R O W S E R

econxtra.swlearning.com

Demand

The Demand Curve 4.1Elasticity of Demand 4.2Changes in Demand 4.3

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ObjectivesExplain the law ofdemand.

Interpret a demandschedule and ademand curve.

Key Terms demand

law of demand

marginal utility

law of diminishingmarginal utility

demand curve

quantity demanded

individual demand

market demand

OverviewThe primary building blocks of a marketeconomy are demand and supply.Consumers demand goods and services thatmaximize their utility, and producers supplygoods and services that maximize theirprofit. As a consumer in the United States’market economy, you demand all kinds ofgoods and services. You buy less of a goodwhen its price increases and more of itwhen the price decreases. This sectiondraws on your experience as a consumer tohelp you understand demand, particularlythe demand curve.

The Demand Curve4.1

Demand Rising Slowly For Digital HDTV

Officials at the most recent National Association of Broadcasters Exposition (NAB) saythat sales of digital, high-definition television (HDTV) sets are slowly gaining momen-tum. Little by little, consumers are learning about the new technology’s clearer pictureand better sound quality versus standard analog TV. However, there are a few obsta-cles to demand for this product. One obstacle is the limited availability of digital pro-gramming for HDTVs. Another is the relatively high cost. Although a small number ofconsumers will buy the newest technologies regardless of price, most people havelearned that if you wait a bit for new electronics products, the prices will come down.For example, big-screen TVs started out selling at $4,000 to $5,000, and then a yearlater sold for less than half that price. A 27-inch set that cost $700 to $800 five yearsago sells for $180 today. Because they know the law of demand, consumer electron-ics marketers plan their strategies to sell to the early adopters at a higher price, andthen begin lowering the price to increase the quantity demanded.

Think About It

Why do most consumers wait to purchase new consumer electronics products suchas HDTVs?

[ In the News ]

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Law of DemandHow many 12-inch pizzas will peoplebuy each week if the price is $12? Whatif the price is $9? What if it’s $6? Theanswers reveal the relationship betweenthe price of pizza and the quantity pur-chased. Such a relationship is called thedemand for pizza.

Demand indicates how much of aproduct consumers are both willing andable to buy at each possible price duringa given period, other things remainingconstant. Because demand pertains to aspecific period—a day, a week, amonth—you should think of demand asthe desired rate of purchase per time period ateach possible price. Also, notice theemphasis on willing and able. You may beable to buy a rock concert ticket for $30because you can afford one. However

you may not be willing to buy one if theperformers do not interest you.

This relation between the price andthe quantity demanded is an economiclaw. The law of demand says thatquantity demanded varies inversely withprice, other things constant. Thus, thehigher the price, the smaller the quan-tity demanded. The lower the price, thegreater the quantity demanded.

Demand, Wants, and Needs Consumer demand and consumer wantsare not the same thing. You know thatwants are unlimited. You may want anew Mercedes-Benz SL500 roadster con-vertible, but the $95,000 price tag islikely beyond your budget. (The quantityyou demand at that price is zero.) Nor isdemand the same as need. You mayhave outgrown your winter coat and soneed a new one. But if the price is $200,you may decide your old coat will do fornow. If the price drops enough—say, to$100—then you become both willingand able to buy a new coat.

Substitution Effect What explains the law of demand? Why,for example, is more of a productdemanded when the price falls? Theexplanation begins with unlimited wantsmeeting scarce resources. Many goodsand services are capable of satisfyingyour particular wants. For example, youcan satisfy your hunger by eating pizza,tacos, burgers, chicken, sandwiches,salads, or hundreds of other items.Similarly, you can satisfy your desire forwarmth in the winter with warm cloth-ing, a home-heating system, a trip toHawaii, or in other ways.

Some ways of satisfying your wantswill be more appealing than others. Atrip to Hawaii is more fun than wearingwarm clothing. In a world withoutscarcity, everything would be free, soyou would always choose the mostattractive alternative. Scarcity, however,is a reality, and the degree of scarcity ofone good relative to another helpsdetermine each good’s relative price.

Notice that the definition of demandincludes the other-things-constantassumption. (A Latin phrase you may

102 CHAPTER 4 Demand

demandA relation showingthe quantities of agood that consumersare willing and ableto buy at variousprices per period,other things constant

law of demandThe quantity of agood demanded perperiod relatesinversely to its price,other things constant

The law of demand applies even to personal choices,such as whether or not to own a pet. For example, afterNew York City passed an anti-dog-litter law, owners hadto follow their dogs around the city with scoopers andplastic bags. The law raised the cost, or price, of owninga dog. What do you think happened to the quantity ofdogs demanded as a result of this law, and why?

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hear for “other things constant” is ceterisparibus.) Among the “other things”assumed to remain constant are theprices of other goods. For example, ifthe price of pizza declines while otherprices remain constant, pizza becomesrelatively cheaper. Consumers are morewilling to purchase pizza when its rela-tive price falls. People tend to substitutepizza for other goods. This is called thesubstitution effect of a price change. On theother hand, an increase in the price ofpizza, other things constant, causes con-sumers to substitute other goods for thenow higher-priced pizza, thus reducingtheir quantity demanded.

Remember that the change in the relativeprice—the price of one good relative to the pricesof other goods—causes the substitution effect. Ifall prices changed by the same percent-age, there would be no change in rela-tive prices and no substitution effect.

Income Effect A fall in the price of a product increasesthe quantity demanded for a secondreason. What if you take home $36 aweek from a Saturday job, and yourmoney income is $36 per week. Yourmoney income is simply the number ofdollars you receive per period, in thiscase $36 per week. Suppose you spendall your income on pizza, buying four aweek at $9 each. What if the pricedrops to $6? At that price you can nowafford six pizzas a week.

Your money income remains at $36per week, but the decrease in the pricehas increased your real income—that is,your income measured in terms of howmany goods and services it can buy.The price reduction, other things con-stant, increases the purchasing power ofyour income, thereby increasing yourability to buy pizza and, indirectly, othergoods. The quantity of pizza youdemand likely will increase because ofthis income effect of a price change. You maynot increase your quantity demanded tosix pizzas, but you can now afford six.If you purchase five pizzas a weekwhen the price drops to $6, you wouldhave $6 left to buy other goods.

Thus, the income effect of a lowerprice increases your real income and

thereby increases your ability to purchasepizza and other goods. Because of theincome effect of a price decrease, otherthings constant, consumers typicallyincrease their quantity demanded asthe price decreases. Conversely, anincrease in the price of pizza, otherthings constant, reduces real income,thereby reducing the ability to pur-chase pizza. Because of the income effectof a price increase, consumers typicallyreduce their quantity demanded as theprice increases.

Diminishing MarginalUtilityAfter a long day of school, studies, andsports, you are starved, and so you visita local pizzeria. That first slice tastesgreat and puts a serious dent in yourhunger. The second is not quite as good as the first. A third is just fair. Youdon’t even consider a fourth slice. Thesatisfaction you derive from an addi-tional unit of a product is called yourmarginal utility. For example, theadditional satisfaction you get from asecond slice of pizza is your marginalutility of that slice.

The marginal utility you derive fromeach additional slice of pizza declinesas your consumption increases. Yourexperience with pizza reflects the law of diminishing marginal utility.This law states that the more of a goodan individual consumes per period, otherthings constant, the smaller the marginalutility of each additional unit consumed.

Diminishing marginal utility is afeature of all consumption. A secondfoot-long submarine sandwich at onemeal would probably yield little or nomarginal utility. You might still enjoy a second movie on Friday night, but athird one is probably too much to take.

Consumers make purchases toincrease their satisfaction, or utility. Indeciding what to buy, people makerough estimates about the marginalutility, or marginal benefit, they expectfrom the good or service. Based on thismarginal benefit, people then decidehow much they are willing and able topay. Because of diminishing marginal

marginalutilityThe change in totalutility resulting in aone-unit change inconsumption of agood

law ofdiminishingmarginalutilityThe more of a gooda person consumesper period, thesmaller the increasein total utility fromconsuming onemore unit, otherthings constant

Lesson 4.1 The Demand Curve 103

Why do consumersbuy less of an itemwhen its price rises?


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utility, you would not be willing to payas much for a second slice of pizza asfor the first. This is why it takes adecrease in price for you to increaseyour quantity demanded.

Suppose pizza sells for $2 a slice.How many slices will you buy? You will

increase consumption as long as themarginal benefit you expect fromanother slice exceeds the price. Youstop buying more when your expectedmarginal benefit is less than the price.Simply put, you aren’t willing to pay $2for something that’s worth less to you.

What if the price of pizza drops from$2 to $1 a slice? You buy more if themarginal benefit of another sliceexceeds $1. The law of diminishing mar-ginal utility helps explain why people buy morewhen the price decreases.

Diminishing marginal utility has wideapplications. Restaurants depend on thelaw of diminishing marginal utility whenthey offer all-you-can-eat specials—andno doggie bags. The deal is all you caneat now, not all you can eat now andfor as long as the doggie bag holds out.

After a long winter, that first warmday of spring is something special andis the cause of “spring fever.” The fever is cured by many warm days likethe first. By the time August rollsaround, most people get much less mar-ginal utility from yet another warm day.


How does the law of diminishing marginal utility apply to pizza consumption?

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For an example of pricing that uses the law ofdiminishing marginal utility, visit the UniversalStudios Orlando web site. Access this web sitethrough econxtra.swlearning.com. Click on“Tickets and Vacations.” Which offer or offersdemonstrate the theme park’s understanding ofthe law of diminishing marginal utility? Explainyour answer.


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For some goods, the drop in marginalutility after the first unit is dramatic. Forexample, a second copy of the samedaily newspaper would likely provideyou with no marginal utility. In fact, thedesign of newspaper vending machinesrelies on the fact that you will not wantto take more than one.

More generally, the expressions“Been there, done that” and “Same old,same old” convey the idea that, formany activities, things start to get oldafter the first time. Your marginalutility, or marginal benefit, declines.

DemandSchedule andDemand CurveDemand can be expressed as a demandschedule and as a demand curve. Panel (a)of Figure 4.1 shows a hypotheticaldemand schedule for pizza. When you

describe demand, you must specify theunits being measured and the periodconsidered. In this example, the price isfor a 12-inch regular pizza and theperiod is a week. The schedule listspossible prices, along with the quantitydemanded at each price.

At a price of $15, for example, consumers demand 8 million pizzas per week. As you can see, the lowerthe price the greater the quantitydemanded, other things constant. If the


In small groups, brainstorm a listof products that most members ofthe group consume in a typicalweek. Then, working on your own,apply the law of diminishing mar-ginal utility to each item. Howmany units of each item would youconsume before the marginalbenefit is less than the price ofeach unit? Compare your answerswith those of other groupmembers.

TEAM WORK

Explain the law of demand in yourown words.

C H E C K P O I N T

Market demand curve Dshows the quantity of pizzademanded, at variousprices, by all consumers.

econxtra.swlearning.comFigure 4.1Demand Schedule and Demand Curve for Pizza

$15

D

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Millions of pizzas per week

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izza

(a) Demand schedule

QuantityDemanded per Week (millions)

PriceperPizza

$1512963

abcde

814202632

(b) Demand curve

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price drops as low as $3, consumersdemand 32 million per week. As theprice falls, consumers substitute pizzafor other goods. As the price falls, thereal income of consumers increases,causing them to increase the quantity ofpizza they demand. As pizza consump-tion increases, the marginal utility ofpizza declines, so quantity demandedwill increase only if the price falls.

The demand schedule in panel (a) ofFigure 4.1 appears as a demand curvein panel (b), with price on the verticalaxis and the quantity demanded perweek on the horizontal axis. Each com-bination of price and quantity listed inthe demand schedule in the left panelbecomes a point in the right panel.Point , for example, indicates that ifthe price is $15, consumers demand 8million pizzas per week. These pointsconnect to form the demand curve for

pizza, labeled D. Note that somedemand curves are straight lines andsome are curved lines, but all of themare called demand curves.

The demand curve slopes downward,reflecting the law of demand—that is,price and quantity demanded areinversely, or negatively, related, otherthings constant. Several things areassumed to remain constant along thedemand curve, including the prices ofother goods. Thus, along the demandcurve for pizza, the price of pizzachanges relative to the prices of other goods.The demand curve shows the effect of achange in the relative price of pizza—thatis, relative to other prices, which do notchange.

Demand Versus QuantityDemandedBe sure to distinguish between demandand quantity demanded. An individualpoint on the demand curve shows thequantity demanded at a particularprice. For example, point b on thedemand curve in Figure 4.1 indicatesthat 14 million pizzas are demandedwhen the price is $12. The demand forpizza is not a specific quantity, but theentire relation between price and quantity

a


demand curveA curve or lineshowing the quanti-ties of a particulargood demanded atvarious prices duringa given time period,other things constant

quantitydemandedThe amountdemanded at a par-ticular price

THE WALL STREET JOURNALReading It Right What’s the relevance of the fol-lowing statement from The Wall Street Journal: “Few things are asgratifying to American consumers as finding a good bargain. . . .The psychology of this is simple: It feels good to pay less.”

Demand Can Be Deadly Misjudgingdemand can have an enormous effect on acompany’s sales or profits, but it can havemore devastating, even tragic, effects as well.On a quiet Sunday morning in Bangladesh, atleast 30 women and children were killed andhundreds more injured in a stampede, asthousands of poor people scrambled forclothes being handed out as charity. Theclothes were being distributed by a business-man in conjunction with the Islamic Eid Al-Fitrfestival. The Associated Press reported thatthe stampede happened outside an aban-doned jute mill in a village in northernBangladesh. Those in charge woefully under-

estimated the response to the news of thegiveaway—they failed to predict what thedemand for the clothing would be at a price of$0. Consequently, they were totally unpre-pared for the more than 10,000 people whoshowed up to get the free clothes. Two menin charge of distributing the clothes werearrested for possible negligence.

Think CriticallyAnalyze this situation. Do you think the twomen, attempting to be charitable, should bepunished for underestimating the demand and not preparing for the crowds? Why orwhy not?

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demanded. This relation is representedby the demand schedule or the demandcurve. To recap, quantity demanded isrepresented by one point on thedemand curve or schedule, whereasdemand is represented by the entiredemand curve or schedule.

Individual Demand andMarket DemandIt is useful to distinguish between individual demand, which is thedemand of an individual consumer, andmarket demand, which sums the indi-vidual demands of all consumers in themarket. The market demand curve shows thetotal quantity demanded per period by all con-sumers at various prices.

In most markets, there are manyconsumers, sometimes millions. To giveyou some feel for how individualdemand curves sum to the marketdemand curve, assume that there areonly three consumers in the market forpizza: Hector, Brianna, and Chris.

Figure 4.2 shows how three individualdemand curves are added together toget the market demand curve. Whenthe price of pizzas is $8, for example,Hector demands two pizzas a week,Brianna demands one, and Chrisdemands none. The market demand ata price of $8 is therefore three pizzas.At a price of $4, Hector demands threeper week, Brianna two, and Chris one,for a market demand of six. Panel (d)sums across each individual’s demandcurve to arrive at the market demandcurve.

The market demand curve is simply the sumof the individual demand curves for all con-sumers in the market. Unless otherwisenoted, this book will focus on marketdemand.

individualdemandThe demand of anindividual consumer

marketdemandThe sum of the indi-vidual demands of allconsumers in themarket


Figure 4.2Role of Price in Market System: Market Demand for Pizzas

Pizzasper week)

(a) Hector

10 2 3

4

8

$12

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(b) Brianna

10 2

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$12

(c) Chris

10

4

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$12

(d) Market demand for pizzas

10 3 6

4

8

$12

dCdH dB

dH + dB + dC = D

Prices send signals and provide incentives to buyers. Whendemand changes, market prices adjust, affecting buyers’incentives. For example, at a price of $8 per pizza, Hectordemands 2 per week, Brianna demands 1, and Chris demandsnone. Market demand at a price of $8 is 2 � 1 � 0 � 3 pizzasper week. At a lower price of $4, Hector demands 3, Briannademands 2, and Chris demands 1. Market demand at a priceof $4 is 6 pizzas. The market demand curve D is the horizontalsum of individual demand curves dH , dB , and dC.

Mai

n Idea

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n Idea

What do a demand schedule anddemand curve show?

C H E C K P O I N T

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Key Concepts1. Many students would like to own an expensive sports car. Is this considered

demand? Why or why not?

2. Why would demand for one fast food restaurant’s hamburgers grow if the price of the hamburgers at the fast food restaurant across the street increasedby $0.50?

3. How would the income effect of a price change be demonstrated by a $10reduction in the price of tickets to a concert that resulted in a sell-out crowd?

4. Joe is willing to pay $1.50 for one taco after basketball practice but choosesnot to purchase a second taco for the same price. How does this illustrate thelaw of diminishing marginal utility?

5. On Saturday nights, lots of people attend movies at the State Theater. Thenumber who attend depends at least in part on the price of tickets. At thecurrent price of $8 per ticket, an average of 285 tickets are sold each Saturdaynight. What is the demand and what is the quantity demanded in this example?

6. What is the market demand per day for lunches in the cafeteria at your school?

Graphing Exercise7. The owners of a local shoe store surveyed their customers to determine how

many pairs of running shoes they would buy each month at different prices.The results of the survey appear in the demand schedule below. Use thesedata to construct a demand curve for running shoes. Explain how your graphdemonstrates the law of diminishing marginal utility.

Think Critically8. Marketing Nancy is the sales manager of the shoe store. The owner has told

her that she must set a price that allows the store to sell at least 50 pairs ofrunning shoes next month. What price should she set? If another local storehas a big sale and lowers its price for running shoes by 25 percent, willNancy’s employer reach the sales goal? Why or why not?

9. History When television sets first became available to consumers in the late1940s, many people wanted one. Still, very few sets were sold at first. Explainwhy people’s desire to own televisions did not result in a great demand for thisproduct.

Assessment4.1

Demand for Running Shoes

Price Quantity Demanded

$70 40

$60 50

$50 60

$40 70

$30 80



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ObjectivesCompute the elasticityof demand, andexplain its relevance.

Discuss the factorsthat influence elastic-ity of demand.

Key Terms elasticity of demand

total revenue

OverviewKnowing the law of demand is useful, but ademand curve can provide even more infor-mation. It can tell how sensitive quantitydemanded is to a change in price. Forexample, a fast-food restaurant would like toknow what will happen to its total revenue ifit introduces a dollar menu. The law ofdemand indicates that a lower price increasesquantity demanded, but by how much? Afirm’s success or failure depends on howmuch it knows about the demand for itsproduct. This section measures how sensitivequantity demanded is to a change in price.

Elasticity of Demand4.2

109

Super Bowl of Avocados

Super Bowl Sunday is the biggest single day of avocado consumption in the UnitedStates, thanks to the serving up of bowls and bowls of the zesty green dip known asguacamole. More than 40 million pounds of avocados are smashed, mashed,whipped, and eaten with blue and white corn chips, flour tortillas, tacos, and chunksof bread during Super Bowl festivities, according to the California AvocadoCommission. California growers sold a record 400 million pounds of avocados for avery profitable $398 million (nearly a dollar a pound) in the 2001–2002 season.California is home to 86 percent of the nation’s crop, and 46 percent of the state’savocados come from San Diego County. The more than 6,000 avocado growers see ahuge potential for growth in the market. Until fairly recently, the avocado, originallyfrom southern Mexico, was either unknown or considered odd and exotic in most ofthe United States. But the expanding popularity of California cuisine and the spreadof Hispanic populations over the years have opened a host of new markets foravocado growers. Today only 18 percent of the population, mainly in the Southwest,eat nearly half of all avocados sold in the United States. Avocados are consumed innearly 45 percent of U.S. homes, but in the West the portion is 80 percent.

Think About It

What if in the following season the growers reduce the price of avocados fromapproximately $1 a pound to 90 cents a pound? Based on the expanding market pre-dictions, would the total revenue probably be less than $398 million, remain thesame, or be more than $398 million? Explain your answer.

[ In the News ]

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Computing theElasticity ofDemandFigure 4.3 shows the downward slopingdemand curve for pizza developedearlier. As you can see, if the price ofpizzas falls from $12 to $9, the quantitydemanded increases from 14 million to20 million. Is such a response in quantitydemanded a little or a lot? The demandelasticity measures consumer responsive-ness to the price change. Elasticity isanother word for responsiveness.Specifically, the elasticity of demandmeasures the percentage change inquantity demanded divided by the percentage change in price, or

Elasticity of demand �

What’s the demand elasticity whenthe price of pizza falls from $12 to $9?The percentage increase in quantitydemanded is the change in quantitydemanded, 6 million, divided by 14 million. So, quantity demanded

increases by 43 percent. The percentagechange in price is the price change of$3 divided by $12, which is 25 percent.

The elasticity of demand is the per-centage increase in quantity demanded,43 percent, divided by the percentagedecrease in price, 25 percent, whichequals 1.7.

Elasticity ValuesDoes an elasticity of 1.7 indicate thatconsumers are sensitive to the pricechange? To offer some perspective,economists sort elasticity into threegeneral categories. If the percentagechange in quantity demanded exceedsthe percentage change in price, theresulting elasticity exceeds 1.0. Such ademand is said to be elastic, meaningthat a percentage change in price willresult in a larger percentage change inthe quantity demanded. Thus quantitydemanded is considered relativelyresponsive to a change in price. Thedemand for pizza is elastic when theprice falls from $12 to $9.

If the percentage change in quantitydemanded just equals the percentagechange in price, the resulting elasticity is1.0, and this demand is called unit-elastic.Finally, if the percentage change inquantity demanded is less than the per-centage change in price, the resulting

Percentage change inquantity demanded

Percentagechange in price


elasticity ofdemandMeasures howresponsive quantitydemanded is to aprice change; thepercentage changein quantitydemanded dividedby the percentagechange in price

If the price falls from $12 to $9, the quantity of pizzademanded increases from 14 million to 20 million perweek.

econxtra.swlearning.comFigure 4.3The Demand for Pizza

D

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$15


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izza

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elasticity lies between 0 and 1.0, andthis demand is said to be inelastic.

In summary, demand is elastic if greaterthan 1.0, unit elastic if equal to 1.0, and inelas-tic if between 0 and 1.0. Also, the measureof the price elasticity of demand usuallyis different at different points on ademand curve. Demand is almostalways more elastic at higher prices andless elastic at lower prices. This is par-ticularly true when the demand curve isa straight line that slopes down fromleft to right.

Elasticity expresses a relationshipbetween two amounts: the percentagechange in price and the resulting per-centage change in quantity demanded.Because the focus is on the percentagechange, you need not be concernedwith how output or price is measured.For example, suppose the good inquestion is apples. It makes no differ-ence in the elasticity formula whetheryou measure apples in pounds, bushels,or even tons. All that matters is the per-centage change in quantity demanded.Nor does it matter whether you measureprice in U.S. dollars, Mexican pesos,French francs, or Zambian kwacha. Allthat matters is the percentage change inprice.

Elasticity and TotalRevenueKnowledge of elasticity is especiallyvaluable to producers, because it indi-cates the effect a price change will haveon how much consumers spend on thisproduct. Total revenue is price multi-plied by the quantity demanded at thatprice. What happens to total revenuewhen price decreases? A lower pricemeans producers are paid less for eachunit sold, which tends to decrease totalrevenue. However, according to the lawof demand, a lower price increasesquantity demanded, which tends toincrease total revenue.

The impact of a lower price on totalrevenue can be estimated using theproduct’s price elasticity of demand.When the elasticity is greater than 1.0,or elastic, reducing the price by 5percent will cause sales to grow bymore than 5 percent. Thus the total

revenue will increase. When the elastic-ity is equal to 1.0, or unit elastic, reduc-ing the price by 5 percent will causesales to grow by 5 percent. In this

total revenuePrice multiplied bythe quantitydemanded at thatprice

Lesson 4.2 Elasticity of Demand 111

We Ate All the Big Fish

“Fisherman used to go out and catch these phenomenallybig fish,” said a fisheries biologist in Nova Scotia. “Butthey cannot find them anymore. They’re not there. We atethem.” He adds that about 90 percent of big fish—such asgiant tuna, swordfish, and Chilean sea bass—are gonefrom the world’s oceans. In fact, at a UN summit meetingin 2002, 192 nations signed a declaration to try to restorefish to healthy levels by 2015. Chilean sea bass is a goodexample of what happened to the big fish. Eight to tenyears ago, very few people had heard of this fish. Therewasn’t much demand, and it was selling at $3 or $4 apound. After several years of word-of-mouth and magazineadvertising, and strong recommendations from food criticsand TV chefs, Chilean sea bass became “the hot newfish.” All the publicity increased the demand, and the lowprice increased the quantity demanded. Suddenly, Chileansea bass was featured on thousands of restaurant menusand sold in every supermarket. Fishermen couldn’t catchenough sea bass to keep up with the rising demand,though they tried. They were overfishing and not giving thefish enough time to replenish their populations. Today,Chilean sea bass sells for $18 to $20 a pound, and is onthe menu of only upscale, “trendy” restaurants. The onceinexpensive, great-tasting fish is now gone from mostsupermarkets. At $20 per pound, the quantity demandedhas decreased considerably. Unfortunately, the speciesalso is nearly gone from our oceans.

Think Critically

Suppose that at a price of $3 a pound, the quantity ofChilean sea bass demanded is 500,000 pounds, and at aprice of $18 a pound, the quantity demanded is 100,000pounds. At these prices and quantities, is the demandelastic, unit elastic, or inelastic?

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What does the elasticity ofdemand measure?

C H E C K P O I N T

case the total revenue will remainunchanged. When the elasticity is lessthan 1.0, or inelastic, reducing the priceby 5 percent will cause the sales togrow, but by less than 5 percent. So,total revenue will fall.

Knowing a product’s elasticity canhelp businesses when they set theirprices. If demand is inelastic, producerswill never willingly cut the price sincedoing so would reduce total revenue.The percentage increase in quantitydemanded would be less than the per-centage decrease in price. Why cut theprice if selling more reduces totalrevenue?

Determinantsof DemandElasticitySo far you have explored the linkbetween elasticity of demand and what happens to total revenue whenthe price changes. However, you havenot yet considered why elasticity differs for different goods. Several char-acteristics influence the elasticity ofdemand.

Availability of SubstitutesAs noted earlier, your individual wantscan be satisfied in a variety of ways. Arise in the price of pizza makes otherfoods relatively cheaper. If close substi-tutes are available, an increase in theprice of pizza will prompt some con-sumers to switch to substitutes. But ifnothing else satisfies like pizza, thequantity of pizza demanded will notdecline as much. The greater the avail-ability of substitutes for a good and the moresimilar the substitutes are to the good in ques-tion, the greater that good’s elasticity ofdemand.

The number and similarity of substi-tutes depend on the definition of thegood. The more broadly a good is defined, thefewer substitutes there are and the less elastic thedemand. For example, everyone needssome sort of shoes, so the demand forshoes as a general category of productis quite inelastic. If the price of allshoes goes up 20 percent, most peoplewill still buy shoes. If you consider oneparticular brand of shoes, however, thedemand is sure to be elastic becausethere are many other brands of shoesyou could buy instead. For example, ifonly one shoe manufacturer raises theprice of its shoes by 20 percent, mostconsumers will substitute a differentbrand of shoes that have not increasedin price.

Certain goods—many prescriptiondrugs, for instance—have no close sub-stitutes. The demand for such goodstends to be less elastic than for goodswith close substitutes, such as Bayeraspirin. Much advertising is aimed atestablishing in the consumer’s mind theuniqueness of a particular product—aneffort to convince consumers “to acceptno substitutes.”


Do you think demand for sun-glasses is elastic or inelastic?Identify the determinant ofdemand that supports youranswer.

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Share of Consumer’sBudget Spent on theGoodRecall that a higher price reduces quan-tity demanded in part because a higherprice reduces the real spending powerof consumer income. A demand curvereflects both the willingness and ability topurchase a good at alternative prices.Because spending on some goods rep-resents a large share of the consumer’sbudget, a change in the price of such agood has a substantial impact on theamount consumers are able to purchase.

An increase in the price of housing,for example, reduces consumers’ abilityto purchase housing. The income effectof a higher price reduces the quantitydemanded. In contrast, the incomeeffect of an increase in the price of, say,paper towels is less significant becausepaper towels represent such a tinyshare of any budget. The more importantthe item is as a share of the consumer’s budget,other things constant, the greater is the incomeeffect of a change in price, so the more priceelastic is the demand for the item. Thisexplains why the quantity of housingdemanded is more responsive to agiven percentage change in price thanis the quantity of paper towelsdemanded.

A Matter of TimeConsumers can substitute lower-priced goods for higher-pricedgoods, but finding substitutesusually takes time. For example,between 1973 and 1974, theOPEC oil cartel raised the price of oilsharply. The result was a 45-percentincrease in the price of gasoline, but thequantity demanded decreased only 8percent. As more time passed, however,people purchased smaller cars and madegreater use of public transportation.Because the price of oil used to generateelectricity and to heat homes increased aswell, people bought more energy-effi-cient appliances and insulated theirhomes better. As a result, the change inthe amount of oil demanded was greaterover time as consumers adjusted to theprice hike.

The longer the adjustment period, thegreater the consumers’ ability to substi-tute relatively higher-priced products withlower-priced substitutes. Thus, the longerthe period of adjustment, the moreresponsive the change in quantitydemanded is to a given change in price.

Figure 4.4 demonstrates how demandfor gasoline becomes more elastic overtime. Given an initial price of $1.00 agallon, let Dw be the demand curve oneweek after a price change; Dm, one


Compare the income effectof an increase in the priceof a car to the incomeeffect of an increase in theprice of a grocery storeitem. For which product isdemand more price elastic?

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month after; and Dy, one year after.Suppose the price increases to $1.25. The more time consumers have torespond to the price increase, the greaterthe reduction in quantity demanded. Thedemand curve Dw shows that one weekafter the price increase, the quantitydemanded has not declined much—inthis case, from 100 to 95 million gallonsper day. The demand curve Dm indicatesa reduction to 75 million gallons per dayafter one month, and demand curve Dyshows a reduction to 50 million gallonsper day after one year.

Some Elasticity EstimatesLet’s look at some estimates of the elas-ticity of demand for particular goods andservices. As noted earlier, the substitution

of lower-priced goods for a good whoseprice has just increased often takes time.Thus, when estimating elasticity, econo-mists often distinguish between a periodduring which consumers have little timeto adjust—call it the short run—and aperiod during which consumers canmore fully adjust to a price change—callit the long run. Figure 4.5 provides someshort-run and long-run elasticity esti-mates for selected products.

The elasticity of demand is greater in thelong run because consumers have more time to adjust. For example, if the price ofelectricity rose today, consumers in theshort run might cut back a bit on theiruse of electrical appliances, and thosein homes with electric heat might lowerthe thermostat in winter. Over time,however, consumers would switch tomore energy-efficient appliances andmight convert from electric heat to oilor natural gas. So the demand for elec-tricity is more elastic in the long runthan in the short run, as noted in Figure4.5. In fact, in every instance whereestimates for both the short run and thelong run are available, the long run ismore elastic than the short run.


Dw is the demand curve oneweek after a price increasefrom $1.00 to $1.25. Alongthis curve, quantity demandedper day falls from 100 to 95million gallons. One monthafter the price increase,quantity demanded has fallento 75 million gallons alongDm. One year after the priceincrease, quantity demandedhas fallen to 50 milliongallons along Dy . At anygiven price, Dy is more elasticthan Dm, which is moreelastic than Dw.

Figure 4.4Demand Becomes More Elastic Over Time

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THE WALL STREET JOURNALReading It Right What’s the relevance of the fol-lowing statement from The Wall Street Journal: “By sellingdirectly via the Internet, catalogs, and the telephone, Dell main-tains direct contact with customers and can regularly gauge theirsensitivity to price changes.”

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An Application: TeenageSmokingAs the U.S. Surgeon General warns oneach pack of cigarettes, smoking ciga-rettes can be hazardous to your health.Researchers estimate that smokingcauses more than 400,000 deaths a yearin the United States—nearly 10 timesthe fatalities from all traffic accidents.

One way to reduce smoking is toraise the price of cigarettes throughhigher cigarette taxes. Economists esti-mate the demand elasticity for cigarettesamong teenage smokers to be about1.3, so a 10 percent increase in theprice of cigarettes would reducesmoking by 13 percent. Among adultsmokers, the estimated elasticity is only0.4, or only about one-third that ofteenagers.

Why are teenagers more sensitive toprice changes than adults? First, recallthat one of the factors affecting the elas-ticity of demand is the importance ofthe item in the consumer’s budget. Theshare of income that a teenage smokerspends on cigarettes usually exceeds theshare for adult smokers. Second, peerpressure is more influential in a young

person’s decision to smoke than in anadult’s decision to continue smoking. (Ifanything, adults face peer pressure notto smoke.) The effects of a higher priceget multiplied among young smokersbecause a higher price reduces smokingby peers. With fewer peers smoking,there is less pressure to smoke. Andthird, because smoking is addictive,young people who are not yet hookedare more sensitive to price increasesthan are adult smokers, who are alreadyhooked.


When estimating elasticity, economistsdistinguish between the short run (a periodduring which consumers have little time toadjust) and the long run (a period duringwhich consumers can more fully adjust to aprice change). The elasticity of demand isgreater in the long run because consumershave more time to adjust.

Figure 4.5Selected Elasticities of Demand

Product Short Run Long Run

Electricity (residential) 0.1 1.9

Air travel 0.1 2.4

Medical care and hospitalization 0.3 0.9

Gasoline 0.4 1.5

Movies 0.9 3.7

Natural gas (residential) 1.4 2.1

What are the determinants ofdemand elasticity?

C H E C K P O I N T

For more information about the dangers of smoking,The Campaign for Tobacco Free Kids maintains aweb site with a page devoted to articles on the eco-nomics of tobacco policy. Access this site througheconxtra.swlearning.com. Click on Tobacco Facts.According to this article, is the total number ofsmokers in the world increasing or decreasing? Thearticle states that between 80,000 and 100,000young people around the world become addicted totobacco every day. If this trend continues, howmany children alive today will die from tobacco-related disease?


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Key Concepts1. What would a shoe store need to do to calculate the price elasticity of demand

for the running shoes it sells if it decides to raise its prices by 10 percent?

2. If the shoe store found that the measure of elasticity for its running shoes is1.3, is there elastic, unit elastic, or inelastic demand for this product at thecurrent price?

3. If the shoe store increases its price for running shoes by 10 percent, whatwould happen to the store’s total revenue from these products?

4. Why should you expect the demand for a particular brand of cake mix to beelastic?

Graphing Exercise5. Consider this graph for running shoes. Note that if the store’s manager

increases the price for running shoes from $60 to $70 (16.7%), the store’ssales would fall from 50 to 40 pairs per month (20.0%). What is the elasticity of demand? Is this price elasticity of demand elastic, unit elastic, or inelastic?Will the store’s total revenue increase, decrease, or remain unchanged?

Think Critically6. Sociology The elasticity of demand for some products is affected by the per-

sonal values of possible customers. Consider people who practice the Hindufaith. They believe it is wrong to eat meat. In Hindu communities, the price elas-ticity of demand for meat products is 0.0, or completely inelastic—consumerswon’t buy meat no matter what happens to its price. Describe several other situ-ations where other factors are more important to the buying decision than price.

7. Entrepreneurship If there are 10 bakeries in a small city, why might the priceelasticity of demand for the products they supply be high? Why might this notbe a good location for you to open another bakery?


Demand Curve for Running Shoes

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Finding appropriate toys for her autisticdaughter was always a challenge for JulieAzuma. In 1995 she met that challenge bystarting a business selling educationaltoys for learning disabled children via theInternet. Her first obstacle—she was notcomputer literate. With determination andcourage, Azuma met the obstacle head-on, and within months her web site wasestablished. Her company, Different Roadsto Learning, received its first orders byDecember of that year.

Selling product via the Internet meantAzuma didn’t need a storefront. This wassomething she originally wanted butquickly learned she couldn’t afford. Sellingvia the Internet had its advantages,however. Azuma was able to reach poten-tial customers throughout the world, andtoday 10 percent of her customers arefrom Canada, the United Kingdom, andAustralia.

From the start, Different Roads toLearning’s web site included a completeline of products. “But as soon as the sitewent up, we received requests for aprinted catalog, too.” Azuma respondedby printing 3,000 catalogs for customerswho requested them. It was a good deci-sion. Although catalog requests typicallycame from parents, “we found thatparents were bringing the catalog to theirchild’s school, asking their school districtsto purchase many of the items.” Thatresulted in larger orders for more prod-ucts. Today Azuma prints 50,000 to100,000 catalogs a year.

Azuma prides herself on serving hercustomers the best she can. She’s quick toadvise parents on what materials may be

appropriate for their child,as well as what toys maynot be a good fit. “We tryto ship all of our orderson the day we receivethem if at all possible,”she explains. “Parents ofautistic children need tohave their materials assoon as possible.”

In response to theincreased demand for advice onhelping an autistic child to learn,in 1999 Azuma started a publishingcompany, DRL Books, Inc. Her first book,a comprehensive handbook for parents ofautistic children, sold more than she pro-jected. She began to look for more booksthat met her high standards of assistingparents and teachers. By 2002, thecompany had published eight books withsales of $175,000. While the first books shepublished were extremely popular, notevery book has met Azuma’s expectations.“I thought that all of our books would havethe same appeal, but there are a lot ofautism books available now.”

In 1996, Different Roads to Learning’sfirst year in business, gross sales were$8,000. By 2000, sales exceeded expensesand the company became profitable.Gross sales in 2002 exceeded $1,000,000,and in 2003 sales were expected toincrease even more. In addition to increas-ing sales, Azuma also has learned how tomake her business more profitable.Azuma’s efforts to help parents of autisticchildren have earned her New York State’sprestigious Martin Luther King Award forcommunity service.

movers&shakersmovers&shakersJul ie Azuma President, Different Roads to Learning

SOURCE READINGAlthough the first books published by DRLBooks, Inc. exceeded sales goals, thebooks she published later were not aspopular. Azuma said, “I thought that all ofour books would have the same appeal,but there are a lot of autism books avail-able now.” What influenced the elasticityof demand for the company’s later books?

ENTREPRENEURS IN ACTIONIf Azuma’s first book sold for $22 and 875copies were sold, what was her totalrevenue? What would likely happen toAzuma’s total revenue if she decreased theprice of the book to $18? If demand isinelastic, would Azuma’s decision to lower the price be a good one? Why orwhy not?


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4.3Changes in Demand

Will Business-Fare Cuts Bring Business Flyers Back?

Major airlines have experienced a huge drop in demand that will result in roughly $4billion in losses in a year. This loss has airlines searching for ways to generate morerevenue. One way being tested is to offer business travelers lower fares. This contra-dicts the airlines’ long-held belief that business travelers would pay whatever they hadto for their necessary business trips. That belief may have been true when theeconomy was soaring and planes were full on the popular routes. However, it’s a muchharder argument in light of tighter travel budgets and lots of empty seats offering travel-ers more choices. Business travelers have been staying at home or in the office, buyingwell in advance of their trip to get the discounts, or going to “no-frills” discount airlines.The airlines have been cutting back their sky-high business-travel fares in selectedmarkets to see if lower fares will bring these flyers back. The early test results areencouraging some carriers to believe that they can in fact cut business fares and main-tain or even increase their revenues. Delta Air Lines has cut business fares by about 21percent in more than 400 small markets with no announcement. The company wasrewarded with a double-digit increase in revenue. Continental Airlines also has beenquietly conducting tests of lower business fares in a number of select markets with“mixed but not discouraging” results, according to Continental officials.

Think About It

Will the airlines’ tests cause a movement along the demand curve or a shift in thedemand curve? Explain.

[ In the News ]

ObjectivesIdentify the determi-nants of demand, andexplain how a changein each will affect thedemand curve.

Distinguish betweenthe money price of agood and the timeprice of a good.

Key Terms tastes

movement along agiven demand curve

shift of a demand curve

OverviewSo far the discussion of demand has beenlimited to the relationship between price andquantity demanded. That is, the focus hasbeen on movement along a particulardemand curve. A demand curve isolates therelation between the price of a good and thequantity demanded when other factors thatcould affect demand remain unchanged.What are these other determinants ofdemand, and how would changes in themaffect demand?

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Changes ThatCan Shift theDemand CurveA demand curve isolates the relationbetween price and quantity when otherfactors that could affect demand areassumed constant. These other factors,often referred to as determinants ofdemand, include

1. Consumer income

2. The prices of related goods

3. The number and composition of consumers

4. Consumer expectations

5. Consumer tastes

How does a change in each affectdemand?

Changes in ConsumerIncomeFigure 4.6 shows the market demandcurve D for pizza. Consumers’ moneyincome is assumed to remain constantalong a demand curve. Suppose money

income increases. Some consumers willthen be willing and able to buy morepizza at each price, so market demandincreases. The demand curve shifts tothe right from D to D ′. For example, ata price of $12, the amount of pizzademanded increases from 14 million to20 million per week, as indicated by themovement from point b on demandcurve D to point f on demand curve D ′.In short, an increase in demand–that is, arightward shift of the demand curve–meansthat consumers are more willing and able tobuy pizza at each price.

Normal GoodsGoods are classified into two broad cat-egories, depending on how the demandfor the good responds to changes inmoney income. The demand for anormal good increases as money incomeincreases. Because pizza is a normalgood, the demand curve for pizza shiftsrightward when consumer incomeincreases. Most goods are normal.

Inferior GoodsIn contrast, the demand for an inferiorgood actually decreases as moneyincome increases. Examples of inferior

Lesson 4.3 Changes in Demand 119

An increase in the demand for pizza isreflected by a rightward shift of thedemand curve. After the increase indemand, the quantity of pizza demandedat a price of $12 increases from 14 million(point b) to 20 million (point f ).

econxtra.swlearning.comFigure 4.6An Increase in the Market Demand for Pizza

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goods include bologna sandwiches,used furniture, used clothing, trips tothe Laundromat, and bus rides. Asmoney income increases, consumersswitch from consuming these inferiorgoods to consuming normal goods—like roast beef sandwiches, new furniture, new clothing, a washer and dryer, and automobile or planerides.

Changes in the Prices ofRelated GoodsAs you’ve seen, the prices of othergoods are assumed to remain constantalong a given demand curve. Now youare ready to consider the impact ofchanges in the prices of other goods.

SubstitutesProducts that can be used in place ofeach other are called substitutes.Consumers choose among substitutespartly on the basis of their relativeprices. For example, pizza and tacos aresubstitutes, though not perfect ones. Yetan increase in the price of tacos, otherthings constant, reduces the quantity oftacos demanded along a given tacodemand curve and shifts the demandcurve for pizza right, as shown in

Figure 4.6. Two goods are substitutes ifan increase in the price of one shifts thedemand for the other rightward and,conversely, if a decrease in the price of one shifts demand for the other leftward.

A decrease in the price of tacoswould reduce the demand for pizza, asshown in Figure 4.7, where the demandcurve for pizza shifts to the left from Dto D ′′. As a result, consumers are lesswilling and able to buy pizza at everyprice. For example, at a price of $12,the amount demanded decreases from14 million to 10 million per week, asindicated by the movement from point bon demand curve D to point j ondemand curve D ′′.

ComplementsCertain goods are often used in com-bination. Pizza and soft drinks, milk and cookies, computer hardware andsoftware, and airline tickets and rentalcars are complements. When two goodsare complements, a decrease in theprice of one shifts the demand for theother rightward. For example, adecrease in the price of soft drinksshifts the demand curve for pizza rightward.


A decrease in the demand for pizza isreflected by a leftward shift of the demandcurve. After the decrease in demand, thequantity of pizza demanded at a price of$12 decreases from 14 million (point b) to10 million (point j ).

econxtra.swlearning.comFigure 4.7A Decrease in the Market Demand for Pizza

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Changes in the Size orComposition of thePopulationAs mentioned earlier, the marketdemand curve is the sum of the individ-ual demand curves of all consumers inthe market. If the population grows, thenumber of consumers in the marketincreases. For example, if the populationgrows, the demand curve for pizza willshift rightward. Even if the total popula-tion remains unchanged, demand couldshift as a result of a change in the com-position of the population. For example,a bulge in the teenage population couldshift pizza demand rightward. A babyboom would shift rightward the demandfor car seats and baby food.

Changes in ConsumerExpectationsAnother factor assumed to be constantalong a given demand curve is consumerexpectations about factors that influencedemand, such as the future income andthe future price of the good. A change in

consumer expectations can shift thedemand curve. For example, you mayspend a little more after lining up asummer job, even before summer arrives.

Changes in price expectations alsocan shift demand. For example, if youexpect pizza prices to jump next week,you may buy an extra one now for thefreezer, thereby shifting the demand forpizza rightward. Or if consumers cometo believe that home prices will climb


Examine changes or trendsin the composition of thepopulation of your city ortown. What products or cat-egories of products mightthese changes affect?

Technology Is a Girl’s Best Friend Banners flying the headline“Technology Is a Girl’s Best Friend” greetedattendees to the 2003 International ConsumerElectronics Show (CES) in Las Vegas. The showincluded a product showcase devoted specificallyto female-friendly products. Also featured at theannual show was a series of conferences andevents concerned with understanding and pro-moting women’s increased role in the consumerelectronics world. A few years earlier, about 70percent to 80 percent of the show’s attendeeswere men. These days, however, the attendanceratio is down to about 60–40 in favor of men. In2003, women’s spending accounted for about$55 billion of the projected $100 billion U.S. con-

sumer electronics market, according to a CESvice president. She also said that women initiatenearly 75 percent of such purchases on theirown or with a spouse. Consumer electronicscompanies are realizing that female buyers are ademographic worthy of their attention. They alsorealize that young girls are more receptive totechnology than older women, according to AnnShoket of Cosmo Girl magazine. “This generationof girls is going to change everything,” Shoketsaid. “They don’t see technology as some sort ofalien, strange thing they’re afraid of.”

Think CriticallyIdentify the determinant of demand this situa-tion illustrates. Explain your answer.

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next year, some will increase theirdemand for housing this year, shiftingthe demand for housing rightward.

Changes in ConsumerTastesDo you like anchovies on a pizza? Howabout sauerkraut on a hot dog? Is musicto your ears more likely to be rock,country, heavy metal, hip-hop, reggae,jazz, new age, or classical? Choices infood, music, clothing, reading, movies, TVshows—indeed, all consumer choices—are influenced by consumer tastes.

Tastes are your likes and dislikes as aconsumer. What determines your tastes?Your desires for food when hungry andliquid when thirsty are largely biological.So is your preference for shelter,comfort, rest, personal safety, and apleasant environment. Your family back-ground shapes many of your tastes.Other influences include the surroundingculture and peer influence. Generally,economists claim no special expertise inunderstanding how tastes develop.

Economists recognize, however, thattastes are important in shaping demand.For example, although pizza is apopular food, some people just don’tlike it and others might be allergic tothe cheese or tomatoes. Thus, somepeople like to eat pizza and othersdon’t. A change in the tastes for a par-ticular good shifts the demand curve.For example, a discovery that the com-bination of cheese and tomato sauce onpizza promotes overall health couldaffect consumer tastes, shifting the

demand curve for pizza to the right. But a change in tastes is difficult to

isolate from other economic changes.That’s why economists attribute achange in demand to a change in tastesonly after ruling out other possibleexplanations.

Movement Along aDemand Curve Versus aShift of the CurveYou should remember the distinctionbetween a movement along a demandcurve and a shift of a demand curve. Achange in price, other things constant,causes a movement along a demandcurve, changing the quantity demanded.A change in one of the determinants ofdemand other than price causes a shiftof a demand curve, changing demand.

Extensions ofDemandAnalysisBecause consumption does not occurinstantaneously, time plays an importantrole in demand analysis.

Role of Time in DemandThe cost of consumption has two compo-nents: the money price of the good and thetime price of the good. Goods aredemanded because of the benefits theyprovide. Thus, you are willing to paymore for medicine that works faster.Similarly, it is not the microwave oven,personal computer, or airline trip that youvalue but the services they provide.Other things constant, the good that pro-vides the same benefit in less time is pre-ferred. That’s also why you are willingto pay more for ready-to-eat foods thatyou don’t need to prepare yourself.


To learn more about the economics of consumption,read Jane Katz’s “The Joy of Consumption: We AreWhat We Buy,” in the Federal Reserve Bank ofBoston’s Regional Review. Access this articlethrough econxtra.swlearning.com. What evidencedoes Katz cite about how the rising value of timehas affected consumer spending patterns?


tastesConsumer prefer-ences; likes and dis-likes in consumption;assumed to be con-stant along a givendemand curve

movementalong a givendemand curveChange in quantitydemanded resultingfrom a change in theprice of the good,other things constant

shift of ademand curveIncrease or decreasein demand resultingfrom a change inone of the determi-nants of demandother than the priceof the good

What are the five determinants ofdemand, and how do changes ineach shift the demand curve?

C H E C K P O I N T

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Your willingness to pay more fortime-saving goods and services dependson the opportunity cost of your time.Differences in the value of time amongconsumers help explain differences inthe consumption patterns observed inthe economy. For example, a retiredcouple has more leisure time than aworking couple. The retired couple mayclip coupons and search the newspapersfor bargains, sometimes going from storeto store for particular grocery items onsale that week. The working coupleusually will ignore the coupons andsales and will eat out more often andpurchase more at convenience stores,where they are willing to pay extra forthe convenience. The retired couple willbe more inclined to drive across countryon vacation, whereas the workingcouple will fly to a vacation destination.

The Cost of Waiting In LineJust inside the gates at Disneyland,Disney World, and Universal Studios,visitors see signs posting the waiting

times of each attraction and ride. Atthat point, the visitor already has paidthe dollar cost of admission, so themarginal dollar cost of each ride andattraction is zero. The waiting timesoffer a menu of the marginal time cost ofeach ride or attraction. The opportunitycost of waiting in line is not enjoyingother rides or attractions. Incidentally,people who are willing to pay up to$55 an hour at Disney World and $60an hour at Disneyland (plus the priceof admission) could until recently takeVIP tours that bypass the lines.

Differences in the opportunity cost oftime among consumers shape consump-tion patterns and add another dimen-sion to demand analysis.


Draw ConclusionsDemand for many products can beaffected by a single important event. InSeptember 2002, for example,Hurricane Isadore plowed into thesouthern coast of Louisiana, leavingwidespread destruction in its wake.Thousands of homes were destroyedalong with many businesses, roads,and public buildings.

Consider how this disaster must havechanged people’s demand for goodsand services in Louisiana. Divide thefollowing businesses into two lists: onemade up of firms that would have hadincreased demand for their productsbecause of Isadore, the other of busi-nesses that would have experiencedreduced demand. Explain your place-ment of each business.

• building contractors

• swimming pool installers

• luxury hotels

• apartment buildings

• lumber yards

• amusement parks

Apply Your SkillImagine that the United States mobi-lizes its military forces to fight a war ina foreign country. It calls up 250,000reserve soldiers and increases its pur-chases of military equipment. Manyfactories operate 24 hours a day tokeep up with government orders.Describe several ways in which thiswould shift demand for products in theU.S. economy.

Sharpen Your Life Skills

What’s the difference between themoney price of a good and itstime price?

C H E C K P O I N T

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Key Concepts1. What would happen to the demand curve for bus tickets if the price of gasoline

increased to $5 per gallon? Which of the determinants of demand does thisdemonstrate?

2. What would happen to the demand curve for a particular brand of shampoo ifa famous movie actress with beautiful hair announces that it is the bestshampoo she has ever used? Which of the determinants of demand does thisdemonstrate?

3. What would happen to the demand curve for towels today if a large storeadvertises that it will have a 50 percent off sale on towels next week? Which ofthe determinants of demand does this demonstrate?

4. If the price of hot dogs increases by $.20 per pound when the price of substi-tute products remains the same, will the demand curve for hot dogs shift tothe right, shift to the left, or stay in the same location? Explain your answer.

5. Why is the demand for “Quick Oats” that cook in 2.5 minutes greater than thedemand for regular oats that take 5 minutes to prepare?

Graphing Exercise6. To the right is the demand curve

for running shoes at a localretailer. Make a copy of thedemand curve. Draw the shift indemand on your copy that wouldresult from each of the followingevents. Label each shift in thedemand curve.

a. Many people decide to buynew running shoes to run in alocal marathon.

b. Three months of almost unin-terrupted rain keeps mostpeople inside.

c. Income tax rates for mostworkers are increased by 10percent.

d. A new housing development is built near a store.

Think Critically7. History When the stock market crashed in 1929, demand for most consumer

products fell. Explain why this happened and how it contributed to the causesof the Great Depression that took place during the 1930s.

8. Health For many years, cigarette manufacturers have been required to placehealth warnings on their products. What are these warnings intended to do tosmokers’ demand curves for cigarettes?


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absoluteadvantage To be able tomake somethingusing fewerresources thanother producersrequire

to HistoryC O N N E C T

The Industrial Revolution began with England’stextile industry in the late 1700s. Cotton hadbeen around since the 1630s, when it was intro-duced to Europe from India. Although popular,cotton was considered a threat to the Britishwool, linen, and silk industries. In response,Parliament restricted cotton imports. Therestrictions lasted until 1736, when GreatBritain changed the laws allowing the manufac-ture and sale of cotton. This marked the begin-ning of cotton manufacturing in the West.

The two basic stages of manufacturingcotton textiles were spinning and weaving.Typically these tasks were done in the home inwhat was called a cottage industry.Entrepreneurs supplied raw materials, such asraw cotton or thread, to a household. Thenmembers of the household would producethread or cloth for the entrepreneur. Of the twotasks, spinning was simpler and the spinnersproduced more thread than the weavers couldweave. John Kay’s 1733 invention, the flyingshuttle, changed much of that. It allowed oneweaver rather than two to operate a loom andproduce more cloth. The demand for threadbegan to rise.

To satisfy this demand, James Hargreavesinvented the spinning jenny in the 1760s. Withhis invention, a single worker could spin multi-ple threads, but it produced a relatively weakproduct. Richard Arkwright invented the waterframe in 1769. This innovation produced a

stronger, coarser thread. Finally, SamuelCrompton’s 1779 spinning mule produced astrong yet fine thread. Once again spinners wereproducing more than what weavers could use.

Edmund Cartwright’s power loom,patented in 1785, enabled the British cottontextile industry to explode. In 1796, thecountry manufactured 21 million yards ofcotton cloth. That number increased to 347million by 1830. The demand for cotton clothproved to be highly elastic. The technologicaladvances, coupled with a source supply in theUnited States, caused the price of cotton clothto drop. By the early part of the century, Britainwas even able to sell cotton cloth in India. Withthis increased technology, the demand for rawcotton increased. Great Britain found in theUnited States a willing and able supplier.

THINK CRITICALLYIndicate how the demand curve for cottonwould shift with each of the IndustrialRevolution’s technological inventions. Use D1for the cottage industry demand, D2 for JohnKay’s flying shuttle, D3 for Samuel Crompton’sspinning mule, and D4 for EdmundCartwright’s power loom.

to HistoryIndustrial Revolution in England:The Demand for CottonThe


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SummaryThe Demand Curve

a Demand indicates how much of a productconsumers are willing and able to buy at eachpossible price during a given period, otherthings remaining equal. The law of demandstates that the higher the price, the smallerthe quantity demanded, and vice versa.

b The quantity demanded of a product grows asprices fall because of the substitution effect,income effect, and diminishing marginalutility. The law of diminishing marginal utilitystates that additional units of a product nor-mally provide smaller additional amounts ofutility to a consumer within a period of time.

c Demand for a product can be expressed in ademand schedule or a graph called a demandcurve. Most demand curves slope down fromleft to right, indicating an inverse relationshipbetween changes in price and quantity. Thismeans that as prices decline, the quantitydemanded of the product will grow.

Elasticity of Demand

a The price elasticity of demand measures theresponsiveness of the quantity demanded to a change in price. Elasticity is calculated bydividing the percentage change in the quantitydemanded by the percentage change in price.

b The price elasticity of demand may be elastic,unit elastic, or inelastic. Elastic demand is indi-cated by a value greater than 1.0. When thereis elastic demand, a percentage change inprice will result in a larger percentage changein the quantity demanded. Unit elastic demandis indicated by a value of 1.0. When there isunit elastic demand, a percentage change inprice will result in the same percentagechange in the quantity demanded. Inelasticdemand is indicated by a value less than 1.0.When there is inelastic demand, a percentage

change in price will resultin a smaller percentagechange in the quantitysold.

c The price elasticity of demand can be used topredict what will happen to a firm’s totalrevenue when it changes the price of itsproduct. When there is elastic demand, anincrease in price will result in reduced totalrevenue. When there is unit elastic demand,an increase in price will result in unchangedtotal revenue. When there is inelasticdemand, an increase in price will result inincreased total revenue.

d Products that have many substitutes tend tohave elastic demand. Those that are veryimportant and have few substitutes, or thatrepresent a small proportion of the con-sumer’s budget, tend to have inelasticdemand. As a general rule, the more time thatpasses, the more elastic demand will be.

Changes in Demand and the TimePrice of Goods

a There are five general classifications of eventsthat can cause the location of a demand curveto move. These are: (1) a change in consumerincome, (2) a change in the price of relatedgoods, (3) a change in the number and com-position of consumers, (4) a change in con-sumer expectations, and (5) a change in con-sumer tastes.

b Substitute products may be used interchange-ably. An increase in the price of one will causedemand for the other to increase.Complementary products are normally usedtogether. An increase in the price of one willcause the demand for the other to fall.

c The demand for products can be influencedby time. Customers who must wait in line tobuy a product may choose not to wait. Theyare being required to pay in time as well asmoney to purchase the product.

Chapter Assessment44.1

4.3

4.2


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Chapter Assessment 127

Review Economic TermsChoose the term that best fits the definition. On a separate sheet of paper, write theletter of the answer.

1. The sum of the individual demand of all consumers in themarket

2. A graph that shows the quantities of a particular good that will bedemanded at various prices during a given time period, otherthings constant

3. The demand of a single consumer in the market

4. The amount of a product that is demanded at a particular price

5. An increase or decrease in demand that results from a change ina determinant of demand

6. A change in the quantity of a product demanded that resultsfrom a change in the product’s price

7. The change in total utility resulting from a one-unit increase inconsumption of a particular product

8. The more of a good a person consumes per period, the smallerthe increase in total utility from consuming one more unit, otherthings constant

9. The quantity of a good demanded per period relates inversely toits price, other things constant

10. Price multiplied by the quantity demanded at that price

11. A relation showing the quantities of a good that consumers arewilling and able to buy at various prices per period, other thingsconstant

12. Measures how responsive quantity demanded is to a pricechange

13. Consumer preferences; assumed to be constant along a givendemand curve

a. demand

b. demand curve

c. elasticity of demand

d. individual demand

e. law of demand

f. law of diminishing

marginal utility

g. marginal utility

h. market demand

i. movement along a given

demand curve

j. quantity demanded

k. shift of a demand curve

l. tastes

m. total revenue

Review Economic Concepts14. True or False A change in the price of a

product will not cause that product’s demandcurve to shift.

15. The __?__ is demonstrated by the fact thatpeople will buy more hot dogs and hamburg-ers when the price of pizza increases.

16. Elasticity expresses a relationship between thepercentage change in __?__ and the resultingpercentage change in __?__.

17. Which of the following is false about demandcurves?

a. They normally slope down from left toright.

b. They show the relationship between priceand the quantity demanded.

c. They can be used to calculate a product’sprice elasticity of demand.

d. They show how much profit is earned bybusinesses that sell the product.

18. True or False Quantity demanded at a partic-ular price is represented by an individual pointon the demand curve.

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19. Which of the following is the correct formulafor the price elasticity of demand?

a. change in the price of the productchange in the quantity demanded

b. change in the quantity demandedchange in the price of the product

c. % change in the price of the product% change in the quantity demanded

d. % change in the quantity demanded% change in the price of the product

20. True or False A firm’s total revenue willincrease if it raises the price of a product thathas a price elasticity of demand equal to 0.73.

21. If the total revenue from selling a productdeclines when the product’s price is increased,the demand for that product is __?__.

22. True or False A business is more likely toincrease the price of its products if thedemand for these products is elastic than if thedemand is inelastic.

23. Which of the following does not influence theelasticity of demand?

a. availability of substitute products

b. availability of complementary products

c. the share of the consumer’s budget spenton the good

d. the timeframe of the purchase

24. True or False Market demand is the demandof an individual consumer.

25. Which of these products is most likely to havevery elastic demand?

a. a cable television service

b. a particular brand of hand soap

c. ground black pepper

d. taxi service in a large city

26. True or False When consumers earn moreincome, their demand for all products willincrease.

27. Which of the following is not a determinant ofdemand?

a. consumer income

b. prices of related goods

c. consumer expectations and tastes

d. all of the above would affect demandwhen other factors are assumed constant

28. True or False Demand for a normal gooddecreases as money income increases.

29. The purpose of advertising is to

a. shift a product’s demand curve to theright.

b. shift a product’s demand curve to the left.

c. make a product’s demand more elastic.

d. point out a product’s substitutes to itsconsumers.

30. Your __?__ income is your income measured interms of how many goods and services it canbuy.

31. Which of the following pairs of products areexamples of complementary goods?

a. blank sheets of paper and copy machines

b. dining room tables and floor lamps

c. heating oil and natural gas

d. warm gloves and trips to Florida

e. peanut butter and jelly

f. private and public transportation

g. Coke and Pepsi

h. alarm clocks and automobiles

i. golf clubs and golf balls

32. A change in a __?__ will change demand for aproduct when there is no change in price.

33. True or False If a person’s income falls to zero, he or she will still demand some products.

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Chapter Assessment 129

35. Price Elasticity of Demand If Rita changed theprice of her tacos from $1.75 to $1.50 each, hersales would grow from 100 to 125 per day.Calculate the percentage change in price andquantity demanded and then the price elastic-ity of demand. Is this demand elastic, unitelastic, or inelastic?

36. Total Revenue Calculate the total revenueRita received from the tacos when she soldthem at a price of $1.75 and now that she sellsthem at a price of $1.50. Can you be sure thather business is more profitable at the lowerprice? Explain why.

37. Market Demand Working in small groups,determine your group’s market demand forgasoline. Make up a chart listing a variety of

prices per gallon of gasoline, such as $1.00,$1.25, $1.50, $1.75, $2.00, $2.25. Each groupmember should determine how many gallonsper week they would purchase at each possi-ble price. Then do the following:

a. Plot each group member’s demand curve.Check to see whether each person’sresponses are consistent with the law ofdemand.

b. Derive the “market” demand curve byadding up the quantities demanded by allstudents at each possible price.

c. What do you think will happen to thatmarket demand curve after your classgraduates and your incomes rise?

38. Read the Real Per Capita Disposable Incomearticle in the EconDataOnline section ateconxtra.swlearning.com. What happens to

quantity of goods demanded when real percapita disposable income increases?


Old and New Demand Schedule for Rita’s Tacos

Price Old Quantity New Quantity

Per Taco Demanded Demanded

$2.00 25 75

$1.75 50 100

$1.50 75 125

$1.25 100 150

$1.00 125 175

$0.75 150 200

Apply Economic Concepts34. Graphing Shifts in Demand The owner of

Rita’s Tacos bought ads in a local newspaper. Asa result, the demand for her tacos increased asdemonstrated in the demand schedule below.

Draw a graph of her demand as it was beforethe ads were printed. On the same graph, drawthe new demand curve for tacos. Explain whymany businesses advertise their products.

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7758 ch04 100-129 12/5/03 5:33 pm page 100 4 demand 12/5/03 5:33 pm page 100 objectives explain the...

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