Economics Chapter 4Economics Chapter 4

DemandDemand

DemandDemand

Demand is the desire, ability Demand is the desire, ability and willingness to buy a and willingness to buy a product.product.

Demand is a microeconomics Demand is a microeconomics concept. concept. MicroMicroeconomics is the economics is the area of economics that deals area of economics that deals with behaviors and decisions with behaviors and decisions made by small units such as made by small units such as individuals and firms.individuals and firms.

Demand ScheduleDemand Schedule

A demand A demand schedule is a schedule is a listing that listing that shows the shows the various various quantities quantities demand of a demand of a particular particular product at all product at all prices that prices that might prevail in might prevail in a market.a market.

PricePrice Qty. Qty. DemandedDemanded

$50$50 00

$20$20 55

$15$15 1010

$10$10 2727

$5$5 4747

Demand curve for Snuggies

Demand CurveDemand Curve

A demand A demand curve is a curve is a graph showing graph showing the quantity the quantity demanded at demanded at each and each and every price every price that might that might prevail in a prevail in a market.market.

The demand curve goes DOWN!

Law of DemandLaw of Demand

The Law of Demand states that The Law of Demand states that the quantity demanded of a the quantity demanded of a good or service varies inversely good or service varies inversely with its price.with its price.

Market Demand CurveMarket Demand Curve

A market demand curve shows A market demand curve shows the quantity demanded by the quantity demanded by everyone who is interested in everyone who is interested in purchasing the product.purchasing the product.

Marginal UtilityMarginal Utility

Marginal utility is the extra Marginal utility is the extra usefulness or satisfaction that a usefulness or satisfaction that a person gets from acquiring or person gets from acquiring or using one more unit of a using one more unit of a product.product.

Extra lollipops bring Erick extra utility!

Diminishing Marginal UtilityDiminishing Marginal Utility The principle of diminishing The principle of diminishing

marginal utility states that the marginal utility states that the extra satisfaction we get from extra satisfaction we get from using additional quantities of the using additional quantities of the product begins to diminish.product begins to diminish.

Think of eating contests or block days at KHS!

Section 2Section 2

When there is a change in a When there is a change in a people’s willingness and ability people’s willingness and ability to buy, it typically falls in one of to buy, it typically falls in one of two categories – two categories –

Change in QUANTITY Change in QUANTITY DEMANDED OR CHANGE IN DEMANDED OR CHANGE IN DEMANDDEMAND

Change in Quantity Change in Quantity DemandedDemanded

A change in quantity demanded A change in quantity demanded is a movement ALONG the is a movement ALONG the demand curve that shows a demand curve that shows a change in the quantity of the change in the quantity of the product purchased in response product purchased in response to a change in PRICE.to a change in PRICE.

Income Effect and Substitution Income Effect and Substitution EffectEffect The income effect is a change in The income effect is a change in

quantity demand (movement ON the quantity demand (movement ON the line) because a change in price line) because a change in price alters consumers’ real income.alters consumers’ real income.

The substitution effect is the change The substitution effect is the change in quantity demanded because of a in quantity demanded because of a change in the relative price of an change in the relative price of an item. (Example – Substituting item. (Example – Substituting substituting a concert ticket for a CD)substituting a concert ticket for a CD)

Change in DemandChange in Demand

A change in demand occurs A change in demand occurs because people are now willing because people are now willing to buy different amounts of the to buy different amounts of the product at the same prices.product at the same prices.

A CHANGE IN DEMAND WILL A CHANGE IN DEMAND WILL RESULT IN AN ENTIRELY RESULT IN AN ENTIRELY NEW DEMAND CURVE. (oh NEW DEMAND CURVE. (oh shift!)shift!)

What Changes Demand?What Changes Demand?

Consumer incomeConsumer income Consumer tastesConsumer tastes SubstitutesSubstitutes Complements (you look nice Complements (you look nice

today!)today!) Change in expectationsChange in expectations Change in the number of Change in the number of

consumersconsumers

Consumer IncomeConsumer Income

Changes in consumer income Changes in consumer income can cause a change in demand.can cause a change in demand.

Example – you get a raise or Example – you get a raise or you lose your jobyou lose your job

Consumer TastesConsumer Tastes

Consumers Consumers do not always do not always want the want the same thing.same thing.

Example – Example – change in change in fashion, style, fashion, style, the the development development of new of new productsproducts

More on Changing Tastes…More on Changing Tastes…

Changing tastes shift Changing tastes shift demand curves (and can demand curves (and can actually be quite amusing actually be quite amusing after a few years!).after a few years!).

SubstitutesSubstitutes

A change in A change in the price of the price of related related products can products can cause a cause a change in change in demand. demand.

Substitutes Substitutes can be used can be used in place of in place of other other products. products.

ComplementsComplements Related goods Related goods

are known as are known as complements complements because the use because the use of one increases of one increases the use of the the use of the other.other.

Example – Example – peanut butter peanut butter and jelly, and jelly, hotdogs and hotdogs and hotdog bunshotdog buns

ElasticityElasticity

Elasticity is the Elasticity is the measure of measure of responsiveness responsiveness that tells us how that tells us how a dependent a dependent variable such as variable such as quantity quantity responds to a responds to a change in an change in an independent independent variable such as variable such as price.price.

Demand ElasticityDemand Elasticity

Demand Elasticity is the extent Demand Elasticity is the extent to which a change in price to which a change in price causes a change in the quantity causes a change in the quantity demanddemand

ElasticElastic

““Elastic” is Elastic” is when a when a given given change in change in price price causes a causes a relatively relatively larger larger change in change in quantity quantity demanded.demanded.

Perfectly Elastic Product

Inelastic DemandInelastic Demand

Inelastic means that a given Inelastic means that a given change in price causes a change in price causes a relatively smaller change in the relatively smaller change in the quantity demanded.quantity demanded.

Perfectly INELASTIC Demand Curve

Unit Elastic DemandUnit Elastic Demand

Unit elastic means that a given Unit elastic means that a given change in price causes a change in price causes a proportional change in the proportional change in the quantity demanded.quantity demanded.

Selected ElasticitiesSelected Elasticities Cigarettes Cigarettes

-0.3 to -0.6 US population -0.3 to -0.6 US population -0.6 to -0.7 US children-0.6 to -0.7 US children

Airline travel Airline travel -0.3 First Class US-0.3 First Class US -0.4 Unrestricted Coach US-0.4 Unrestricted Coach US -0.9 Discount-0.9 Discount

Local newspapers Local newspapers -0.1-0.1

Oil -0.4 World Oil -0.4 World Rice Rice

-0.47 Austria -0.47 Austria -0.8 Bangladesh -0.8 Bangladesh -0.8 China -0.8 China -0.25 Japan -0.25 Japan -0.55 US-0.55 US

Beef Beef -1.6 US-1.6 US

Legal gamblingLegal gambling -1.9 US -1.9 US -0.80 to -1.0 Indiana/Kentucky -0.80 to -1.0 Indiana/Kentucky

MoviesMovies -0.87 US -0.87 US -0.2 Teenagers US-0.2 Teenagers US -2.0 Adults US-2.0 Adults US

Medical insuranceMedical insurance -0.31 US -0.31 US

Bus travel Bus travel -0.20 US -0.20 US

Insulin Insulin -0.01 daily users US-0.01 daily users US

Ford compact automobile Ford compact automobile 2.82.8

Coke Coke 3.83.8

Mountain DewMountain Dew 4.44.4

What determines demand What determines demand elasticity?elasticity?

Can the purchase be delayed?Can the purchase be delayed? Are adequate substitutes Are adequate substitutes

available?available? Does the purchase use a large Does the purchase use a large

portion of income?portion of income?