Section 1: What is Demand?Section 2: Factors Affecting DemandSection 3: Elasticity of Demand
Demand is more than the desire to have a product. Demand – the desire, ability, and willingness to buy a product. Demand is a microeconomic concept. Microeconomics – the part of economics that studies small units such as individuals and firms. Demand is easy to understand because it only involves 2 variables – price and quantity.
Demand Schedule – shows the various quantities demanded of a particular product at all prices that might prevail in the market at a given time.
Price Quantity$30 0$25 0$20 1$15 3$10 5 $5 8
The demand schedule can be plotted visually or graphically on a demand curve. Demand Curve – a curve that shows the quantities demanded at all possible prices.
The prices and quantities in the previous demand schedule and demand curve point out a feature of demand: For practically every good or service that we might buy, higher prices are associated with smaller amounts in demand, while lower prices are associated with larger amounts demanded. This is known as the Law of Demand.
Market Demand Curve – a curve that shows how much of a product ALL consumers will buy at all possible prices. Remember from Chapter 1, utility is the amount of usefulness or satisfaction that someone gets from the use of a product. Marginal Utility – additional satisfaction or usefulness a consumer gets from having one more unit of a product.
The reason we buy something in the first place is because we feel that the product is useful and will give satisfaction, but this changes the more we use a product. Diminishing Marginal Utility – principle that states that the extra satisfaction we get from using additional quantities of a product begins to decline. Because of this, we are usually unwilling to pay as much for the second, third, etc.
Go to page 112 and answer questions 17 – 19. You may use your notes/book, as always. This is a 100 point quiz, turn it in when done.
Change in Quantity Demanded – a change that is graphically represented as a movement along the demand curve. Income Effect – the part of change in quantity demanded due to a change in the buyer’s real income when a price changes. Substitution Effect – the part of a change in quantity demanded due to a price change that makes other products more or less costly.
Change in Demand – shift of the demand curve when people buy different amounts at every price.
Substitutes – competing products that can be used in place of one another. Substitutes are important when a change in the price of a product causes a change in demand. For example, if we think of butter and margarine as substitutes, then a rise in the price of butter would lead to a decrease in the demand for butter and an increase in the demand for margarine; and vice versa.
Complements – products that increase the use of other products. If computers are a complement to software, then a rise in the price of computers would cause the demand for computers to go down as well as the demand for software. We see that a change in income, consumer tastes, and prices of related products affects individual demand curves and thusly, the market demand curve.
Go to page 112 and answer questions 20 – 21. You may use your notes/book, as always. This is a 100 point quiz, turn it in when done.
Demand Elasticity – the extent to which a change in price causes a change in the quantity demanded. Elastic – type of elasticity where a change in price causes a relatively larger change in quantity demanded. Inelastic – type of elasticity where a change in price causes a relatively smaller change in quantity demanded. Unit Elastic – type of elasticity where a change in price causes a proportional change in quantity demanded.
We find the total expenditures by multiplying the price of a product by the quantity demanded for any point along the demand curve. For elastic demand curves - price goes up, total expenditures go down; for inelastic – price goes down, expenditures go down; for unit – price goes down, no change in expenditures.
3.5 a 3 2.5 Expenditure $6=$3Pr 2 b per 2 unitsi Expenditure $8=$2c 1.5 per 4 unitse 1 Overlap 0.5 0 0 1 2 3 4 5 Quantity
3.5 3 a’ 2.5 Expenditure $6=$3P per 2 units 2 b’ri Expenditure $5=$2 1.5c per 2.5 unitse 1 Overlap 0.5 0 0 0.5 1 1.5 2 2.5 3 3.5 4 Quantity