Chapter 4

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Chapter 4

  1. 1. Section 1: What is Demand?Section 2: Factors Affecting DemandSection 3: Elasticity of Demand
  2. 2.  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.
  3. 3.  Demand Schedule – shows the various quantities demanded of a particular product at all prices that might prevail in the market at a given time.
  4. 4. Price Quantity$30 0$25 0$20 1$15 3$10 5 $5 8
  5. 5.  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.
  6. 6. 25 20 15Price 10 Curve 5 0 1 2 3 4 5 6 7 8 Quantity
  7. 7.  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.
  8. 8.  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.
  9. 9.  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.
  10. 10.  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.
  11. 11.  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.
  12. 12.  Change in Demand – shift of the demand curve when people buy different amounts at every price.
  13. 13. Price D D’$30 0 1$25 1 3$20 3 6$15 6 10$10 10 15 $5 15 20
  14. 14. 40 35 30 25 Increase inPrice 20 Demand 15 D 10 D 5 0 0 1 2 3 4 5 6 7 8 9 1011121314151617181920 Quantity
  15. 15.  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.
  16. 16.  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.
  17. 17.  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.
  18. 18.  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.
  19. 19.  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.
  20. 20. 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
  21. 21. 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
  22. 22. 3.5 3 a’’ 2.5 Expenditure $6=$3Pr 2 b’’ per 2 unitsi Expenditure $6=$2c 1.5 per 3 unitse 1 Overlap 0.5 0 0 1 2 3 4 Quantity
  23. 23. Type of Elastic Inelastic Unit Elastic DemandChange in Price Change in NoExpenditure Change
  24. 24.  Go to page 112 and answer questions 22 – 24. You may use your notes/book, as always. This is a 100 point quiz, turn it in when done.

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