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Economics Unit II: Microeconomics. Chapter 4: Demand. Economics Chapter 4: Demand. Why is it important to understand Demand? A knowledge of demand is essential in understanding how a market economy works. Knowledge of demand is also important for sound business planning.

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economics chapter 4 demand
Economics Chapter 4: Demand

Why is it important to understand Demand?

  • A knowledge of demand is essential in understanding how a market economy works.
  • Knowledge of demand is also important for sound business planning.

**Lifestyle changes can create new market demand.

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Economics Chapter 4: Demand
  • Demand is the desire, ability, and willingness to buy a product.
  • An individual demand curve illustrates how the quantity that a person will demand varies depending on the price of a good or service.
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Economics Chapter 4: Demand
  • Economists analyze demand by listing prices and desired quantities in a demand schedule (chart).
  • When the demand data is graphed, it forms a demand curve with a downward slope.
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Economics Chapter 4: Demand

1st left page Question #1:

Record the names and approximate prices of the last two items you purchased. In general, would you have spent your money differently if the price of each item was twice as high? Would you have spent your money differently if each of the items cost half as much as it did? Explain your response in complete sentences.

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Economics Chapter 4: Demand
  • The Law of Demand states that the quantity demanded of a good or service varies inversely with its price. When prices go up, the quantity demanded goes down; when price goes down, the quantity demanded goes up.
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Economics Chapter 4: Demand
  • A market demand curve illustrates how the quantity that all interested persons (the market) will demand varies depending on the price of a good or service.
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Economics Chapter 4: Demand

1st left hand page Question #2:

Why is price a consumer’s obstacle to buying? Explain your answer

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Economics Chapter 4: Demand
  • Marginal Utility is the extra usefulness or satisfaction a person receives from getting or using one more unit of a product.
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Economics Chapter 4: Demand
  • The principle of diminishing marginalutility states that the satisfaction we gain from buying a product lessens as we buy more of the same product.
  • Example is buying a soda. For each one you consume, your satisfaction or usefulness goes down.
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Economics Chapter 4: Demand

1st left hand page question #3:

  • What is another case in which more product gives less satisfaction? Explain your answer.
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Economics Chapter 4: Demand

Factors Affecting Demand

1. The change in the quantity demanded shows a change in the amount of a product purchased when there is a change in price.

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Economics Chapter 4: Demand
  • The income effect means that as prices drop, consumers are left with extra real income.
  • The substitution effect means that price can cause consumers to substitute one product with another similar but cheaper item.
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Economics Chapter 4: Demand

2nd left hand page question #1: Imagine you have a weekly budget for groceries. When you shop one week, certain items you needed were on sale, and after you paid the cashier, you had $20 left. What would you do with the extra money? Explain

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Economics Chapter 4: Demand

2. A change in demand is when people buy different amounts of the product at the same prices.

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Economics Chapter 4: Demand
  • A change in demand can be caused by a change in income (+/-), tastes, a price change in a related product (either because it is a substitute or complement), consumer expectations (future new technology or future rise in price or shortage), and the number of buyers (new and leavers).
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Economics Chapter 4: Demand
  • Substitutes: can be used in place of other products.
  • Example is butter and margarine
  • Generally, the demand for a product tends to go up if the price of its substitute price goes up and vice versa.
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Economics Chapter 4: Demand
  • Compliments: related products that increase the value of each other; products related in such a way that an increase in price of one reduces the demand for both.
  • Example is computers and computer software.
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Economics Chapter 4: Demand

2nd left page Question #2:

Although CDs are by far today’s most popular form of musical recording, interest in vinyl albums is growing. What might happen to the demand for vinyl albums as interest increases? Explain.

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Economics Chapter 4: Demand
  • Elasticity measures how sensitive consumers are to price changes.
  • Demand is elastic when a change in price causes a large change in demand.
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Economics Chapter 4: Demand
  • Demand is inelastic when a change in price causes a small change in demand.
  • Demand is unit elastic when a change in price causes a proportional change in demand.
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Economics Chapter 4: Demand

2nd left hand page Question #3:

What are some examples of items for which an increase in price would cause you or your family to reconsider buying them? Give at least 3 examples and explain why you would reconsider buying them.

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Economics Chapter 4: Demand

The Total Expenditures Test

Price x quantity demanded = total expenditures

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Economics Chapter 4: Demand
  • Changes in expenditures depend upon the elasticity of a demand curve – if the change in price and expenditures move in opposite directions on the curve, the demand is elastic (↓ ↑) ; if they move in the same direction (↑ ↑ ), the demand is inelastic; if there is no change in expenditures, demand is unit elastic.
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Economics Chapter 4: Demand
  • Understanding the relationship between elasticity and profits can help producers effectively price their products.
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Economics Chapter 4: Demand

3rd left page Question #1:

What are some examples of items for which a drop in price wouldnot encourage you to buy more of an item? Give at least 3 examples and explain your reasons you would not buy more of it.

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Economics Chapter 4: Demand

Determinants of Demand Elasticity

  • Demand is elastic if the answer to the following questions are “yes.”

1. Can the purchase be delayed? (some purchases cannot be delayed, regardless of price changes).

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Economics Chapter 4: Demand

2.Are adequate substitutions available? (Price changes can cause consumers to substitute one product for a similar product).

3. Does the purchase use a large portion of income? (demand elasticity can increase when a product commands a large portion of a consumer’s income).

** Glue chart here **

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Economics Chapter 4: Demand

3rd left hand page Question #2:

What are some things you buy for which price is not the issue? At least 3 examples. Explain why price is not an issue for each.

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Economics Chapter 4: Demand

4th left hand page Question 1:

  • Bring in an advertisement for a product. Glue it in your notebook. List things in the advertisement that appeal to you in the ad. Explain how the advertiser tries to get you to buy the product.