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Chapter 4. Demand. Demand  the desire to own something and the ability to pay for it BOTH factors must be present for demand to exist. 4.1: Understanding Demand. Do I really Demand this?. Consumers will buy more of a good when its price is lower, and less when the price is higher.

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chapter 4

Chapter 4


influencing factors

Substitution effect When consumers react to an increase in a good’s price by consuming less of that good and more of a substitute good

  • Consumers would choose an alternative to pizza if it went up in price
Influencing Factors
income effect

The change in consumption that results when a price increase causes real income to decline

  • Opposite is also true, if prices fall you now feel wealthier
  • Buy more due to a lower price; Less due to a higher price
Income Effect
demand schedules1

A table that lists the quantity of goods a person will buy at various prices in a market

  • Shows how much you will buy at each individual price
  • Example: Mr. Burden buys 3 slices of pizza at $1.50 per slice
Demand Schedules
market demand schedules

Table that lists the quantity of a good all consumers in a market will buy at various prices

  • Example: The whole PHS faculty buys 55 slices of pizza at $1.50 per slice
  • Page 89
Market Demand Schedules
demand curves1

Graphic representation of a demand schedule

  • Shows the same information contained in the demand schedule, just in a different, more visual, way
Demand Curves
demand curve setup

Vertical axis will ALWAYS list the price

  • Horizontal axis will ALWAYS list the quantity
Demand Curve Setup
page 90

Notice two things about the curve on page 90

  • First, only shows the relationship between the price of the good and the quantity demanded
  • Secondly, it is downward sloping. As price decreases, quantity demanded increases
Page 90
shifts in the demand curve

Shifts in the Demand Curve

Chapter 4, Section 2

ceteris paribus

Latin phrase that means “all other things held constant”

  • We are only taking the price of the good into account
  • Demand curves are accurate as long as no other factors change besides the price
Ceteris Paribus
change in demand vs change in quantity demanded

Do not confuse the two

  • A change in Quantity demanded is a change at one price only
  • A change in Demand is a change at all price levels, therefore forming an entire new curve
Change in Demand vs Change in Quantity Demanded
what causes a change in demand

6 Total Factors

  • Income, Consumer Expectations, Population, Demographics, Consumer Tastes and Advertising, and Prices of Related Goods
What Causes a Change in Demand?

Consumer’s income effects their demand for goods

  • When income rises, the demand curve shifts to the right (increases)
  • When income falls, the demand curve shifts to the right (decreases)
normal vs inferior goods

Normal goods A good that consumers will demand more of when their income rises

  • Steak for dinner, not Ramen noodles
Normal vs Inferior Goods
inferior goods

A good that consumers will demand less of when their income increases

  • Buy new cars instead of used; Name brands, not generic brands
Inferior Goods
consumer expectations

Expectations about the future impact our demand for goods

  • If you expect prices to rise in the future, your demand for that product will rise
  • If you expect the price to fall in the future, your demand also falls
Consumer Expectations

Rise in population leads to increased demand for houses, food, etc

  • Consider the effects caused by baby boomer generation?
  • Clothes
  • Food
  • Schools

The statistical characteristics of populations and population segments, especially when used to identify consumer markets

  • Businesses use this data to identify who potential customers are, where they live, and how likely they are to purchase a specific product
largest population on the rise

Which portion of the American population is growing at the largest rate?

  • Due to this surge, businesses are devoting their resources to producing goods and services for these consumers
  • Hint…think across the street
Largest population on the rise?
consumer tastes and advertising

Advertising shifts demand curves…that is a fact!

  • Advertising is everywhere, streets, TV, Radio, Online
  • 1.9 Billion spent in advertising on Facebook and MySpace in 2008
Consumer Tastes and Advertising
6 price of related goods

Complements two goods that are bought and used together

  • Example…Peanut butter and Jelly
  • Substitutes Goods that are used in place of one another
  • Example…Beef and Chicken
6. Price of Related Goods
effect on curves

When price of a product rises, the demand for its complement will fall

  • The opposite is also true
  • When the price of a product rises, the demand for its substitute will rise
  • Opposite is al true for this
Effect on Curves
elasticity of demand

Elasticity of Demand

Chapter 4: Section3

defining elasticity

A measure of how consumers respond to price changes

  • Measures how drastically buyers will cut back or increase their demand for a good when the prices rises or falls
Defining Elasticity
inelastic demand

A good is INELASTIC if you buy the same amount or just a little less of a good after a large price increase; Not very sensitive to price changes

  • These goods will most likely be your needs and necessities
  • Medicine, baby formula/milk, etc
Inelastic Demand
elastic demand

A good is ELASTIC if you buy much less of a good after a small price increase

  • Very responsive to price changes
Elastic Demand
unit elastic

A good is UNIT ELASTIC is the change in demand is proportional after a price change

  • Example: If a product is on sale for 20% off you will buy 20% more
Unit Elastic
determining elasticity

If X<1 Inelastic

  • If X>1 Elastic
  • If X = 1 Unit Elastic
Determining Elasticity
elasticity formula

{Qb- QA)/ (Qb + Qa}/(Pb-Pa)/ (Pb + Pa}

  • Qb = quantity before
  • Qa= quantity after
  • Pb = Price before
  • Pa = Price after
Elasticity Formula
factors affecting elasticity

#1 Availability of Substitutes

  • If there are few substitutes available, you will buy more likely to buy the item even with an increase in price
  • If substitutes are available, you are less likely to buy the item
Factors Affecting Elasticity
2 relative importance

How much of your budget can you spend?

  • If you spend a large share of your income on a good, a price increase will force you to make some tough choices
#2 Relative Importance
3 necessities vs luxuries

Will always buy necessities They will be Inelastic

  • Luxuries are items we can more easily cut back on They will be Elastic
  • Necessities and luxuries will vary from person to person
#3 Necessities vs. Luxuries
4 change over time

May take some time to change your spending habits

  • 1970’s gas crisis is good example
  • Price of gas rose quickly, but little changed during the short term
  • People still bought same amount of gas
#4 Change Over Time

Over time though people started to demand smaller, more fuel efficient cars

  • Reduced their consumption for gas and found substitutes
  • So gas in the short term was inelastic, over time it became more elastic
chevy volt1


  • It can be plugged into a household electric socket and charged fully within about six hours. Completely charged it can drive roughly 40 miles on electricity alone
  • If the battery does run down, the 1.0-liter, three-cylinder gas engine acts as a generator to charge the battery and provides enough power to for up to an additional 600 miles.
Chevy Volt