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Demand. Chapter 3. What is demand?. The willingness and ability to purchase a good or service Demand = Willingness and ability to purchase. The Law of Demand. As a price of a good increases the quantity demanded of the good decreases and vice versa

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Chapter 3

what is demand
What is demand?
  • The willingness and ability to purchase a good or service
  • Demand = Willingness and ability to purchase
the law of demand
The Law of Demand
  • As a price of a good increases the quantity demanded of the good decreases and vice versa
        • Quantity Demanded – is there a difference between demand and quantity demanded?
          • A demand for popcorn
          • Buying the popcorn 2 bags for 1 dollar is quantity demanded
opposite directions
Opposite Directions
  • Why do price and quantity demanded move in opposite directions?
    • Law of diminishing marginal utility
      • Candy experiment
    • As you obtain less utility from additional units you will only buy large quantities at low prices
demand schedule
Demand Schedule
  • Law of Demand says…
    • The up / down relationship is inverse relationship
    • A chart showing the inverse is a demand schedule
demand curve
Demand Curve
  • 3-1 b shows the demand curve
    • Plotting connected points to show patterns
    • There are almost always patterns in economics
what happens when said curve shifts
What happens when said curve shifts?
  • Demand curves shifting right or left show more or less demand of a product at price
  • What causes these shifts?
  • As income goes up, people have the ability to purchase more of a good
    • This doesn’t necessarily mean they will
  • Normal Good – income goes up, purchase of that good goes up
  • Inferior Good – income goes up, purchase of that good goes down
  • Neutral Good – income goes up, purchase of that good stays the same
  • People prefer certain products
    • Types of video games
prices of related goods
Prices of Related Goods
  • Substitute Goods
    • Cars – Coffee / Tea – Video Games
  • Complements
    • Things that go together
      • Balls / Bats
      • PS2 / Games
      • Cars / Tires
number of buyers
Number of Buyers
  • Certain goods are demanded more in certain areas
    • Surfboards / CA v. SD
change in demand v change in quantity demanded
Change in Demand v. Change in Quantity Demanded
  • A change in demand refers to a shift in the curve
  • Change in quantity demanded = A movement from one point to another point on the same demand curve
responsibilities of buyers
Responsibilities of Buyers
  • Researching
  • Ethics in paying
section 3
Section 3
  • Elasticity of Demand
    • Relationship between percentage change in in quantity demanded and the percentage change in price

% Change in quantity demanded

Elasticity of demand = ----------------------------------------------------

% Change in price

  • Elastic demand – when quantity demanded percentage changes more than the price
  • Inelastic demand – when quantity demanded percentage changes less than the price
  • Unit Elastic demand – when quantity demanded and price have similar relationships
determinants of elasticity
Determinants of Elasticity
  • The number of substitutes has great effects on elasticity
    • Heart Medicines
    • Breads
luxuries v necessities
Luxuries v. Necessities
  • Luxury – don’t need it to survive
  • Necessity – Food, medicine…
    • Which goods are elastic?
percentages of income
Percentages of Income
  • Making budgets on any level, percent of income is studied
  • Obvious which goods are more responsive to
  • Relationship to Time
    • Changing to adapt and adjust over time
what does it matter
What does it matter?
  • All versions of elasticity matter, because they relate to total revenue
case 1
Case 1
  • A rise in price does not necessarily mean a rise in revenue

Elastic demand + Price rise = TR Decrease

case 2
Case 2
  • If demand is elastic and price is decreased, revenue will go up
    • Elastic Demand + Price Decline = TR Increase
case 3
Case 3
  • Inelastic demand + Price Rise = TR Increase
  • If demand is inelastic a price rise will lead to a revenue increase
case 4
Case 4
  • If demand is inelastic and price declines, total revenue will decrease
  • Inelastic demand + Price decline = TR Decrease
unit elastic
Unit Elastic
  • Equal forces in opposite directions
  • No change to total revenue