Chapter 4Demand

4.1: Understanding Demand

Demand the desire to own something and the ability to pay for it

BOTH factors must be present for demand to exist

Do I really Demand this?

Law of Demand

Consumers will buy more of a good when its price is lower, and less when the price is higher

Law of Demand in Action

This pizza is $1.00 per slice, how much would you buy? What if it were $5.00?

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

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

Demand Schedules

Demand Schedules

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

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

Demand Curves

Demand Curves

Graphic representation of a demand schedule

Shows the same information contained in the demand schedule, just in a different, more visual, way

Demand Curve Setup

Vertical axis will ALWAYS list the price

Horizontal axis will ALWAYS list the quantity

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

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

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

Occurs when the entire demand curve shifts, consumers buy different quantities at EVERY price

What Causes a Change in Demand?

6 Total Factors

Income, Consumer Expectations, Population, Demographics, Consumer Tastes and Advertising, and Prices of Related Goods

1. Income

Income

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

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

2. Consumer Expectations

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

3. Population

Population

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

Consider the effects caused by baby boomer generation?

ClothesFoodSchools

Biggest Demand for Baby Boomers Now?

Healthcare

4. Demographics

Facebook membership by age

Demographics

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

5. Consumers Tastes and Advertising

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

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

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

Elasticity of DemandChapter 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

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

Elastic Demand

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

Very responsive to price changes

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

Determining Elasticity

If X<1 Inelastic

If X>1 Elastic

If X = 1 Unit Elastic

Elasticity Formula

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

Qb = quantity before

Qa= quantity after

Pb = Price before

Pa = Price after

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

#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

#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

#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

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 Volt

Chevy Volt

$41,000

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.