chapter 4 demand. free enterprise economy in the united states producers make and sell goods at the...
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Chapter 4Demand
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Free Enterprise Economy
• In the United States producers make and sell goods at the highest possible price.
• Buyers buy goods at the lowest possible price
• Forces of demand help set these prices
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Definition of Demand
• Demand – desire to have some good or service and the ability to pay for it.
• If you cant afford something you have no real demand for it. Even though you may want it.
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• Law of demand – the price of a good or service goes up people usually buy less of it.
• So quantity demanded and price have an inverse relationship.
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Demand ScheduleShows the law of demand in a chart form.
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Demand Curve Shows the laws of demand in a graph form.
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Factors That Affect Demand
• Law of Diminishing Marginal Utility – the marginal benefit of using each additional unit of a product during a given period will decline.
• Remember when using the term marginal we are referring to one more of something.
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Do you think the 50th hot dog Joey Chestnut ate tasted as good as the first?
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• Substitute effect – consumers react to a change in the price of a good or service by buying a substitute product.
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• Income effect - change in the amount of a product a person will buy because of the purchasing power of their income has changed.
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6 Factors that change Demand(exam)
• Income• Market Size• Consumer Tastes• Consumer Expectations• Substitute Goods• Complementary Goods
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• Income – change in income will cause buyer to buy less or more
• Market Size – if the market gets bigger products within that market have a higher demand
• Consumer Tastes – higher the popularity the more demand of that product
• Consumer Expectations – if the buyer expects a change in price that will determine when the buyer buys
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• Substitute Goods – if a good can be used in place of another then that good will be purchased if it is cheaper.
• Complementary Goods – an increase in demand for one good, will cause an increase in demand for another
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Change in Demand vs. Change in Quantity Demanded
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• Change in quantity demanded is just the change in demand due to the change in price.
• On a curve it is the movement from one point to another.
• Change in demand is an actual shift in the demand curve. This would mean the actual market changes affecting demand.
• On a curve this is the entire line moving either to the left or right.
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Elasticity of Demand
• Elasticity of demand – a measure of how responsive consumers are to changes in price
• Demand is either elastic or inelastic
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Elastic
• Elastic – if demand is elastic then a change in price either up or down will lead to a large change in quantity demanded.
• Examples of these types of products would be???
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Inelastic
• Inelastic – change in price leads to a small change in quantity demanded.
• Examples of these products would be???
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How can a product become more elastic?
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Determinates of Elasticity
• 1. Substitute goods – if there are no substitute goods for that product, the demand is inelastic.
• If the price of your medication goes up what are you going to do?
• If the price of Arizona Ice Tea goes up what are you going to do?
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• 2. Proportion of Income – if you spend very little on an item and the price of that item goes up, you will still buy that item at relatively the same rate
• Examples – candy, pencils, q-tips• These examples would be inelastic
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• Examples of elastic products in proportion of income is…
• Xbox games, another xbox controller, xbox live.• If the price of these products go up it is a
higher percentage of your income that goes towards buying them, so demand will go down.
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• 3. Necessity vs. Luxuries – milk might be a necessity for some, so an increase in price will result in a small change in quantity demanded, so the demand is inelastic since change in quantity demanded is smaller than change in price
• Ice cream on the other hand is a luxury so an increase in price will result in a large change in quantity demanded, so the product is elastic.
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Total Revenue
• Total Revenue – the amount of money a company gets from selling its products