Download - Chapter 4
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.