Chapter 4 – Demand

Glencoe McGraw-HillEconomics

Principles & Practices

Objective:1. Explain the meaning and

concept of demand.2. Explain the purpose of a

demand schedule.3. Illustrate the concept of

demand in the form of a graph.

4.1 What is Demand?

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I. An Introduction to Demand

A. Demand is the desire, ability, and willingness to buy a product.

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I. An Introduction to Demand

B. An individual demand curve illustrates how the quantity that a person will demand varies depending on the price of a good or service.

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I. An Introduction to Demand

C. Economists analyze demand by listing prices and desired quantities in a demand schedule (chart). When the demand data is graphed, it forms a demand curve with a downward slope.

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DEMANDSCHEDULE

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Think about something you have been wanting to buy. What is its price? At what price would you be willing to buy an item?

DISUSSION

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II. The Law of Demand

A. The Law of Demand states that the quantity demanded of a good or service varies inversely with its price. When price goes up, the quantity demanded goes down; when price goes down, the quantity demanded goes up.

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II. The Law of Demand

B. A market demand curve illustrates how the quantity that all interested persons (the market) will demand varies on the price of a good or service.

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Why is price a consumer’s obstacle to buying?

Answers will vary but may include that a consumer’s money is limited, and the price of a product forces the consumer to determine how much his or her demand is for the product.

DISUSSION

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III. Demand & Marginal Utility

A. Marginal utility is the extra usefulness or satisfaction a person receives from getting or using one more unit of a product.

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III. Demand & Marginal Utility

B. The principle of diminishing marginal utility states that the satisfaction we gain from buying a product lessens as we buy more of the same product.

Objective:1. Explain the causes of a

change in quantity demanded.

2. Describe the factors that could cause a change in demand.

3. Understand the relationship between the demand curve and diminishing marginal utility.

4.2 The Law of Demand

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I. Change in the Quantity Demanded

A. The change in quantity shows a change in the amount of a product purchased when there is a change in price.

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B. The income effect means that as prices drop, consumers are left with extra real income.

I. Change in the Quantity Demanded

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C. The substitution effect means the price can cause consumers to substitute one product with another similar but cheaper item.

I. Change in the Quantity Demanded

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II. Change in Demand

A. A change in demand is when people buy different amounts of the product at the same prices.

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B. A change in demand can be caused by a change in income, tastes, a price change in a related product (either because it is a substitute or complement), consumer expectations, and the number of buyers.

II. Change in the Demand

Objective:1. Analyze the elasticity of

demand for a product.2. Explain the 3 determinates

of demand elasticity.

4.3 Elasticity of Demand

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I. Demand Elasticity

A. Elasticity measures how sensitive consumers are to price changes.

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B. Demand is elastic when a change in price causes a large change in demand.

I. Demand Elasticity

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C. Demand is inelastic when a change in price causes a small change in demand.

I. Demand Elasticity

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D. Demand is unit elastic when a change in price causes a proportional change in demand.

I. Demand Elasticity

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II. The Total Expenditures Test

A. Price times quantity demanded equals total expenditures.

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B. Changes in expenditures depend on the elasticity of a demand curve – if the change in price & expenditures move in opposite directions on the curve, the demand is elastic; if they move in the same direction, the demand is inelastic; if there is no change in expeditures, demand is unit elastic.

II. The Total Expenditures Test

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C. Understanding the relationship between elasticity and profits can help producers effectively price their products.

II. The Total Expenditures Test

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III. Determinants of Demand Elasticity

• Demand is elastic if the answer to the following questions are:

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A. Can the purchase be delayed? Some purchases cannot be delayed, regardless of price changes.

III. Determinants of Demand Elasticity

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B. Are adequate substitutions available? Price changes can cause consumers to substitute one product for a similar product.

III. Determinants of Demand Elasticity

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C. Does the purchase use a large portion of income? Demand elasticity can increase when a product commands a large portion of a consumer’s income.

III. Determinants of Demand Elasticity