UNIT 2 MICROECONOMICS
CHAPTER 4 DEMAND
SECTION 1 WHAT IS DEMAND?
DEMAND-the desire, ability, and willingness to buy a product.
I. AN INTRODUCTION TO DEMAND
A. DEMAND ILLUSTRATED-How do you measure demand? Gauge reactions
consumers have to different prices. Poll consumers about prices. Study data
B. THE INDIVIDUAL DEMAND SCHEDULE-A DEMAND SCHEDULE is a lisiting
that shows the various quantities demanded of a particular product at all prices that might
prevail in the market at a given time.
C. THE INDIVIDUAL DEMAND CURVE-The demand schedule can also be shown
graphically as the downward-sloping line. DEMAND CURVE-a graph showing the
quantity demanded at each and every price that might prevail in the market.
II. THE LAW OF DEMAND-For practically every product or service, higher prices are
associated with a smaller amount demanded. Lower prices are associated with larger amounts
demanded. This is known as THE LAW OF DEMAND-which states that the quantity demanded
of a good or service varies inversely with its price. In other words, when price goes up, quantity
demanded goes down.
A. FOUNDATIONS FOR THE LAW OF DEMAND-stating something in the form of a
LAW might seem too strong, but economists have 2 reasons for doing so.
1. The inverse relationship between price and quantity.
2. Common sense and simple observation.
B. THE MARKET DEMAND CURVE-the demand curve that shows the quantities
demanded by everyone who is interested in purchasing the product. The market demand
curve is similar to the individual demand curve. Both are downward sloping.
Ill. DEMAND AND MARGINAL UTILITY-Marginal utility is the extra satisfaction a person
gets from acquiring or using one more unit of a product. The reason we buy a product/service in
the first place is because it brings us satisfaction. DIMINISHING MARGINAL UTILITY-states
that the extra satisfaction we get from using additional quantities of the product begins to
diminish. When you reach the point where marginal utility is less than the price, you stop buying.
SECTION 2 -FACTORS AFFECTING DEMAND
1. CHANGE IN THE QUANTITY DEMANDED-a movement along the demand curve that
shows a change in the quantity of the product purchased in response to a change in price.
A. THE INCOME EFFECT-When prices drop, consumers pay less for the product and as
a result, have some extra real income to spend. If prices go up, consumers have less real
income to spend. The INCOME EFFECT- the change in quantity demanded because of a
change in the price that alters consumer's real income.
B. THE SUBSTITUTION EFFECT-is the change in quantity demanded because of the
change in the RELATIVE price of the product.
II. CHANGE IN DEMAND -something happens to cause people to be willing to buy
DIFFERENT amounts of the product at the same price. The demand curve itselfwill shift
A. CONSUMER INCOME-changes in consumer income can cause a change in demand.
When income goes up, you can afford to buy more goods and service. When income goes
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down, you can afford to buy less.
B. CONSUMER TASTE-consumers do not always want the same things. Advertising,
fashion trends, new products, season changes, can all affect consumer tastes. If consumers
want more of the product, they will buy more and the curve will shift to the right. If they
get tired of a product, they will buy less and the curve will shift to the left.
C. SUBSTITUTES-these products can be used in place of another product
D. COMPLEMENTS-The use of one product can increase the use of another.
E. CHANGE IN EXPECTAnONS -this refers to the way consumers think about the
future .. If they think prices will increase in the future, they will buy more now and if they
think prices will decrease, they will buy less now and wait until prices drop.
F. NUMBER OF CONSUMERS- an increase in the number of consumers in the
population can cause the curve to shift to the right. A decrease in the number of
consumers in the market will cause the demand curve to shift to the left.
SECTION 3 ELASTICITY OF DEMAND­
I. ELASTICITY- a measure of responsiveness that tells us how a dependent variable such as
quantity responds to a change in an independent variable such as price.
A. DEMAND ELASTICITY-the extent to which a change in price causes a change in the
quantity demanded The demand for most products is such that consumers do care about
changes in prices-and the concept of elasticity tells us just how sensitive consumers are to
these changes.
B. ELASTIC DEMAND-is when a given change in prices causes a relatively larger
change in quantity demanded..
C. INELf\STIC DEMAND-is when a change in price causes a relatively smaller change
in the quantity demanded.
D. UNIT ELASTIC DEMAND-Sometimes the demand for a product or service falls
midway between elastic and inelastic. UNIT ELASTIC is when a given price change
causes a proportional change in quantity demanded.
II. THE TOTAL EXPENDITURES TEST
A. DETERMINING TOTAL EXPENDITURES- Total expenditures are found by
multiplying the price of a product by the quantity demanded for any point along the
demand curve.
B. THREE RESULTS- ELASTIC increase in price causes expenditures to go down.
Decrease in price causes expenditures to go up. Movement of price and expenditures is
opposite. INELASTIC Lower price, lower expenditures. Higher price, higher expenditure.
Movement of price and expenditures are same direction. UNIT ELASTIC- A change in
price causes no change in expenditures.
C. ELASTICITY AND PROFITS- Very important to businesses. If they want to increase
their profits, they need to know if the product is elastic or inelastic. If elastic, raising
prices might cause profits to go down
III. DETERMINANTS OF DEMAND ELASTICITY
A. CAN THE PURCHASE BE DELAYED? If the answer is yes, the product is probably
elastic. If the answer is no, the product is inelastic.
B. ARE ADEQUATE SUBSTITUTES AVAII..ABLE? If adequate substitutes are
available, then consumers can switch back and forth and the product is probably elastic.
If no substitutes are available, the product is inelastic.
C. DOES THE PURCHASE USE A LARGE PORTION OF INCOME? If the answer to
this question is yes, then the product is probably elastic. If the answer is no, the product is
probably inelastic. The answer for some products might be yes and no. Medical care is
inelastic yet is does take a large portion of income ..
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