ECON CH 4.

0
Demand
Mr. Castaeda,Vincent Memorial Catholic High School

Based on Gary E. Clayton, Ph.D., Glencoe McGraw-Hill, Economics Principles & Practices, 2005
CH 4.1
 1. AN INTRODUCTION TO DEMAND
Continued

Demand is the desire , ability, and willingness to buy a

product
An individual demand curve illustrates how the
quantity that a person will demand varies depending
on the price of a good or service

Notice as price goes
down my demand for
coffee increases
1. AN INTRODUCTION TO DEMAND

Economist 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 downward slope
2. THE LAW OF DEMAND
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 the price goes down, the quantity demanded
goes up
2. THE LAW OF DEMAND
Continued
A market demand curve illustrates how the quantity
that all interested persons ( the market ) will demand
varies depending in the price of a food or service
3. DEMAND AND MARGINAL UTILITY

Marginal utility is the usefulness or satisfaction a person

receives from getting or using one more unit of a
product
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
CH 4.2
1. CHANGE IN QUANTITY DEMANDED

The change in quantity demanded shows the change in

the amount of a product purchased when there is a
change in price
1. CHANGE IN QUANTITY DEMANDED
Continued

The income effect means that as prices drop,

consumers are left with extra real income
Substitution effect means that price can cause
consumers to substitute one product with another
similar but cheaper item
 .
Notice as price goes
down my demand for
coffee increases
2. CHANGE DEMAND

The change in demand is when people buy different

amounts of the product at the same prices
A change in demand can be caused by a change in
income, tastes, a price change in a related product
(either substitute or complement), consumer
expectations, and the number of buyers

Notice that its an actual
shift of the demand curve
 DEMAND CURVE
A Change in Demand:
A shift in the demand curve
Consumers (aggregate demand)
behavior have been influenced
by determinants of demand
Change in quantity Demanded:
Is a movement along the fixed
demand curve.
Moving from point x to point y
DEMANDS AKA:
Is a schedule or a curve showing the amount of a
product that buyers are willing and able to purchase, in
a particular time period, at each possible price in a
series of prices.
 DEMAND AND INCOME EFFECTS
NORMAL GOOD INFERIOR GOOD OR BAD
A good that is consumed more An inferior good varies inversely
when income increases. Or vice with the income effect. When
versa, a good that is consumed income increases you consume
less when income decreases. less of the inferior good.
Conversely, you consume more
when your income decreases.
EXAMPLES

NORMAL INFERIOR
NORMAL GOODS
 INFERIOR GOOD
VS NORMAL GOOD

Good X is the inferior good

Good Y is the normal good
RELATED GOODS

SUBSTITUTE GOOD COMPLEMENTARY GOOD

Is one that can be used in Is one that is used together
place of another good with another good
DETERMINANTS OF DEMAND
A change in buyers:
Taste: i.e. EV cars become more popular.
The # of buyers: i.e. the avg. lifespan increases.
Consumer income: i.e. you get a raise
Change in the prices of substitutes or complements: i.e.
airfare cost decreases might decrease the demand for the bus
Consumer expectations: i.e. increase in gas prices
CH 4.3
Elasticity
THE TOTAL EXPENDITURE TEST
In other words what happens to total revenue
Price x Quantity = Total Revenue (TR) or Total Expenditures
Changes in expenditures depend on the elasticity of a demand curve
Understanding the relationships between elasticity and profits can help producers effectively
price their products.
if the change in the price and expenditures move in opposite directions on the curve, the
demand is elastic
If they move in the same direction, the demand in inelastic
If there is no change in expenditures, demand is unit elastic
1. DEMAND ELASTICITY
Elasticity measures how sensitive consumers are to price changes

Demand:
is elastic when a change in price causes a large change in demand
is inelastic when a change in price causes a small change in demand
is unit elastic when a change in price causes a proportional change
in demand
Total Revenue Test
PRICE ELASTICITY OF DEMAND
measures the responsiveness of consumers to a price
change. AKA elasticity coefficient.

=

The averages of the 2 prices and 2 quantities are used as

the base references in calculating the percentage changes
THREE CASES
ELASTIC DEMAND > 1
Given: 2% decline in price of flowers results in 4% increase in quantity
demanded

=

.04
= =2
.02
Notice = 2 > 1; , .
This implies consumers are sensitive to the price change of flowers
 THREE CASES
INELASTIC DEMAND < 1
Given: 2% decline in price of coffee results in 1% increase in quantity
demanded

=

.01
= = .5
.02
Notice = .5 < 1; , .
This implies consumers are not sensitive to the price change of coffee
THREE CASES
UNIT ELASTIC DEMAND = 1

Given: 2% decline in price of chocolates results in 2% increase in

quantity demanded

=

.02
= =1
.02

Notice = 1 = 1; , .
PERFECT INELASTIC/ELASTIC DEMAND
 MORE GRAPHS AND ELASTICITY COEFFICIENTS

= > 1 = 1 < 1 = 0
Total Revenue Test
EASIER TO MEMORIZE

Type of Demand Change in Price Effect on TR

Elastic Price TR
Elastic Price TR
Inelastic Price TR
Inelastic Price TR
Type of Demand Change in Price Change in Qt. Effect on TR
Unit Elastic Price Qt. Unchanged
Unit Elastic Price Qt. Unchanged
PRICE ELASTICITY
OF DEMAND
ALONG A LINEAR
CURVE
DETERMINANTS OF PRICE ELASTICITY OF DEMAND
Substitutability

The larger the amount of substitute goods that are

available the greater the price elasticity of demand
i.e. chocolate candy bars
DETERMINANTS OF PRICE ELASTICITY OF DEMAND
Proportion of Income

Other things equal, the higher the price of a good

relative to consumers incomes , the greater the price
elasticity of demand.
Price elasticity of demand for cars or houses are very
elastic.
DETERMINANTS OF PRICE ELASTICITY OF DEMAND
Luxuries versus necessities

The more a product is considered a luxury than a

necessity, the greater the price elasticity of demand.
Necessities have a low elasticity of demand. i.e. salt
DETERMINANTS OF PRICE ELASTICITY OF DEMAND
Time

In general product demand is more elastic the

longer the time period under consideration.
Customers need time to adjust to changes in price
Example Beef, Gas
CROSS ELASTICITY OF DEMAND
Measures how sensitive consumer purchases
of one product (X) are to a change in the price
of some other product Y
CROSS ELASTICITY OF DEMAND

in qt.demanded of
=
in pri
This cross elasticity concept allows us to understand
substitute and complementary goods.
Conversely to price elasticity the coefficients of can be
either negative or positive
 CROSS ELASTICITY OF DEMAND
Substitute goods
in qt.demanded of
If = + ,
in pri

meaning the sales of x move in the same direction as change in the

price of y,
Then x and y are substitutes
i.e. Evian water and Dasani
The larger the positive , the greater the substitutability of x & y
 CROSS ELASTICITY OF DEMAND
Complementary goods
in qt.demanded of
If = ,
in pri
meaning the sales of x move in the opposite direction as change in the
price of y.
So, we know x and y go together
Therefore x and y are complements
Example, fries and hamburgers
The larger the negative , the greater the complimentary between x & y
CROSS ELASTICITY OF DEMAND
Independent goods

in qt.demanded of
If = = 0,
in pri

the two products being considered are unrelated or

independent goods
Example walnuts and plums
WHY DO WE CARE ABOUT
Because companies analyze cross elasticity when considering
price changes among their products. Governments use it
when analyzing the impact of company merges on consumers.
CROSS ELASTICITY OF DEMAND

LOW CROSS ELASTICITY HIGH CROSS ELASTICITY

Indicates the two products are weak Indicates the two products are highly
substitutes for each other substitutable for each other
Hence, little effect on each other. Hence, large effect on each other
i.e. Coke and Sprite i.e. Coke and Pepsi
INCOME ELASTICITIES OF DEMAND
Measures the degree to which consumers respond
to a change in their incomes by buying more or less
of a particular good.
INCOME ELASTICITIES OF DEMAND
in qt.demanded of
=
in
This income elasticity concept allows us to understand
normal and inferior goods.
Conversely to price elasticity the coefficients of can be
either negative or positive
 Cross and income elasticities of demand
Type of Good Description Values of
Coefficients

Substitutes Qt. demanded of x s in the same direction as the in price of y > 0

Positive

Complements Qt. demanded of x s in the opposite direction as the in price of y < 0

Negative

Normal Goods Qt. demanded of the product (x) s in the same direction as the in > 0
income Positive

Inferior Goods Qt. demanded of the product (x) s in the opposite direction as the < 0
in income Negative
CROSS AND INCOME ELASTICITIES OF DEMAND
Normal Goods
Most normal goods have > 0
An increase in income leads to the greater demand of the
subject matter
Note, different products have different income elasticity of
demand
i.e. automobiles have +3; conversely, farm products only
about +.20
What happens during recession?
CROSS AND INCOME ELASTICITIES OF DEMAND
Inferior Goods
Inferior goods have < 0
A decrease in income leads to the greater demand of inferior
goods
i.e. used car tires, used clothing, cabbage, bus tickets, etc.
The reciprocal is also true, when income goes up you buy
lease of these goods
What happens during recession?