Chapter 7 The Demand Curve and Elasticity of Demand
Dec 14, 2015
Chapter 7
The Demand Curve and
Elasticity of Demand
Graphing the Demand Curve
• A demand schedule is a table reflecting quantities demanded at different possibleprices.
• A demand curve shows the quantitydemanded of a good or service at each possible price. Demand curves slope downward, clearly showing the inverse relationship.
Determinants of Demand
• Main Idea: A change in the demand for a particular item shifts the entire demand curve to the left or right.
• *Increase moves right• *Decrease moves left
Highlight this in your notes!!
1. Population
• D1 – represents the original demand for TV’s
• D2 – represents the demand after the population increased
• If population decreased, demand would also decrease
2. Income
If Income increases, demand also increases.
3. Tastes & Preferences
*This refers to what people like and prefer to choose.
*Fads (trends)
This Beanie Baby graph represents the demand in the early 1990’s. As the popularity died down, the demand curve shifted back to the left.
FYI-There are Beanie Babies 2.0 now in stores featuring Cartoon characters (Madagascar, Diego & Dora, WonderPets)
4. SubstitutesDetermined by availability & price of substitute
Think it through!If the price of the substitute decreases, then you’ll buy that instead of the original item.
Vice versa:If the price of the substitute increases, you’ll be more of the original item.
5. Compliments
*Things that are bought and sold together
If the price of one decreases, the demand of BOTH complimentary items increases.
This examples shows:If the price of a digital camera decreases, the demand of the camera AND the flash memory increases.
The Price Elasticity of Demand
• Main Idea: Elasticity of demand measures how much the quantity demanded changes when price goes up or down.
• For some goods, a rise or fall in price greatly affects the amount people are willing to buy. This economic concept is referred to as elasticity.
• The measure of how much consumers respond to a given change in price is referred to as price elasticity of demand.
ExamplesElastic Demand• Luxury items, vacations,
high-end electronics, even coffee are examples of elastic goods/services and have a very elastic demand.
Inelastic Demand• Staple foods, medicine,
spices have an inelastic demand. A price change has little impact on the quantity demanded by consumers.
Three factors determine the price elasticity of demand for an item:
– The existence of substitutes
– The percentage of a person’s total budget devoted to the purchase of that good
– The time consumers are given to adjust to a change in price
Figure 8
Figure 9
Figure 11
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