Chapter Four: Demand

CHAPTER FOUR: DEMAND12th Grade Economics

Chapter Four: Demand1. What is Demand?2. Factors Affecting

Demand3. Elasticity of Demand

Familiarize yourself with all the key terms from this chapter.

Chapter Four: DemandACOS: 3. Analyze graphs

to determine changes in supply and demand and their effect on equilibrium price and quality.

After reading the section, create a six-tab Foldable.

Cut the first tab off and write “4.1 What is Demand?”

Write demand, demand schedule, demand curve, the Law of Demand, and market demand curve on the remaining tabs (one term per tab).

Define each term AND provide an example/illustration for each.

4.1 What is Demand?

4.1 What is Demand?Daily Objectives: Describe and

illustrate the concept of demand.

Explain how demand and utility are related.

4.1 What is Demand? Basics of Demand Demand and

Marginal Utility

Guided PracticeCreate a five tab book for the vocabulary words from 4.1.

Provide the definition of each word and an example.

Basics of Demand Demand is “the desire,

ability, and willingness to buy a product.”-89.

Demand is a microeconomic concept.

Microeconomics is “the area of economics that deals with behavior and decision making by small units such as individuals and firms.”

Basics of Demand A demand schedule

shows the various quantities of a product demanded at different prices at a given time.

When the information from a demand schedule is plotted on a graph, it is called a demand curve.

Guided Practice Notice the shape

and direction of the demand curve.

How does the price effect the quantity demanded?

Basics of Demand The Law of Demand

states that “the quantity demanded at each and every price varies inversely with its price.” The more something costs,

the people demand less. The less something costs,

the people demand more. Be sure to note the

quantity demanded (not demand itself) is affected.

Basics of DemandA market demand curve combines the various individual demand curves into one.

Demand and Marginal Utility

Remember utility is the amount of usefulness or satisfaction person gets from the use of a product.

Marginal utility is “the extra usefulness or satisfaction a person gets from acquiring or using one more of a product.” -93. Example: A second hamburger

may also help satisfy your hunger.

Demand and Marginal Utility

The principle of diminishing marginal utility states that the utility of a product decreases with each additional unit of a product. Example: A tenth copy of

the same newspaper offers little utility over the first.

Guided Practice

Name other examples where the principle of diminishing marginal utility applies.

Guided Practice For what does

the P stand? For what does

the Q stand? Which curve is

the demand curve?

Guided PracticeCreate a market demand curve using the demand schedule on the left.

After reading the section, create a horizontal, three-tab Foldable with a small space at the bottom.

Write income, tastes & expectations, and price of related goods on the three tabs (one per tab).

Explain how each factor changes demand inside each tab.

4.2 Factors Affecting Demand

Chapter Four: DemandACOS: 3. Analyze graphs

to determine changes in supply and demand and their effect on equilibrium price and quality.

4.2 Factors Affecting Demand

Daily Objectives: Explain what causes

a change in quantity demanded.

Describe the factors that could cause a change in demand.

4.2 Factors Affecting Demand

Changes in Quantity Demanded

Changes in Demand

Changes in Quantity Demanded

A change in the quantity demanded is usually a result of the income effect or the substitution effect.

A change in the quantity demanded is represented by movement along the demand curve in response to a change in price.

Figure 4.3A Change in Quantity DemandedFigure 4.3A Change in Quantity Demanded

The income effect is the “change in quantity demanded because of a change in price that alters consumers’ real income.” When prices fall, consumers

have greater purchasing power.

When prices rise, consumers have less purchasing power.

The quantity demanded reflects the extra real income.

Changes in Quantity Demanded

The substitution effect allows consumers to replace costly items with cheaper items that are similar. (ex: DVD vs. VHS)

Changes in Quantity Demanded

Changes in DemandChanges in demand cause the demand curve itself to move. The curve shifts to the right to show an increase in demand.

It shifts to the left to show a decrease.

Changes in Demand

Figure 4.3A Change in Quantity DemandedFigure 4.3A Change in Quantity Demanded

Figure 4.4A Change in DemandFigure 4.4A Change in Demand

Change in Quantity Demanded Change in Demand

Changes in DemandFigure 4.4A Change in DemandFigure 4.4A Change in Demand

Changes in Demand Demand is influenced

by six factors: Consumer income

(ex: eating from the dollar menu vs. Texas Roadhouse)

Consumer Tastes (ex: fuel efficient cars vs. bigger cars; 8 tracks vs. C.D.’s.)

Changes in Demand Substitutes (ex: butter vs. margarine)

Complements (ex: peanut butter and jelly; laptops and software)

Changes in Demand Change in Expectations (ex: PS2 vs. PS3)

Number of Consumers (ex: baby boomers)

Changes in Demand The prices of the substitutes or

complements influence demand of the related products.Figure 4.4A Change in DemandFigure 4.4A Change in Demand

Read this section.4.3 Elasticity of Demand

4.3 Elasticity of DemandDaily Objectives: Explain why elasticity

is a measure of responsiveness.

Analyze the elasticity of demand for a product.

Understand the factors that determine demand.

4.3 Elasticity of DemandElasticityTotal Expenditures Test

Determinants of Demand Elasticity

Elasticity Elasticity measures

how sensitive consumers are to price changes.

Demand is elastic when a change in price causes a LARGE change in demand.

Figure 4.5The Total Expenditures Test for Demand ElasticityFigure 4.5The Total Expenditures Test for Demand Elasticity

Elasticity Demand is

inelastic when a change in price causes a SMALL change in demand.

Figure 4.5The Total Expenditures Test for Demand ElasticityFigure 4.5The Total Expenditures Test for Demand Elasticity

Elasticity Demand is unit

elastic when a change in price causes a PROPORTIONAL change in demand.

Figure 4.5The Total Expenditures Test for Demand ElasticityFigure 4.5The Total Expenditures Test for Demand Elasticity

Guided Practice

What are examples of items for which an

increase in price would cause you or your family

to reconsider buying them?

Total Expenditures Test Price times quantity demanded equals

expenditures. Changes in expenditures depend on the

elasticity of the demand curve. If the change in price and expenditures

move in the opposite directions on the curve, demand is elastic.

If they move in the same direction, demand is inelastic.

If there is no change in expenditures, demand is unit elastic.

Understanding elasticity helps producers effectively price their products.

Figure 4.5The Total Expenditures Test for Demand ElasticityFigure 4.5The Total Expenditures Test for Demand Elasticity

Figure 4.5The Total Expenditures Test for Demand ElasticityFigure 4.5The Total Expenditures Test for Demand Elasticity

Guided Practice Create a three-tabbed Foldable about

demand elasticity. Elastic Demand Unit Elastic Demand Inelastic Demand

Guided PracticeWhat are examples

of items for which a drop in price would NOT encourage you to buy more of an item?

Determinants of Demand Elasticity

Demand is elastic if the answer to the following questions are “yes.” Can the purchase be delayed? Some purchases

cannot be delayed, regardless of price changes. (ex: medicine)

Are adequate substitutions available? Price changes can cause consumers to substitute one product for a similar product. (beef vs. chicken)

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.

All three answers do not necessarily have to be “yes” or “no.”

Figure 4.6Estimating the Elasticity of DemandFigure 4.6Estimating the Elasticity of Demand

Guided Practice

What are some things you buy for which price is not an issue?

Independent Practice Use your textbook

to copy AND answer questions 1-6 under the “Reviewing the Facts” section on page 110.

Reviewing the Facts 1. Describe a demand

schedule and a demand curve. How are they alike?

A demand schedule is a list that shows the quantities demanded for a product at all prices that prevail in the market. A demand curve shows the same data in graphic form.

Reviewing the Facts 2. Explain how the principle of

diminishing marginal utility is related to the downward-sloping demand curve.

Diminishing marginal utility states that as we use more of a product, we are not willing to pay as much for it. People will not pay as much for the second and third product as they did for the first, therefore the demand is downward sloping.

3. Describe the difference between the income effect and the substitution effect.

The income effect is the change in quantity demanded due to a change in price that alters consumers’ real income. The substitution effect is the change in quantity demanded due to the change in the relative price of the product.

Reviewing the Facts

4. Identify the five factors that can cause a change in market demand.

The five factors that can cause a change in market demand are: consumer income consumer tastes substitutes and complements change in expectations number of consumers

Reviewing the Facts

5. Describe the difference between elastic demand and inelastic demand.

When demand is elastic, there is a relatively large change in quantity demanded when the price changes, giving the demand curve a flat slope. The change in quantity demanded is much smaller for inelastic demand, making the slope of the demand curve steeper.

Reviewing the Facts

6. Explain how the total expenditures test can be used to determine demand elasticity.

By observing the change in total expenditures when the price changes, you can determine demand elasticity. If expenditures and price move in opposite directions, demand is elastic, If they move in the same direction, demand is inelastic. If expenditures do not change, demand is unit elastic.

Reviewing the Facts