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Chapter 4

Chapter 4. Demand. Demand  the desire to own something and the ability to pay for it BOTH factors must be present for demand to exist. 4.1: Understanding Demand. Do I really Demand this?. Consumers will buy more of a good when its price is lower, and less when the price is higher.

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Chapter 4

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  1. Chapter 4 Demand

  2. Demand the desire to own something and the ability to pay for it • BOTH factors must be present for demand to exist 4.1: Understanding Demand

  3. Do I really Demand this?

  4. Consumers will buy more of a good when its price is lower, and less when the price is higher Law of Demand

  5. This pizza is $1.00 per slice, how much would you buy? What if it were $5.00? Law of Demand in Action

  6. Substitution effect When consumers react to an increase in a good’s price by consuming less of that good and more of a substitute good • Consumers would choose an alternative to pizza if it went up in price Influencing Factors

  7. The change in consumption that results when a price increase causes real income to decline • Opposite is also true, if prices fall you now feel wealthier • Buy more due to a lower price; Less due to a higher price Income Effect

  8. Demand Schedules

  9. A table that lists the quantity of goods a person will buy at various prices in a market • Shows how much you will buy at each individual price • Example: Mr. Burden buys 3 slices of pizza at $1.50 per slice Demand Schedules

  10. Table that lists the quantity of a good all consumers in a market will buy at various prices • Example: The whole PHS faculty buys 55 slices of pizza at $1.50 per slice • Page 89 Market Demand Schedules

  11. Demand Curves

  12. Graphic representation of a demand schedule • Shows the same information contained in the demand schedule, just in a different, more visual, way Demand Curves

  13. Vertical axis will ALWAYS list the price • Horizontal axis will ALWAYS list the quantity Demand Curve Setup

  14. Notice two things about the curve on page 90 • First, only shows the relationship between the price of the good and the quantity demanded • Secondly, it is downward sloping. As price decreases, quantity demanded increases Page 90

  15. Shifts in the Demand Curve Chapter 4, Section 2

  16. Latin phrase that means “all other things held constant” • We are only taking the price of the good into account • Demand curves are accurate as long as no other factors change besides the price Ceteris Paribus

  17. Do not confuse the two • A change in Quantity demanded is a change at one price only • A change in Demand is a change at all price levels, therefore forming an entire new curve Change in Demand vs Change in Quantity Demanded

  18. Occurs when the entire demand curve shifts, consumers buy different quantities at EVERY price Change in Demand

  19. 6 Total Factors • Income, Consumer Expectations, Population, Demographics, Consumer Tastes and Advertising, and Prices of Related Goods What Causes a Change in Demand?

  20. 1. Income

  21. Consumer’s income effects their demand for goods • When income rises, the demand curve shifts to the right (increases) • When income falls, the demand curve shifts to the right (decreases) Income

  22. Normal goods A good that consumers will demand more of when their income rises • Steak for dinner, not Ramen noodles Normal vs Inferior Goods

  23. A good that consumers will demand less of when their income increases • Buy new cars instead of used; Name brands, not generic brands Inferior Goods

  24. 2. Consumer Expectations

  25. Expectations about the future impact our demand for goods • If you expect prices to rise in the future, your demand for that product will rise • If you expect the price to fall in the future, your demand also falls Consumer Expectations

  26. 3. Population

  27. Rise in population leads to increased demand for houses, food, etc • Consider the effects caused by baby boomer generation? • Clothes • Food • Schools Population

  28. Healthcare Biggest Demand for Baby Boomers Now?

  29. Facebook membership by age 4. Demographics

  30. The statistical characteristics of populations and population segments, especially when used to identify consumer markets • Businesses use this data to identify who potential customers are, where they live, and how likely they are to purchase a specific product Demographics

  31. Which portion of the American population is growing at the largest rate? • Due to this surge, businesses are devoting their resources to producing goods and services for these consumers • Hint…think across the street Largest population on the rise?

  32. 5. Consumers Tastes and Advertising

  33. Advertising shifts demand curves…that is a fact! • Advertising is everywhere, streets, TV, Radio, Online • 1.9 Billion spent in advertising on Facebook and MySpace in 2008 Consumer Tastes and Advertising

  34. Complements two goods that are bought and used together • Example…Peanut butter and Jelly • Substitutes Goods that are used in place of one another • Example…Beef and Chicken 6. Price of Related Goods

  35. When price of a product rises, the demand for its complement will fall • The opposite is also true • When the price of a product rises, the demand for its substitute will rise • Opposite is al true for this Effect on Curves

  36. Elasticity of Demand Chapter 4: Section3

  37. A measure of how consumers respond to price changes • Measures how drastically buyers will cut back or increase their demand for a good when the prices rises or falls Defining Elasticity

  38. A good is INELASTIC if you buy the same amount or just a little less of a good after a large price increase; Not very sensitive to price changes • These goods will most likely be your needs and necessities • Medicine, baby formula/milk, etc Inelastic Demand

  39. A good is ELASTIC if you buy much less of a good after a small price increase • Very responsive to price changes Elastic Demand

  40. A good is UNIT ELASTIC is the change in demand is proportional after a price change • Example: If a product is on sale for 20% off you will buy 20% more Unit Elastic

  41. If X<1 Inelastic • If X>1 Elastic • If X = 1 Unit Elastic Determining Elasticity

  42. {Qb- QA)/ (Qb + Qa}/(Pb-Pa)/ (Pb + Pa} • Qb = quantity before • Qa= quantity after • Pb = Price before • Pa = Price after Elasticity Formula

  43. #1 Availability of Substitutes • If there are few substitutes available, you will buy more likely to buy the item even with an increase in price • If substitutes are available, you are less likely to buy the item Factors Affecting Elasticity

  44. How much of your budget can you spend? • If you spend a large share of your income on a good, a price increase will force you to make some tough choices #2 Relative Importance

  45. Will always buy necessities They will be Inelastic • Luxuries are items we can more easily cut back on They will be Elastic • Necessities and luxuries will vary from person to person #3 Necessities vs. Luxuries

  46. May take some time to change your spending habits • 1970’s gas crisis is good example • Price of gas rose quickly, but little changed during the short term • People still bought same amount of gas #4 Change Over Time

  47. Over time though people started to demand smaller, more fuel efficient cars • Reduced their consumption for gas and found substitutes • So gas in the short term was inelastic, over time it became more elastic

  48. Chevy Volt

  49. $41,000 • It can be plugged into a household electric socket and charged fully within about six hours. Completely charged it can drive roughly 40 miles on electricity alone • If the battery does run down, the 1.0-liter, three-cylinder gas engine acts as a generator to charge the battery and provides enough power to for up to an additional 600 miles. Chevy Volt

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