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Demand

Demand. Chapter 4. What is demand?. Microeconomics Area of economics that deals with behaviors and decision making by small units Individuals and firms (businesses) Demand The desire, ability, and willingness to buy a product. Why is demand important to businesses?

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Demand

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  1. Demand Chapter 4

  2. What is demand? • Microeconomics • Area of economics that deals with behaviors and decision making by small units • Individuals and firms (businesses) • Demand • The desire, ability, and willingness to buy a product • Why is demand important to businesses? • What are the factors that influence demand? • Price • Utility • The usefulness or satisfaction a person gets from using a product

  3. Why is utility so important? • Marginal utility • The extra usefulness or satisfaction a person gets from acquiring or using additional units of the product • Example: Ice cream • Does this item show marginal utility? • Diminishing marginal utility • The extra satisfaction we get from using or obtaining additional quantities of the same product decreases • Ice cream example • How do consumers react to DMU?

  4. Movement along the demand curve • Change in quantity demanded • Movement from point to point on the demand curve indicates a different quantity is purchased in response to a change in price • Income effect • The portion of a change in quantity demanded caused by a change in a consumer’s real income when the price of a product changes • Substitution effect • Portion of a change in quantity demanded due to a change in the relative price of the product • Concerts vs. CDs • Both effects can be positive or negative

  5. Shift in the Demand Curve • Change in demand • Consumers demand different amounts at every price, causing the demand curve itself to move left or right • What changes would cause this sort of movement of the curve? • Consumer income • Consumer expectations • Number of consumers • Consumer tastes • New developments • Tired of product • Substitutes • Butter vs. margarine • Complements • Goods that are usually used together • How do they affect each other?

  6. Elasticity of Demand • Elasticity is a cause and effect relationship that measures the responsiveness of consumers • Specifically, demand elasticity is the extent to which a change in price causes a change in quantity demanded • Tells us how sensitive consumers are to price changes • A good is elasticwhen a given change in price causes a large change in quantity demanded • Vegetables • A good is inelastic when a price change does not greatly affect quantity demanded • Table salt • Gasoline? • A good is unit elastic when its price change and quantity demanded are negatively proportional

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