Chapter 4 Demand The Law of Demand

Chapter 4: Demand

The Law of Demand KEY CONCEPTS – Demand—the desire for an item and the ability to pay for it – Law of demand when price of good or service goes up, quantity demand goes down when price of good or service goes down, quantity demand goes up

Demand Schedules KEY CONCEPTS – Demand schedule—a table that summarizes one consumer’s behavior lists how much of an item an individual will buy at each price – Market demand schedule—a table that summarizes all consumers’ behavior lists how much of an item all consumers will buy at each price

Demand Curves KEY CONCEPTS – Demand curve—a graph that shows amount of an item a consumer will buy at each price – Market demand curve—amount all consumers will buy at each price – Demand curves graphically show information found on demand schedules

Reviewing Key Concepts Explain the differences between the terms in each of these pairs: – demand law of demand – demand schedule and demand curve – market demand schedule and market demand curve

What Factors Affect Demand?

More About Demand Curves KEY CONCEPTS – Law of diminishing marginal utility marginal benefit of each additional unit declines as each unit is used – Income effect amount people buy changes as purchasing power of their income changes – Substitution effect amount people buy changes as they buy substitute products

Change in Quantity Demanded KEY CONCEPTS – Change in quantity demanded change in amount consumers buy because of change in price each change shown by new point on demand curve does not shift the demand curve itself

Change in Demand KEY CONCEPTS – Change in demand is caused by a change in the marketplace prompts people to buy different amounts at every price also called shift in demand – Six factors can cause change in demand

What is Elasticity of Demand?

Elasticity of Demand KEY CONCEPTS – Buying habits affected by type of product and importance to consumer – Elasticity of demand measure of how responsive consumers are to price changes Elastic—quantity demanded changes greatly as price changes Inelastic—quantity demanded changes little as price changes

What Determines Elasticity? KEY CONCEPTS – Three factors affect elasticity of demand availability of substitutes proportion of income spent on good or service whether product is a necessity or luxury

Calculating Elasticity of Demand KEY CONCEPTS – Knowing elasticity of demand tells sellers whether to cut prices if demand is elastic, price cuts might increase earnings if demand is inelastic, price cuts will not increase earnings – formulas used to calculate elasticity Is change in quantity demanded greater than change in price?

Total Revenue Test KEY CONCEPTS – Total revenue—amount of money company gets for selling its products Formula: TOTAL REVENUE = P (price) x Q (quantity sold) – Total revenue test—shows total revenue from item at various prices if total revenue increases after price drops, demand is elastic if total revenue decreases after price drops, demand is inelastic

Reviewing Key Concepts Use each of these terms in a sentence that gives an example of the term: – elastic – inelastic – total revenue