WHAT IS DEMAND Economics Ch 4 Section 1

WHAT IS DEMAND? Economics Ch. 4 Section 1

• In a market system the interaction of buyers and sellers determines the prices of most goods as well as what quantity of a good will be produced. • Buyers demand goods, sellers supply those goods, and the interactions between the two groups lead to an agreement on price and the quantity traded.

• Demand is the desire to own something and the ability to pay for it. • The law of demand says that when a good’s price is lower, consumers will buy more of it. When price is higher, consumers will buy less. • This is the result of not one pattern of behavior but of two separate patterns that overlap. • Substitution effect – consumers react to a rise in the price of one good by consuming less of that good and more of a substitute good. • Income effect – buying fewer of one good without increasing your purchases of others

• Economists measure consumption in the amount of a good that is bought, not the amount of money spent to buy it. • To have demand for a good, you must be willing and able to buy it at the specified price. • A demand schedule is a table that lists the quantity of a good that a person will purchase • Figure 4. 2 p. 100

• A market demand schedule shows the quantities demanded at each price by all consumers in the market. • Figure 4. 3 p. 101 • A demand curve is a graphic representation of a demand schedule. • Used to predict how people will change their buying habits when the price of a good rises or falls. • Figure 4. 4 and 4. 5 p. 102 & 103

WHAT FACTORS AFFECT DEMAND? Economics Ch. 4 Section 2

• Other factors might have influence over a demand curve • The assumption is that nothing except the price would change • Ceteris paribus – Latin for “all other things held constant. ” • A demand curve is accurate only as long as there are no changes other than price which would affect consumer’s decision.

• If the ceteris paribus rule is dropped and other factors are allowed to change the demand shifts • Economists call this a change in demand • Several other factors can cause demand for a good to change • Income • Most goods bought are normal goods (goods that consumers demand more of when their income increases) • Inferior goods are goods that consumers demand less of when their incomes increase. • Examples – generic cereals, used cars

• Consumer expectations • Future price increases, causes demand to increase • Population • Rise in population will increase demand for houses, food, and other goods and services • Consumer Tastes and Advertising • Can’t be explained by income or other factors • Prices of related goods • Demand curve for one good can be affected by a change in the demand for another good

• Two types of related goods that interact his way • Complements – are two goods that are bought and used together. • Substitutes – are goods used in place of one another.

ELASTICITY OF DEMAND Economics Ch. 4 Section 3

• The way consumers respond to price changes is elasticity of demand. • Shows how buyers will cut back or increase their demand when price rises or falls. • Inelastic: unresponsive to change • Elastic: responsive to change • To calculate elasticity of demand • % of change in demand /% of change in price • Elasticity of a good varies at every price level • P. 121 – Calculating Elasticity of Demand

• Factors affecting elasticity • Availability of substitutes • Relative importance • Budget • Necessities vs. Luxuries • Necessity is a good people will always buy • Change over time

• Elasticity of demand determines how a change in prices will affect a business’s total revenue • Total revenue: amount of money a company receives for selling its goods. • Businesses need to be aware of the demand for its product – elastic or inelastic • Price info leads to greatest revenue