Chapter 4Chapter 4

DemandDemand

Key termsKey terms

Page 91Page 91 Define all 9 key terms using Cornell style Define all 9 key terms using Cornell style

notes to present terms and definitions. notes to present terms and definitions. Vocab quiz will be _____________.Vocab quiz will be _____________.

Chapter launching ActivityChapter launching Activity

Select two agriculture productsSelect two agriculture products One that you expect to increase in popularity in the One that you expect to increase in popularity in the

next few yearsnext few years One that you expect to decrease in popularity.One that you expect to decrease in popularity. For each product explain why you expect the change.For each product explain why you expect the change. What causes the desire, or demand, for each product.What causes the desire, or demand, for each product. Students can use the internet to look up financial Students can use the internet to look up financial

records. Site sourcerecords. Site source Create charts and graphs to support your position on Create charts and graphs to support your position on

the two productsthe two products..

Transparency 10Transparency 10 Demand video clipDemand video clip

DemandDemand

The desire, ability, and willingness to buy The desire, ability, and willingness to buy a product.a product.

Microeconomic conceptMicroeconomic concept Is essential to answer what, how, and for Is essential to answer what, how, and for

who questions.who questions. Involves two variables- the price and Involves two variables- the price and

quantity of a specific product at a given quantity of a specific product at a given point in time.point in time.

Demand CurveDemand Curve

Demand ScheduleDemand Schedule

Is a collection of data that covers price and Is a collection of data that covers price and quantity at each given price.quantity at each given price.

Demand CurveDemand Curve

Shows the various quantities demanded of Shows the various quantities demanded of a particular product at all prices that might a particular product at all prices that might prevail in the markets at a given time.prevail in the markets at a given time.

Figure 2:  Increase in Demand

                                                               

Figure 3:  Decrease in DemandFigure 3:  Decrease in Demand

The Law of DemandThe Law of Demand

There is an inverse relationship between There is an inverse relationship between price of a product and the quantity price of a product and the quantity demanded.demanded.

Market Demand CurveMarket Demand Curve

A curve that shows how much of a product A curve that shows how much of a product all consumers will buy at all possible all consumers will buy at all possible prices.prices.

Demand and Marginal UtilityDemand and Marginal Utility

As we buy more of an item, we get less As we buy more of an item, we get less satisfaction from each additional purchase.satisfaction from each additional purchase.

Diminishing marginal utility: decrease in Diminishing marginal utility: decrease in satisfaction or usefulness from having one satisfaction or usefulness from having one or more unit of the same product.or more unit of the same product.

Factors Affecting DemandFactors Affecting Demand

Change in Quantity demanded.Change in Quantity demanded. Only a change in price can cause a change in Only a change in price can cause a change in

quantity demanded.quantity demanded. Income effect: price change alters consumers Income effect: price change alters consumers

real income. real income. Substitution effect: replacing a more costly Substitution effect: replacing a more costly

product with a cheaper product.product with a cheaper product.

Determinates of DemandDeterminates of DemandDeterminateDeterminate ExampleExample Effect on Effect on

DemandDemandpriceprice Falling priceFalling price increaseincrease

incomeincome Gas price Gas price decreases so decreases so more money to more money to spend on other spend on other items.items.

increaseincrease

substitutionsubstitution Hay prices high Hay prices high substitute with substitute with cubescubes

Substitute Substitute demand demand increasesincreases

Change in DemandChange in Demand

Consumer incomeConsumer income Consumer tasteConsumer taste SubstitutesSubstitutes ComplementsComplements ExpectationsExpectations Number of consumersNumber of consumers

Elasticity of DemandElasticity of Demand

Elasticity is a general measure of Elasticity is a general measure of responsiveness- an important cause-and-responsiveness- an important cause-and-effect relationship in economics.effect relationship in economics.

How a change to a dependent variable How a change to a dependent variable such as quantity demanded, responds to such as quantity demanded, responds to an independent variable, such as price.an independent variable, such as price.

When price changes the quantity When price changes the quantity demanded can change a little or a lot.demanded can change a little or a lot.

Demand elasticity = consumers reactionDemand elasticity = consumers reaction Example: price changes of seasonal fruits Example: price changes of seasonal fruits

and veggies.and veggies.

Inelastic DemandInelastic Demand

Change in price has a very little change in Change in price has a very little change in demand.demand.

Example: unlimited resources or items that Example: unlimited resources or items that consumers can only consume so much of consumers can only consume so much of the product.the product.

Unit Elastic DemandUnit Elastic Demand

Given change in price causes a Given change in price causes a proportional change in quantity demanded.proportional change in quantity demanded.

Total Expenditure TestTotal Expenditure Test

Used to estimate the demand elasticity of Used to estimate the demand elasticity of a product.a product.

To find total expenditure:To find total expenditure: Price of product (p) x quantity (q) for any Price of product (p) x quantity (q) for any

point along demand curvepoint along demand curve Example:Example:

Demand CurveDemand Curve (p)$2 x (q) 3 = 6(p)$2 x (q) 3 = 6 (p) $3 x (q) 0 = 0(p) $3 x (q) 0 = 0 Demand elasticity Demand elasticity

would be high.would be high.

Results from expenditure testResults from expenditure test

Elastic =Price drops and demand Elastic =Price drops and demand increases.increases.

Inelastic = Price drops the increase in Inelastic = Price drops the increase in demand is so small that total expenditure demand is so small that total expenditure fallsfalls

Unit elastic = total expenditures remain Unit elastic = total expenditures remain unchanged when price decreases.unchanged when price decreases.

See page104 figure 4.5See page104 figure 4.5

Determinates of Demand ElasticityDeterminates of Demand Elasticity

Can the purchased delayed?Can the purchased delayed? Are adequate substitutes available?Are adequate substitutes available? Does the Purchase use a large portion of Does the Purchase use a large portion of

income?income?

Determinates of Determinates of elasticityelasticityYes=elasticYes=elasticNo= inelasticNo= inelastic

Fresh Fresh tomatoestomatoes

GasolineGasoline ButterButter Water/ Water/ irrigation irrigation waterwater

Can the purchased Can the purchased delayed?delayed?

YesYes NoNo YesYes NoNo

Are adequate Are adequate substitutes available?substitutes available?

YesYes NoNo YesYes NoNo

Does the Purchase Does the Purchase use a large portion of use a large portion of income?income?

NoNo YesYes NoNo YesYes

Type of elasticityType of elasticity ElasticElastic inelasticinelastic elasticelastic inelasticinelastic