Unit 2, Chapter 4: Demand
(Factors of Demand: Expectations) What is an example of this?
- a company announces a technological breakthrough in the cost and quality of televisions - even if the product isn't available for a year, some consumers might hold off buying a TV today because of their expectations - fewer TVs will be purchased, and the demand curve will shift to the left
Elasticity
- a measure of responsiveness that tells us how a dependent variable, such as quantity demanded or quantity supplied, responds to a change in an independent variable such as price
Marginal Utility
- additional satisfaction or usefulness obtained from acquiring or consuming one more unit of a product
(Factors of Demand: Consumer Tastes) What can change consumer tastes?
- advertising - fashion trends - peer group pressure - changes in the season
What is another reason, besides price, that the entire demand curve might shift?
- an advertising campaign - a change in consumer income
Microeconomics
- branch of economic theory that deals with behavior and decision making by small units such as individuals and firms
What are the determinants of demand elasticity?
- can the purchase be delayed? - are adequate substitutes available? - does the purchase use a large portion of income
(Demand Elasticity: Inelastic) Inelastic
- case of demand elasticity where the percentage change in the independent variable (usually price) causes a less than proportionate change in the dependent variable (usually quantity demanded or supplied)
Demand
- combination of quantities that someone would be willing and able to buy over a range of possible prices at a given moment
(Factors of Demand: Substitutes) Substitutes
- competing products that can be used in place of one another - products related in such a way that an increase in the price of one increases the demand for the other - ex.) an increase in the price of butter, will increase the demand for margarine
What are some factors that can change demand?
- consumer income - consumer tastes - future expectations - the number of consumers - the price of related goods such as substitutes or complements
Diminishing Marginal Utility
- decrease in additional satisfaction or usefulness as additional units of a product are acquired
Market Demand Curve
- demand curve that shows the quantities demanded by everyone who is willing and able to purchase a product at all possible prices at one moment in time
Change in Demand
- different amounts of a product are demanded at every price, causing the demand curve to shift to the left (decrease in demand) or to the right (increase in demand)
(Demand Elasticity: Unit Elastic) Unit Elastic
- elasticity where a change in the independent variable (usually price) generates a proportional change of the dependent variable (quantity demanded or supplied)
Demand Curve
- graph showing the quantity demanded at each and every possibly price that might prevail in the market at a given time - observations in the demand schedule turned into a graph
(Demand Elasticity: Unit Elastic) What is an example of unit elastic demand?
- hard to find because the demand for most products is either elastic or inelastic - more like a middle ground that separates the other two categories
(Demand Elasticity) Are adequate substitutes available?
- if adequate substitutes are available, consumers can switch back and forth between the product and its substitute to take advantage of the best price - the fewer the available substitutes, the more inelastic the demand tends to be - sometimes only one substitute is needed to make demand elastic (ex.) e-mail or instant messages as a substitute for the US Postal Service) - ex.) if the price of beef goes up, buyers can switch to chicken
(Demand Elasticity) Does the purchase use a large portion of income?
- if the amount of income required to make the purchase is large, than demand tends to be elastic - if the amount of income is small, demand tends to be inelastic
(Demand Elasticity: Elastic) What is an example of an elastic demand?
- if the price of a vegetable were to go up, people could always buy another vegetable
(Demand Elasticity: Inelastic) What is an example of an inelastic demand?
- if the price of medicine were to go up, the quantity demanded would most likely not change, since people have a set dosage they need and very few substitutes
(Factors of Demand: Expectations) How can expectations have the opposite effect?
- if the weather service forecasts a bad year for crops, people might stock up on some foods today, before these items become scarce - demand curve shifts to the right
(Factors of Demand: Consumer Tastes) Why would people buy less of a product?
- if they get tired of it - if they have a reason to worry about whether it's a good choice
Demand Schedule
- listing showing the quantity demanded at all possible prices that might prevail in the market at a given time
(Factors of Demand: Number of Consumers) What happens when more consumers enter the market?
- market demand increases - the curve shifts to the right - ex.) a large group of workers comes to a neighborhood, and many of them buy burritos for lunch
Change in Quantity Demanded
- movement along the demand curve showing that a different quantity is purchased in response to a change in price - a change that is graphically represented as a movement along the demand curve
(Factors of Demand: Complements) Complements
- products that increase the use of other products - products related in such a way that an increase in the price of one reduces the demand for both - ex.) personal computers and software
Law of Demand
- rule stating that more will be demanded at lower prices and less at higher prices - an inverse relationship between price and quantity demanded
Incentive
- something that motivates
(Demand Elasticity) Can the purchase by delayed?
- sometimes consumers cannot postpone the purchase of a product (this is inelastic demand) - the quantity of the product demanded is not especially sensitive to changes in price
Income Effect
- that portion of a change in quantity demanded caused by a change in a consumer's income when the price of a product changes - the change in quantity demanded because of a change in price that alters consumers' income
What happens if the price of a product changes, but all other factors remain the same?
- the demand curve doesn't move - the quantity demanded changes
Demand Elasticity
- the extent to which a change in price causes a change in the quantity demanded - demand elasticity has three cases: elastic, inelastic, or unit elastic
Substitution Effect
- the portion of a change in quantity demanded that is due to a change in the relative price of the good - ex.) not buying expensive pizzas, but instead buying less expensive burritos
(Demand Elasticity: Elastic) Elastic
- type of elasticity in which a change in the independent variable (usually price) results in a larger change in the dependent variable (usually quantity demanded or supplied)
Define a demand schedule.
- when the price goes up, you will buy less - when the price goes down, you will buy more - income, hunger, and many other factors will feed into desire, willingness, and ability to buy, but if all those are held constant, the only single incentive will be the change in price
What is an example of this?
- you pay a high price for a bottle of water - you are no satisfied, and are less willing to pay the same price as you did for the first
What are the 3 cases of demand elasticity?
1.) elastic 2.) inelastic 3.) unit elastic
What 2 variables determine the calculation of demand?
1.) the price of a product 2.) the quantity available at a given point in time
What is the only reason a change in quantity demanded can happen?
a change in price
What is the relationship between a change in price and a change in revenue with elastic demand?
a change in price and a change in revenue move in opposite directions
What is the relationship between a change in price and a change in revenue with inelastic demand?
a change in price and a change in revenue move in the same direction
What is economics?
a social science
What happens because of diminishing marginal utility?
as we consume every additional unit, we usually are not as willing to pay as much for them as we did for the first one
How do you find total expenditures (or total revenue)?
by multiplying the price of a product by the quantity demanded for any point along the demand curve
What is this known as?
change in demand
How do you estimate elasticity?
compare the direction of a price change to the direction of the change in total revenue, or total expenditures
What important feature of demand do price and quantity point out?
higher prices are associated with smaller amounts demanded, and lower prices are associated with larger amounts demanded
What happens when other factors change while the price remains the same?
people may decide to buy different amounts of a product at the same price
What is the only thing that can cause a movement along the demand curve?
price
What is this known as?
the Law of Demand
What is this sometimes called?
the total revenue or total expenditures test
(Factors of Demand: Expectations) What can affect demand?
the way people think about the future
What is the relationship between a change in price and a change in revenue with unit elastic demand?
there is no change in revenue regardless of the change in price
What happens when a price change causes a change in quantity demanded?
we see a movement along the demand curve
(Demand Elasticity: Elastic) When is demand elastic?
when a change in price causes a relatively larger change in quantity demanded
(Demand Elasticity: Unit Elastic) When is demand unit elastic?
when a given change in price causes a proportional change in quantity demanded
(Demand Elasticity: Inelastic) When is demand inelastic?
when a given change in price causes a relatively smaller change in quantity demanded
(Factors of Demand: Consumer Income) How can consumer income change demand?
when people earn more, they are usually willing to buy different amounts all possible prices
