# Demand. How do we decide what to buy? Chapter. on the go. Essential Question, Chapter 8. Section 1 Understanding Demand

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1 Chapter 8 Demand Essential Question, Chapter 8 How do we decide what to buy? Section 1 Understanding Demand Section 2 Shifts in the Demand Curve Section 3 Elasticity of Demand To on the go To study anywhere, anytime, download these online resources at PearsonSuccessNet.com 174 DemanD

3 Section 1 Understanding Demand Objectives Explain demand. Describe how the substitution effect and the income effect influence decisions. Identify demand schedules. Interpret a demand curve using demand schedules. Law of demand Substitution effect income effect Guiding Question How does the law of demand affect the quantity demanded? Copy this table and fill it in as you read. As the price of a good goes up... Quantity demanded goes down consumers feel poorer, so consumption of that good goes down Demand As the price of a good goes down... People buy less of a substitute good demand the desire to own something and the ability to pay for it law of demand consumers will buy more of a good when its price decreases and less when its price increases Reading Strategy Text Structure Preview this section. Notice the headings, features, and boldfaced words. Economics and You If you have ever bought something, you can understand demand. Suppose you are shopping at the local mall. After visiting many stores, you find a watch you really like. But the watch costs a little more than you want to pay. Otherwise, it is perfect. You decide that you just have to have it. If you want the watch and you can pay for it, you have demand for that good. Principles in Action Price changes always affect the quantity demanded. The Economics & You feature shows how a change in price serves as an incentive to buy something else instead. What is demand? Demand has two parts. First, consumers must be willing to buy. Then, they must have the ability to pay. Wanting something does not create demand. Suppose you go to an auto show and see a \$50,000 sports car you like. You probably do not have \$50,000 to pay for it. According to economists, you have not added to demand. In the same way, you might have \$50,000. But if you are not willing to spend it on the sports car, demand is not affected. What is the law of demand? The law of demand is simple. It says that when the price of a good goes up, the quantity demanded goes down. If the price goes down, demand generally goes up. Producers are aware of this law. They know that if their prices rise too high, consumers will stop buying their goods and services. 176 DemanD

5 demand schedule explains the law of demand in table form demand curve a graph that shows the same information as a demand schedule market demand schedule a table that lists the quantity of a good all consumers in a market will buy at each different price What does a demand schedule look like? A demand schedule explains the law of demand in a table. Look at Figure 8.1. It shows how price affects the demand for pizza. Let s look at a pretend student called Ashley. What if you took the numbers in Ashley s individual demand schedule and plotted them on a graph? The result would be a demand curve. Figure 8.2 shows the same information as the demand schedules in Figure 8.1, but in graph form. Both the demand schedules and the demand curves show the same thing. Demand for pizza is greater when the price is lower. What is a market demand schedule? A market demand schedule shows the quantities demanded at each price by all consumers in the market. Pizza sellers can predict how many pizza slices they would sell at different prices. The schedule also shows the law of demand. The number of slices demanded falls as the price rises. The only difference between the individual and market demand schedules is that the market demand schedule shows the possible demands of all consumers rather than just one. How do you read a demand curve? Note that Ashley s demand curve in Figure 8.2 shows only how the price of pizza affects the amount of pizza Ashley buys. It assumes that all other factors stay the same. In other words, Ashley s income, the price of other goods, and the quality of the pizza do not change. Fig. 8.1 Demand Schedules The demand curves slope downward to the right. Follow the curve with your finger from the top left to the bottom right. You will notice that as prices fall, the quantity demanded jumps. This is just another way of stating the law of demand. Higher prices will always lead consumers to demand less. All demand schedules and curves show the law of demand. Market Demand Schedule Individual Demand Schedule Chart SkillS Demand schedules show that demand for a good falls as the price rises. 1. How does individual demand for pizza change when the price falls from \$3.00 to \$2.00 a slice? 2. How does market demand for pizza change when the price rises from \$3.00 to \$4.00 a slice? Price of a slice of pizza \$1.00 \$2.00 \$3.00 \$4.00 \$5.00 Quantity demanded per day Price of a slice of pizza \$1.00 \$2.00 \$3.00 \$4.00 \$5.00 Quantity demanded per day \$ \$ DemanD

6 Fig. 8.2 Demand Curves GraPh SkillS Ashley s demand curve shows the number of slices of pizza she is willing and able to buy at each price. The market demand curve illustrates demand for pizza in an entire market. 1. How many slices of pizza does Ashley demand when the price is \$4.00 per slice? 2. How is the market demand curve similar to Ashley s demand curve? Price per slice (in dollars) Ashley s Demand Curve Demand Slices of pizza per day Price per slice (in dollars) online Market Demand Curve Demand Slices of pizza per day For an animated version of this graph, visit PearsonSuccessNet.com What are the limits of a demand curve? In real life, market conditions often change. The market demand curve is only accurate for one specific set of market conditions. Even if the price for pizza stayed the same, demand might change. For example, a factory near a pizza restaurant might close. There would be fewer workers wanting pizza for lunch. In the next section, you will read how demand curves can shift because of changes in factors other than price. C h e CkpointWhat does a shift in the demand curve mean about a particular good? SECTION 1 ASSESSMENT SECTION Assessment To continue to build a response to the Essential Question, go to your Journal Essential Questions Journal. Guiding Question 1. Use your completed table to answer this question: How does the law of demand affect the quantity demanded? Key Terms and Main Ideas Directions: On a sheet of paper, write the answer to each question. Use complete sentences. 2. What two qualities make up demand? 3. According to the law of demand, what will happen when the price of a good increases? 4. Under the substitution effect, what will happen when the price of a good drops? 5. What information about consumers does a market demand schedule show? Critical Thinking 6. Make Comparisons Describe the difference between the substitution effect and the income effect. 7. Draw Inferences What can economists predict by creating a demand curve? Chapter 8 179

7 Section 2 Shifts in the Demand Curve Objectives Explain the difference between a change in quantity demanded and a shift in the demand curve. Identify the factors that create changes in demand and that can cause a shift in the demand curve. Describe how change in the demand for one good can affect demand for another good. Guiding Question Why does the demand curve shift? Copy this concept web and fill it in as you read. consumer expectations Cause of a shift in the demand curve consumer tastes and advertising Population increases ceteris paribus a Latin phrase that means all other things held constant Economics and You After reading about individual and market demand for pizza in Section 1, you may think about opening your own pizza shop. All you have to do is create a market demand schedule and pick the best price and quantity combination right? However, as you may have guessed, several other factors can affect demand for a good at any price. Principles in Action Changes in demand that are not connected to price can cause the entire demand curve to shift to either the left or the right. Section 2 describes factors besides price and quantity that may cause a shift in the demand curve. Shifts in the demand curve affect market equilibrium, as well as the prices of related goods. What factors besides price affect demand? When we counted the number of pizza slices that would sell as the price went up or down, we assumed that nothing besides the price of pizza would change. Economists call this ceteris paribus. It is a Latin phrase meaning all other things held constant. The demand schedule took into account only changes in price. In this section, you will learn how economists consider the effect of other changes on the demand for goods like pizza. If we consider other factors that affect demand, the whole demand curve shifts. A shift in the demand curve means that at every price, consumers buy a different amount than before. The shift of the entire curve is what economists call a change in demand. C h e CkpointWhat does a shift in the demand curve mean about a particular good? 180 DemanD

13 inelastic describes demand that is not very sensitive to price changes unitary elasticity describes demand whose elasticity is exactly equal to 1 The law of demand tells us that a rise in prices causes demand to go down. It does not tell us how much the demand decreases. Economists use the term elasticity to measure the effect of the rise in price. Even a small change in the price causes a large change, or stretch, in the amount demanded. When the price increase causes a large change in demand, the demand is said to be elastic. In other words, people are less likely to buy the product if the price goes up. Some food items are good examples of elasticity. For example, the demand for lobster is elastic. Usually lobster is priced higher than beef or chicken. At the regular price, only a certain number of people will buy it. But if the store has a half-price sale, consumers will rush in to buy the lobster. Figure 8.4 shows how price changes affect the demand for lobster. Why is the demand for some products inelastic? The demand for some products is inelastic. Inelastic demand occurs when the price increase has little effect on demand. Milk is a good example. Most people consider milk to be a necessary part of their diets. Raising or lowering the price of milk is not likely to affect demand very much. Even if the price were cut in half, the amount demanded would not go up much. Likewise, if the price doubled, people would still buy milk. Sugar, salt, and bread are other examples of items with inelastic demand. Fig. 8.4 Elasticity of Demand for Lobster Sometimes the percentage change in quantity demanded is exactly equal to the percentage change in the price. This is known as unitary elasticity. Suppose the elasticity of demand for a magazine at \$2.00 is unitary. When the price of the magazine rises by 50 percent to \$3.00, the newsstand will sell exactly half as many copies as before. \$12.00 Price (per pound) \$10.00 \$8.00 C heckpoint Is demand for an expensive, unnecessary good with plenty of substitutes likely to be elastic, inelastic, or unitary elastic? \$6.00 \$4.00 What factors affect elasticity? \$ Quantity Demanded (Tons of Lobster) GraPh SkillS As the price of lobster goes up, the demand for lobster drops. Elastic demand means the demand changes, or stretches, when the price changes. 1. At \$2.00 per pound, about how many tons of lobster are demanded? 2. At \$10.00 per pound, has demand for lobster increased or decreased? 186 Several different factors can affect the elasticity of demand for a specific good. 1. Is the product or service a luxury or a necessity? Elasticity is greatest in goods and services we consider luxuries. Things we think of as necessities have little elasticity. 2. Is a substitute available? Juice, milk, and water are all substitutes for soft drinks. Demand is more elastic when many substitutes are available. Sometimes, consumers have few or no substitutes. For example, we have to buy medicine we need even if the price goes up. When few substitutes are available, demand is often inelastic. DemanD VA_EPF_Ch08_ indd 186 6/13/10 6:15 PM

17 QUICk STUDY guide QuIck STuDy GuIDE Section 1 Understanding Demand Demand describes the ability and desire to buy a good or service. The law of demand says that when a good s price is lower, consumers buy more of it. When the price is higher, consumers buy less of it. The substitution effect and the income effect are two different ways consumers can change their spending patterns. A demand schedule lists the quantity of a good a person will purchase at various prices. A market demand schedule shows this same quantity for all consumers in the market. A demand schedule shown as a graph is called a demand curve. Section 2 Shifts in the Demand Curve A demand schedule takes into account only changes in price (ceteris paribus). The whole demand curve shifts when other factors affect demand. Consumers demand more normal goods when their incomes increase. They demand fewer inferior goods when their incomes increase. Several things affect demand: consumer income expectations, population increases, demographics, and consumer tastes. Complements are two or more goods bought and used together. Substitutes are goods used in place of others. Section 3 Elasticity of Demand Elasticity of demand measures how consumers respond to price changes. Demand for a good that people will buy despite a price increase is inelastic. It does not change in response to price changes. If people buy much less of a good after a small price increase, demand is elastic. It changes in response to a price change. Section 1 How does the law of demand affect the quantity demanded? Section 2 Why does the demand curve shift? Section 3 What factors affect elasticity of demand? Essential Question, Chapter 8 How do we decide what to buy? 190 DemanD

18 CHAPTEr 8 Assessment DOCUMENT-BASED ASSESSMENT Pumpkin growers in Texas say demand is up By Betsy Blaney In October 2008, heavy rains damaged some of the largest pumpkin crops in West Texas. This caused pumpkin supplies to be low at a time of the year when demand for pumpkins is traditionally high. Low supply coupled with high demand and the increased cost of production resulted in people paying higher prices for pumpkins than they had in previous years....several heavy downpours across many parts of West Texas in the past few weeks came at inopportune times for pumpkin producers it s prime pumpkin time across the country with Halloween and Thanksgiving just around the corner. Demand for pumpkins is at an all-time high, Texas agriculture officials said, and it s mostly because there are fewer pumpkins coming from Floyd County this year. Across the country, pumpkin prices are up in many places, though that could reflect increased production and transportation costs, said Gary Lucier of the U.S. Agriculture Department.... Does the drop in acreage mean there might not be enough pumpkins to go around in Texas? Prices are high because of a diminished supply. Pumpkins, which come in several varieties ranging in size from less than 2 pounds to as much as 300, this year are selling for an average of 13 cents a pound, Ragland said. The average price over the past 10 years is about 6 cents a pound The drop in acreage this year is basic economics, Ragland said. Everything done with the pumpkin needs to be done by hand, he said. Hand labor is expensive. Producers also had to water the crop earlier in the season, which added to their irrigation costs. Energy costs are just so high, Greg Carthel [a Texas pumpkin farmer] said, adding that running irrigation pumps prohibits many growers from planting more acres.... I would suspect our supply will be short once we get to Halloween time, J.D. Ragland [a Texas AgriLife Extension Agent] said. We ve got pumpkins available now. Come get them while they last. Document-Based Questions 1. According to this article, what is the reason for the pumpkin shortage? 2. Why don t farmers plant more pumpkins? 3. What are some costs associated with the planting and distribution of pumpkins? 4. How is a drop in acreage basic economics? 5. Do you think pumpkin planters will profit from the increased price of pumpkins? SOURCE: Pumpkin Growers in Texas say demand is up by Betsy Blaney, The Associated Press, October 20, 2008 Chapter 8 191

19 CHAPTEr 8 Assessment Chapter 8 ASSESSMENT Directions: Choose the letter of the correct answer or write the answer using complete sentences. Section 1 Understanding Demand 1. What is demand? 2. According to the law of demand, what happens when the price of a good drops? 3. How would an increase in income affect the demand curve for a normal good? 4. What is the income effect? 5. What is the substitution effect? 6. What is a demand schedule called when it is represented as a graph? A. demand curve c. law of demand B. curve schedule D. consumer curve Section 2 Shifts in the Demand Curve 7. What is the name for two goods that are bought and used together? 8. What is the name for a good used in place of another good? 9. What does a shift in the demand curve mean? 10. What things can cause a demand curve to shift? 11. What is an inferior good? 12. What kind of goods are most things we buy? A. abnormal B. inferior c. normal D. excess Section 3 Elasticity of Demand 13. What term do economists use to measure the effect of the rise in price? 14. Why would raising the price of a loaf of bread likely not have a great effect on demand? on the go 192 DemanD

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