Chapter 4: Understanding Demand

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SCHS SOCIAL STUDIES What you need to know UNIT TWO 1.

What factors will shift a curve Terms you should know Demand Law of Demand Substitution

1 SCHS SOCIAL STUDIES What you need to know UNIT TWO 1. What a competitive market is and how it is described by the supply and demand model 2. What a supply curve shows 3. The difference between a movement along and a shift of a curve 4. What factors will shift a curve Terms you should know Demand Law of Demand Substitution effect Income Effect Demand Schedule Market Demand Schedule Demand Curve Ceteris Paribus Normal Good Inferior Good Complements Substitutes Elasticity of Demand Inelastic Elastic Unitary Elastic Total Revenue

4-1 Summary: Fill in the missing words. The states that a good s price has an important effect on the amount of that good people will buy. The lower the price, the more consumers will buy.

2 4-1 Summary: Fill in the missing words. The states that a good s price has an important effect on the amount of that good people will buy. The lower the price, the more consumers will buy. Similarly, the higher the price, the less consumers will buy. More people will buy a slice of pizza priced at $1 than at $10. The law of demand results from two patterns of human behavior. The first, known as the, says that as the price of a good rises, people are more likely to alternative goods. When the price of pizza becomes more expensive, compared to other foods like tacos, people are more likely to buy those other foods. The result is that the demand for pizza drops. However if the price of pizza drops, consumers are more likely to substitute pizza for other choices. This causes the demand for pizza to. The other pattern is known as the. When the price of pizza and other goods rise, people are likely to feel poorer. The income effect takes place when a consumer responds to a price increase by spending more on that good, even though it is more expensive. They spend more, but usually buy less. A illustrates the quantities demanded at each price by consumers in the market. The axis shows price, and the axis show quantity demanded. Because demand rises as prices fall, the demand curve slopes down and to the right. The demand curve shows the relationship between a good s price and the demand for that good. LABEL AND COMPLETE THE FOLLOWING MARKET DEMAND CURVE.

3 Fill in the key term the example illustrates in the space provided. 1. The higher the price of pizza, the fewer slice people will buy 2. Eating salad or tacos instead of pizza when the price of pizza goes up 3. Buying fewer slices of pizza when rising prices reduce real income 4. Price Quantity Price Quantity

4 Price Price Chapter 4: Understanding Demand 4-2 Summary: Fill in the missing words. Many other factors besides price can affect the demand for goods. For example, if it was discovered that tomato sauce was extremely good for your health, demand for pizza would rise. would want to buy more pizza at all price levels. This increase in demand shifts the entire demand curve to the. If it was announced that tomato sauce was unhealthy, then people would buy less pizza at all price levels. The decrease in demand shifts the demand curve to the. Other factors can shift the demand curve. For example, if your income were to rise, you might buy more pizza. causes people to buy more of most goods at every price level. This creates a shift to the of the demand curve. Similarly, a decrease in income causes demand for most goods to. Changes in population will affect demand. For example, an increase in the number of senior citizens is likely to increase the demand for medical care. Advertising and fashion trends can also have a big effect on consumer demand. The demand for one good can also affect the demand for other goods. are two goods that are bought and used together. People who buy skis are likely to buy ski boots. are goods used in place of one another. When people buy more snowboards they will buy fewer skis. An increase and decrease in demand cause more or less of a good to be demanded at all price levels. COMPLETE THE FOLLOWING SHIFTS OF THE DEMAND CURVES. Left shift of a curve Right shift of a curve Quantity Quantity

5 Answer the following questions in the space provided. 1. What condition must exist to make a demand curve accurate? 2. What happens to a demand curve when there is a change in factors (other than price) that can affect consumers decisions about purchasing the good? 3. How does consumer income affect the demand for normal and inferior goods? 4. How does consumer expectation affect demand for certain goods? 5. Explain how the baby boom generation affected demand for certain goods. 6. How are consumer tastes and advertising related? 7. Explain how demand for a good can affect demand for a related good. 8. Give an example of a substitute good.

6 4-3 Summary: Fill in the missing words. Economists use the term to describe the way people respond to price changes. If you deep buying despite a price increase, your demand is. If you buy less after a small price increase your demand is. Demand tends to be inelastic for goods that have few, like medicines, or for goods that are considered essential, like milk. To compute elasticity demand, take the change in the demand of a good and this number by the percentage in change in the price of the good. Say that if the price of pizza rises from $1.00 to $1.50, demand falls from 4 to 3 slices per day. The change in demand is a 25 percent decrease. The change in price is a 50 percent increase. The elasticity of demand is 25 percent divided by 50 percent, or.5. Since this number is less than 1, the demand is. Customers continue to buy even if the price increases. A demand that is more than 1 is. Elasticity is an important tool for businesses owners. It helps them to determine how a change in price will affect their business s, or the amount of money the company receives by selling its goods. If a business faces elastic demand, then prices will result in a sharp drop in demand, total revenue. However, when a good has an demand, a business might be able to increase its total revenue by increasing the price. Elasticity of demand describes how people react to changes in prices. FROM YOUR TEXTBOOK, LABEL EACH ARROW TO SHOW THE RELATIONSHIP OF TOTAL REVENUE AND ELASTICITY. Elastic Demand Inelastic Demand

7 Supply the missing information in the spaces provided. Calculating Elasticity (Provide a formula or numerical value.) 1. Computation of elasticity of demand: 2. Elastic demand: 3. Inelastic demand: 4. Unitary elastic demand: Factors Affecting elasticity (How does each affect elasticity?) 5. Substitutes: 6. Necessities vs. luxuries: 7. Changes over time: Elasticity and revenue (Define and explain.) 8. Total revenue: 9. How elasticity affects a company s pricing:

Demand- how much of a product consumers are willing and able to buy at a given price during a given period.

Demand- how much of a product consumers are willing and able to buy at a given price during a given period. Ch. 4 Demand Ch. 4.1 The Demand Curve (Learning Objective- explain the Law of Demand) In your world- What are the goods and services that you demand? What happens to your buying when the price goes up