Chapter 4 Review: Demand. CHAPTER 4 Graphic Organizer

Transcription

1 Chapter 4 Review: Demand CHAPTER 4 Graphic Organizer

2 CHAPTER 4, SECTION 1 Key Concepts What Is Demand? A market is a place where people buy and sell things. A market has two sides. There is a buying side and a selling side. The buying side of a market is called demand. The selling side is called supply. Demand is the willingness and ability of buyers to purchase different amounts of something at different prices, during a specific time period. Willingness to buy means a person has a desire for a product. Ability means a person has the money to pay for it. Without both willingness and ability, there is no demand. Both must be present for there to be demand. What Does the Law of Demand "Say? The law of demand says that when the price of a product goes up, the quantity demanded goes down. This law also says the opposite. It says that when the price goes down, the quantity demanded goes up. Quantity demanded refers to the number of units of a good that are purchased at a specific price; Notice that the terms demand and quantity demanded sound alike. They are, however, different. You will learn more about this later. Why do Price and Quantity Demanded Move in Opposite Directions? The law of diminishing marginal utility says that as a person uses more of a product, the person gets less satisfaction from it. For example, you get less satisfaction from the second hamburger you eat than from the first. You get less satisfaction from the third than from the second. And so on. The law of diminishing marginal utility affects the law of demand. The more satisfaction you receive from something, the more you will pay. The less satisfaction you receive, the less you will pay. This means that you will buy more of something only if it costs less. This is the law of demand. The Law of Demand in Numbers and Pictures We can show the law of demand with both numbers and pictures. A demand schedule shows the law of demand with numbers. A demand curve shows the law of demand in picture form (graphically). Individual Demand Curves and Market Demand Curves An individual demand curve shows one person's demand for a good. A market demand curve shows the sum of all the individual curves for the good.

3 CHAPTER 4, SECTION 2 Key Concepts When Demand Changes, the Curve Shifts Demand can change. It can go up, or it can go down. When demand changes, the demand curve moves. It can move either left or right. When demand increases, the curve moves to the right. When demand decreases, the curve moves to the left. What Factors Cause Demand Curves to Shift? Several things can cause demand to change. These factors include o income; o buyer preferences; o prices of related goods; o number of buyers; and o future price. Income When a person's income changes, his or her demand for goods can change. The changes in demand depend on the goods involved. Economists talk about three kinds of goods when they talk about income and demand o normal goods o inferior goods o neutral goods If income and demand move in the same direction, the good is a normal good. For example, if your income rises and you buy more of a good, the good is a normal good. If your income falls and you buy less, the good is also a normal good. If income and demand move in opposite directions, the good is an inferior good. If your income goes up and you buy less of a good, it is an inferior good. If your income goes down and you buy more, the good is also an inferior good. If income changes but the demand does not change, the good is a neutral good. Buyer Preferences People's preferences (what they like most) affect demand. If more people start to like something, demand goes up for that item. If demand goes up, the demand curve moves to the right. If people stop liking something, the demand goes down and the curve shifts to the left. Prices of Related Goods Demand is affected, by the prices of related goods. There are two types of related goods. These are substitutes and complements. Substitutes are similar goods. One can take the place of the other. Peanuts can substitute for pretzels, for example. The price of one good and the demand for the other move in the same direction. For example, if the price of pretzels goes up, the demand for peanuts goes up. Complements are two goods that are used together. Tennis rackets and tennis balls are complements. The demand for one good and the price of the other move in opposite directions. If the price of tennis rackets goes up, the demand for tennis balls goes down.

4 Number of Buyers The more buyers for a good, the higher the demand. The fewer buyers, the lower the demand. Future Price Buyers may expect the price of a good to be higher in the future. If so, they may buy now. This increases the current demand. The opposite can also happen. Buyers might think the price will be lower in the future. In this case, they may wait to buy. This decreases the current demand. What Factor Causes a Change in Quantity Demanded? Only one factor can change quantity demanded. This factor is price. The change is shown as movement along a demand curve. Some helpful examples:

5 CHAPTER 4, SECTION 3 Key Concepts What Is Elasticity of Demand? Elasticity of demand deals with the relationship between price and quantity demanded: It measures the impact of a price change. A small price change can cause a big change in how many of a certain product people buy. Or a small price change can cause little change in the number of units of a good that people buy. How do economists measure the relationship between price and quantity demanded? They compare the percentage change in price with the percentage change in quantity demanded. They do this, by dividing the percentage change in quantity demanded by the percentage change in price. This comparison produces three types of results: o When the percentage change in quantity demanded is greater than the percentage change in price, the result is elastic demand. o When the percentage change in quantity demanded is less than the percentage change in price, the result is inelastic demand. o When the percentage chap.ge in quantity demanded is the same as the percentage change in price, the result is unit-elastic demand. What Determines Elasticity of Demand? Four factors affect elasticity of demand: o number of substitutes o whether the good is a luxury or a necessity o percentage of income spent on the good o time Number of Substitutes Some goods have few substitutes. Other goods have many. Heart medicine is an example of a good with few substitutes. A soft drink is an example of a good with many substitutes. If a good has few substitutes, the demand will probably be inelastic. If a good has many substitutes, the demand will probably be elastic. Luxuries versus Necessities Necessary goods are goods that people feel they need to survive. Food is a necessary good. Even if the price increases, people will not be able to cut back on these goods. The demand for necessities tends to be inelastic. Luxuries are goods that people do not need to survive. Very expensive cars are luxuries. If the price increases, people will cut back on their purchases of these items. The demand for luxuries tends to be elastic. Percentage of Income Spent on the Good Buyers react more to price changes on goods for which they spend a lot of their income. The demand for these goods tends to be elastic. On the other hand, buyers don't react much to price changes if they spend a small amount of their income on a good. The demand for such a good tends to be inelastic. Time More time means more chances to change how much people buy after a price change. With more time, they can find substitutes. They can change their lifestyle. This means their demand is more elastic with more time. With little time to react, people tend not to change the amount they buy after a price change. They do not have time to react, so their demand tends not to change. This means the demand is inelastic.

6 An Important Relationship between Elasticity and Total Revenue Whether demand for a good is elastic or inelastic matters to sellers of goods. It affects their total revenue. Four different results can occur when prices rise or fall: o If demand is elastic, an increase in price causes a decline in total revenue. o If demand is elastic, a decrease in price causes an increase in total revenue. o If demand is inelastic, an increase in price causes an increase in total revenue. o If demand is inelastic, a decrease in price causes a decrease in total revenue.

7 CHAPTER 4 Study Questions For the fill-in-the-blank questions, the number in parenthesis represents where in the textbook you can look to help find the answer if you need additional support. 1. A is any place where buyers and sellers meet. (90) 2. In economics, demand means and to buy a good. (90) 3. Market demand represents all demand curves added together. (94) 4. If the demand for computers increases, the demand curve will shift to the (right or left). (95) 5. A shift of the demand curve represents a change in (demand or quantity demanded). (95) 6. If the demand curve shifts to the left, it means buyers want to buy (more or less). (95) 7. A (normal, inferior or neutral) good will be in higher demand if a person s income increases. (96) 8. If a decrease in income increases the demand for a good, the good is (normal, inferior or neutral). (96) 9. A change in the of the product will not change the demand for a product. (96-97) 10. If the number of buyers in the market increases, the demand in the market will (increase or decrease). (97) 11. Higher birthrates, increased immigration, and higher prices in the future could all result in a(n) (increased or decreased) demand for a good. (97) 12. When goods are (substitutes or complements), the demand for one good moves in the same direction as the price of the other good. (97) 13. If consumers expect (higher or lower) prices in the near future in the car market, the demand for cars will increase. (97) 14. When goods are (substitutes or complements), the demand for one good moves in the opposite direction as the price of the other good. (97) 15. A change in (demand or quantity demanded) can be caused by price. (98)

8 16. On a demand curve, a change in quantity demanded is represented by a along the curve. (99) 17. Elasticity of demand measures how much buyers to a change in price. (102) 18. If there are few or no substitutes for a good, then the demand would be (elastic, inelastic or unit-elastic). (103) 19. The demand for necessities such as milk, electricity, and water is usually (elastic, inelastic or unit-elastic). (104) 20. If demand for a good is elastic and its price decreases, total revenue goes (up or down). ( ) True or False 21. Suppose that the demand for football tickets at your school is elastic. If your school lowers the price of tickets, then total revenue from ticket sales will increase. 22. The price of DVDs increases 10% and the quantity demanded of DVDs falls 5%. The demand for DVDs is elastic. 23. According to the law of demand, as the price of a good increases, the quantity demanded of the good decreases. 24. Peanut butter and jelly are complement goods. If the price of jelly increase, then the demand for peanut butter increases. 25. The law of diminishing marginal utility states that as a person consumes additional units of a good, eventually the utility gained from each additional unit of the good increases. 26. If the percentage change in price is 10% and the percentage change in quantity demanded is 5%, then the elasticity of demand is equal to If the price of concert tickets increases, the demand for concert tickets will decrease. 28. A demand curve graphically shows the law of demand. 29. If Joe s demand for hot dogs falls as his income rises, then hot dogs are an inferior good. 30. A good will tend to have a more elastic demand if it has many substitutes. 31. A person who has a long period of time to adjust to price increases in housing will likely have an elastic demand for housing.