Chapter 4 Notes

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Transcript Chapter 4 Notes

Chapter 4

Demand

the desire to own something.

Law of Demand

-

consumers buy more of a good when its price decreases and less when its price increases.

Ex. If a gallon of gas went up to $8.00 in one month, would you drive less or get a another job?

OR If a gallon of gas went down to $2.00 or less again, would you drive more frequently or work less hours at a job?

Chapter 4 Notes

Chapter 4-Demand

Substitution effect-

as the price of one item goes up, the consumer buys something else in its place.

– Ex. Slice of pizza goes up to $2 a slice from $1. You begin buying tacos instead because they are only $1.

Income effect-

change in consumption b/c of a change in real income.

– Ex. Price of movie tickets double over the span of a teenager’s high school career. If that teenager is still making the same amount of money since starting high school, then he/she feels poorer and begins cutting back on spending on clothes, food, entertainment, gas, etc.

Chapter 4

• The demand curve… • Individual demand and market demand.

– Involve the same price per unit, but different amounts purchased…the common factor is the amount decreases for the individual as does the market.

• To plot a demand curve, you must have a demand schedule to go by.

Chapter 4 Notes

Chapter 4 Notes

Ch. 4 Section 2- Shifts in Demand Curve

Ceteris paribus-

held constant .” Latin, meaning “all other things – A demand schedule only takes the price into effect, not other factors.

– Ex. Using gas, if pumping gas caused cancer, then consumers might buy different quantities at the same price.

– This would cause the entire graph to shift, resulting in a shift in demand.

Chapter 4 Notes

Chapter 4 Section 2

Causes of a shift in demand

: – Income – Consumer Expectations – Population – Consumer tastes and Advertisements •

Complements

- two goods bought and used together; both demand curves affect each other.

Substitutes

- goods used in place of each other.

• Examples: – Complement-ski boots and skis – Substitute- skis versus snowboards

Ch. 4- Section 3 Elasticity of Demand

Elasticity of Demand-

a measure of how consumers react to a change in price.

Inelastic

-describes demand that is not very sensitive to a change in price.

Elastic

-describes demand that is very sensitive to a change in price.

• Calculating the elasticity of demand… Equation: % change in quantity demanded % change in price • If demand for a good at a certain price is

less than

1,the demand is

inelastic

.

• If demand for a good at a certain price is

greater than

1, the demand is

elastic

.

Chapter 4 Notes Elastic Demand

Chapter 4 Notes Inelastic Demand

Chapter 4 Section 3

• Factors affecting elasticity

rises greatly?): (What is essential to me?, What goods must I have even if the price

– Availability of substitutes • Life saving medicine (

inelastic

) • Apple juice, many brands (

elastic

) – Relative Importance • If a large amount of your income is spent on one good, and that good’s price rises, you must reduce the consumption of that good significantly in order keep your budget balanced.

• Clothes, with a modest price increase, drastically affects how many items you buy (

elastic

) • Another way is if the price of shoelaces doubled…you would not cut back your purchases of shoelaces (

inelastic

).

Chapter 4 Section 3

– Necessities Versus Luxuries • A necessity is a good that is required, no matter the cost.

– Milk or baby formula would be a good example. Most families will buy milk or baby formula regardless of a price increase.

– Necessities are most of the time

inelastic.

• A Luxury is good that consumers want to have, but could go without it if the price increases too much.

– Steak is a good example. If the price of steak increases by 25%, most people would stop buying it or decrease their consumption relatively close to 25%.

– Luxuries are goods that can easily be reduced, making the demand for it

elastic.

Chapter 4 Section 3

• The elasticity of Demand determines how a change in prices will affect the

TOTAL REVENUE

of a business.

Total Revenue-

the amount of money the company receives by selling its goods.

Total Revenue and Elastic Demand: If demand is elastic, and prices are raised, then total revenue will decrease. But if

prices are lowered

, then

total revenue increases

.

Example: Cost of pizza. If 10 slices are bought at $1, that equals $10 revenue. But if price increases to $2, and only 4 are bought, then revenue decreases to just $8.

Chapter 4 Notes

Chapter 4 Section 3

• Total Revenue and

Inelastic Demand

– With

Inelastic Demand

, Total Revenue

increases

as price

increases

. Even though the business may be selling less items, the higher price brings in more money, making up for lower sales of goods.

– Also,

Inelastic Demand

: Total Revenue

decreases

as the price

decreases

. Since it is an

inelastic demand

, not many more goods will be sold. Selling less goods sold at a lower price equals a decrease in total revenue.

Chapter 4 Notes