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.