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- Latin, meaning “all other things
held constant.”
– 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 (What is essential to
me?, What goods must I have even if the price
rises greatly?):
– 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