The Free Enterprise System
- Demand
Objectives:
• Explain the law of demand
• Explain diminishing marginal utility
• Identify products with elastic and inelastic
demand
I. The Law of Demand
A. Demand - consumers' willingness
and ability to buy products
B. Assumption - If price is low, demand
will increase
C. Assumption - If price is high,
demand will decrease
price
D. Demand Curve - Downward sloping
curve representing correlation between
different prices and the quantity people
will buy at each price
1. demand schedule - used to prepare
the demand curve
2. draw a demand curve example:
# of units
E. Diminishing Marginal Utility - the fact
that people may buy a limited quantity of a
product even if price continues to drop
1. this limits the extent of demand
2. i.e. if Reeboks go down to $50.00
you may buy 2 pairs - - then they go
down to $40 - -you may not buy any
more because you have enough for
awhile
F. Elasticity of Demand - the exception to
the "law"
1. The degree to which demand for a
product is affected by a change in price
a. Elastic demand - slight change in
price creates a large change in demand
b. Inelastic demand - change in price
has very little effect on demand
2. Four factors that determine if a product
will have elastic or inelastic demand
a. Are substitutes available if price goes up?
if yes =
elastic
i.e.: McDonald's prices go up, so you go to
Wendy's or Hardees
if no =
inelastic
i.e.: we will still buy insulin even if the price
goes up
b. Is price relative to your income?
•if the price is a large part of your income =
elastic
i.e.: vacationing
•if the price is small in comparison to your
income =
inelastic
i.e.: potato chips
c. Is the product a luxury or necessity?
luxury =
elastic
i.e.: hot tubs
necessity =
inelastic
i.e.: insulin
d. Is the purchase an emergency?
not emergency =
elastic
i.e.: gasoline
emergency =
inelastic
i.e.: gas might be purchased in an
emergency at any price