CHAPTER 4: DEMAND
SSEMI2 The student will explain how the Law of Demand,
the Law of Supply, prices, and profits work to determine
production and distribution in a market economy.
A. Define the Law of Demand.
B. Describe the role of buyers and sellers in determining
market clearing price.
C. Illustrate on a graph how supply and demand
determine equilibrium price and quantity.
D. Explain how prices serve as incentives in a market
economy.
1. What is Microeconomics?
An introduction to demand—a
microeconomics concept (the area in economics
that deals with behavior and decision making by
small units, such as individuals or firms).
2. What three factors determine the demand for a
product?
Demand is the desire, ability, and
willingness to buy a product at a particular price.
An individual Demand curve illustrates how the quantity that a
person will demand varies depending on the price of a good or
service.
The graph shows a demand curve. What can be said about the
demand line moving to the right?
A) demand has decreased.
ANS: B
B) demand has increased.
C) this indicates a reduced supply.
D) an equilibrium price has been determined.
Economists analyze demand by listing prices and
desired quantities in a Demand schedule (chart).
When the Demand date is graphed, it forms a
Demand curve with a Downward slope.
A new technology increases the speed of computers without
increasing production costs. What is the most likely effect of
this technology?
A) the price of new computers will decline.
B) the price of new computers will increase.
C) the demand for new computers will decline.
D) the demand for new computers will increase.
ANS: D
3. What is the purpose of a Demand schedule?
The purpose of a Demand schedule is to show the
quantity demanded of a particular product at all possible
prices that might prevail in the market at a given time.
4/5. How is the demand curve similar to a demand
schedule? How is it different?
Both demand schedule and demand curve
provide information about demand (it tells the
quantity that consumers will demand at each and
every price)—DIFFERENT—the schedule is in the
form of a of a table and the curve is in the form of a
graph.
On a Demand curve:
(1) prices are listed on the vertical axis;
(2) quantities demanded are listed on the horizontal axis;
(3) the demand curve will represent the various
combinations of prices and quantities demanded that
could occur in the market
(4) it helps producers predict how people will change their buying
habits if the price of the good changes.
On a Demand schedule:
(1) it lists in table format a list of the quantity of goods that a
person will purchase at each price in a market.
(2) by adding up the Demand schedule of every buyer in the
market, producers can predict how their total sales will be.
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6. What does the Law of Demand state?
The Law of Demand states that the quantity demanded of
a good or service varies inversely with it’s price.
Note: When price goes up, the quantity demanded goes
down; when price goes down, the quantity demanded goes
up (more will be purchased at a low price than at a high
price).
The Law of Demand is one of the most famous laws in
economics. It states that when the price of a good rises, the
amount demanded ______________, and when the price of
a good falls, the amount demanded _____________.
a) rises, rises
c) rises, falls
ANS: D
b) falls, falls
d) falls, rises
Law of Demand
The law
of
demand states
…the higher the price of
a good, the less people
will demand that good.
At higher the prices,
lower quantity is
demanded. The chart
shows that the curve is
a downward slope.
P
QD
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7. What does the Market Demand curve show?
A Market Demand curve illustrates how the quantity that
all interested persons (the market) will demand varies
depending on the price of a good or service.
8. What is marginal utility?
Marginal utility is the extra usefulness or satisfaction a
person receive from getting or using one more unit of a
product.
9. How does the principle of diminishing marginal utility
affect how much people are willing to pay?
The principle of diminishing marginal utility states that
the satisfaction we gain from buying a product lessens as
we buy more of the same product.
Note: the slope of the Demand curve can be explained by the principle
of diminishing marginal utility in that diminishing marginal utility states
that as we use more of the product, we are not willing to pay as much
for it.
Therefore, the Demand curve is downward sloping (always).
People will not pay as much for the second and third product as they
will for the first. For example, buying only one instead of two sodas
at lunch time.
REMEMBER: To have demand, people must be willing and able to
buy a good at the specific price. Consumers buy more of a good when
its price decreases and less when its price increases.
1. If OPEC decided to cut oil production for the coming year,
what would be the most likely effect?
A) prices would not change
B) oil prices would probably rise
C) oil prices would probably decline
D) the price for substitute products would decline
ANS: B
2. All of the following would cause a shift to the left of the
demand curve except for
A) an increase in taxes.
B) reduction in exports.
C) increased money supply.
D) declining consumer spending.
ANS: C
3. The graph shows the Demand for Twinkie-Doodles in the months of
June and December. The Demand curve has moved to the right on the
graph. This shows that
A) the price for Twinkie-Doodles went down.
B) buyers and sellers cannot agree on a price.
C) the supply of Twinkie-Doodles has decreased.
D) the demand for Twinkie-Doodles has increased.
ANS: D
4. The new oven in Mr. Brown’s bakery allows him to produce bread
more efficiently and more cheaply. What is the most likely effect?
A) the price drops and the quantity demanded decreases
B) the price rises and the quantity demanded decreases
C) the price drops and the quantity demanded increases
D) the price rises and the quantity demanded increases
ANS: C
5. According to the Law of diminishing marginal utility, as you receive
additional units of a product the
A) total utility you receive from these products decline.
B) amount of utility you receive from additional products will remain
unchanged.
C) amount of utility you receive from additional products will increase.
D) amount of utility you receive from additional products will become
smaller.
ANS: D
THE FACTORS AFFECTING DEMAND
SECTION 2
Changes in Demand
When a product’s demand shifts,
different quantities of a product are
demanded at each and every price.
1. The Demand for normal good increases when an individual
income increases. Consumers demand less of inferior
goods when their income increases.
2. The current Demand for a good is directly related to its
expected future price.
3. Changes in the size of the population will affect the demand
for most products.
4. Advertising shifts Demand curves because it plays an
important role in starting many trends.
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SECTION 2
Changes in Demand
Determinants of product demand
shifts:
•
•
•
•
•
consumer tastes and preferences
market size
income
prices of related goods
consumer expectations
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SHIFTS IN DEMAND
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The change in quantity demanded shows a change in the
amount of product purchased when there is a (1) change in
price (usually a decrease in the price amount).
The Income effect means that as prices drop, consumers are
left with extra real income (savings after a sale) and as a result
(2) consumers pay less for a product and thus have more
income to spend. When the price rise, consumers buy less
because they feel they can no longer afford the product.
If there is an increase in price then (3) the quantity
demanded goes down.
The Substitution effect means that price can cause (4)
consumers to substitute one product with another similar
but cheaper item (extra items purchased). Consumers react
to an increase in a good’s price by consuming less of that good
and more of other goods.
A change in demand is (5) when people buy different
amounts of the product at the same prices.
A change in demand can be caused by a change in income,
tastes, a price change in a related product (either because it is a
substitute or complement), consumer expectations, and the #
of buyers.
Note: the Demand curve would respond to an increase in
demand by shifting to the right and to a decrease in
demand by shifting to the left.
Consumer income—when one income goes up, (6) one can
afford to buy more products (goods and services) at each
and every price.
Consumer taste—most people do not always want the same
thing; (7) a change in fashion trends, advertising, news
reports, the introduction to new products, and even
seasons changes customer taste.
Substitutes—used in the place of original products. The (8)
demand for a product tends to increase if the price of its
substitutes goes up (vice versa).
Complements—the use of one increases the use of another
(personal computers and software; CD burners and recordable
CDs). (9) the increase in one’s price will cause a decrease
in the other’s use.
SECTION 2
Changes in Demand
Difference between
substitute goods and
complementary
goods:
• substitute goods—used to replace
the purchase of similar goods when
prices increase
• complementary goods—commonly
used with other goods
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1. An increase in the price of milk causes a decrease in the
demand for cereal. The two products are
a. Substitutes
c. Complements
b. Unrelated
d. Demand elastic
ANS: C
2. Consumers’ willingness to replace a costly item with a less
costly item is an example of
a. Demand elasticity
c. Complements
b. The substitution effect
d. The income effect
ANS: B
3. An increase in the price of cameras results in a decrease in
the demand for film. The two producers are
a. Demand elastic
c. Unrelated
ANS: B
b. Complements
d. Substitutes
Change in Expectations—way people think about the future.
If people think a future product will be better, (10) the
demand will decrease because customers are willing to put
off purchases and wait for that new product (lifestyle,
fashion trends, etc).
If the customer thinks there will be a shortage in the future,
(11) the demand will increase because the consumer will
stock up.
If there is an increase in the number of customers, (12)
market demand curve will increase because consumers will
stock up.
If anyone leaves the market, (13) the market demand will
shift to the right, reflecting the increase in consumer
demand.
SECTION 3
Elasticity of Demand
Objectives:
• What is demand elasticity?
• What is the difference between elastic and
inelastic demand?
• How is demand elasticity measured?
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SECTION 3
Elasticity of Demand
Demand elasticity
reflects the extent to
which changes in a
product’s price affect
the quantity
demanded by
consumers.
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1. Elasticity measures how sensitive consumers are to price changes.
(The cause-and-effect relationship). Demand elasticity—the extent to
which a change in price causes a change in the quantity demanded—will
help analyze these issues.
2. Demand is elastic when a change in price causes a large change in
demand.
3. Demand is inelastic when a change in the price cause a small change
in demand.
4. Demand is unit elastic when a change in price cause a proportional
change in demand.
Remember: change in price effects (elastic) greater change in demand;
(inelastic) lesser change in demand; and a (unit) proportional change in
demand.
SECTION 3
Elasticity of Demand
Difference between elastic and
inelastic demand:
• elastic demand—when a small change in a
product’s price results in a significant change in the
quantity demanded (i.e. price of pizza)
• inelastic demand—when a change in a product’s
price has only a slight effect on the quantity
demanded (i.e. salt & soap)
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Elasticity of Demand
Demand elasticity is measured by using
the total-revenue test.
SECTION 3
The total revenue test can provide valuable
information for a company. Determining
whether a product is elastic or inelastic can
help a firm maximize revenue. If the test
concludes that a good is elastic, the company
will be very cautious about price changes, as
small changes will produce large decreases in
demand. Alternatively, if the good is inelastic,
the firm will know that increases in price will
only yield small changes in the quantity
demanded. Knowing whether a good is
inelastic or elastic will allow a firm to avoid
costly pricing mistakes.
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THE TOTAL EXPENDITUES TEST
5. Price times quantity demanded equals total expenditures.
**Price of product x product**
6. The relationship between the change in price and total
expenditures for an elastic demand curve is inverse.
7. Changes in expenditures depend on the elasticity of a
demand curve—if the change in the price and expenditures
move in opposite directions on the curve, the demand is
elastic; if they more in the same direction, the demand is
inelastic; if there is no change in expenditures, the demand is
a unit elastic.
Understanding the relationship between elasticity and
profits change help producers effectively price their
products.
III. DETERMINANTS OF DEMAND ELASTICITY
Can the purchase be delayed? Some purchases can not be
delayed, regardless of price changes.
Are adequate substitutions available? Price changes can
cause consumers to substitute one product for a similar
product.
Does the purchase use a large portion of income? Demand
elasticity can increase when a product commands a large
portion of a consumer’s income.
NOTE: Products like Insulin (a good that cannot be put off)
is inelastic due to the lack of adequate substitutes for the
medicine.
On the other hand: an item with many substitutes can be
elastic because of consumers switching among the various
substitutes.
However the fewer the substitutes, the more inelastic the
demand it becomes. If the purchase uses a large portion of
income, people are more sensitive to price changes and
demand tends to be elastic.
Demand is Inelastic when a given change in price causes a
relatively smaller change in the quantity demanded.
For example: Insulin—the price increases to
100% and the quantity demanded
decrease 5%.
Demand is Unit elastic when a given change in price causes a
proportional change in the quantity demand.
For example: theater tickets—the price increases to
15% and the quantity demanded decease
15%.
Demand is Elastic when a given change in price causes a
relatively larger change in the quantity demanded:
For example: a hamburger—price increase
20% and the quantity demanded
decrease 50%.
QUESTIONS FOR REVIEW
1. A company decreases the price of a gallon of milk by 10%
and the company’s total revenues fall significantly. What term
best describes the demand for milk?
ANS: B
A. Elastic
C. Unit elastic
B. Inelastic
D. Demand elastic
2. All the following product have relatively inelastic demand
except
A. A physician's services
C. Stereo equipment
B. Tobacco products
D. Prescription drugs
ANS: C
3. The relationship between the change in price and total
expenditures for an elastic demand curve is
ANS: C
A. Variable
C. Inverse
B. Unit elastic
D. Direct
DEMAND SCHEDULE FOR CDS
PRICE PER CD
(IN MILLIONS)
$10
$12
$14
$16
$18
$20
QUANTITY DEMANDED
1,100
900
700
500
300
100
4. If you were to graph this demand schedule, the demand
curve would
A. Slope upward from left to right.
B. Slope downward from left to right.
ANS: B
C. Be horizontal.
D. Be vertical.
5. According to this demand curve, how many movie videos will
be demanded at a price of $16?
ANS: A
A.
400
C.
800
B.
600
D.
1000
6. According to this demand curve, if the price of movie videos
decreases from $14 to $12, the quantity demanded will
A. Fall from 600 to 400.
C. Fall from 400 to 200.
B. Rise from 600 to 800.
D. Rise from 200 to 400.
ANS: B
7. Which of the following choices could cause the movement
shown in the graph?
A. A decrease in income
B. An increase in population
C. A decrease in the price of a substitute
ANS: B
D. An increase in the price of a complement
8. The movement shown in this graph represents a change in
what?
ANS: C
A. Quantity demanded
C. Demand
B. Marginal utility
D. Demand elasticity
8. Which of the following choices could cause the movement
shown in this graph?
A. An increase in the price of film
B. An increase in the price of cameras
C. A decrease in the price of film
D. A decrease in the price of cameras
ANS: D
9. What does the movement from b' to b on the graph
represent?
A. An increase in demand
B. An increase in quantity demanded
ANS:
C. A decrease in demand
D. A decrease in quantity demanded
C
10. What does the movement shown on this graph
represent?
A. A change in demand
B. The inverse relationship between price and
quantity demanded
C. The inverse relationship between price and
marginal utility
ANS:
D. Diminishing marginal utility
B
Rice is what you’ll probably end up with these days if your
local McDonald’s is in Indonesia. With the collapse of the
Indonesian currency, the Rupiah, in 1998, potatoes...Have
quintupled in price. That means rice is turning with an
increasing frequency as an alternative to the French fry.... It’s
not hard to fathom why fries are an endangered menu item
says Jack Greenberg, CEO of McDonald’s: “no one can afford
them.” Source: reprinted from December 14, 1998 issue of Business Week, by special permission,
copyright © 1998 by the McGraw-Hill Companies, INC.
11. Based on this passage, McDonald’s is serving rice in its
Indonesian restaurants because of
A. A decrease in the price of a complement.
B. An increase in the price of a complement.
ANS: D
C. A decrease in price of a substitute.
D. An increase in the price of a substitute.
12. If the price of carrots goes up 5% while all other prices for
vegetable increase by 10% what is the result
A. the relative price of carrots has increased.
B. the relative price of carrots has stayed the same.
C. the relative price of carrots has fallen.
Ans. C
D. the money price of carrots has stayed the same.
13. If a 2% change in the price of a product results in a 3%
change in the quantity of the product that is demanded, then
demand for the product is
A. inelastic.
C. elastic.
Ans. C
B. unit elastic
D. insensitive.
14. Market demand reflects the demand of
A. an individual consumer
C. all suppliers in the market
B. all the consumers
D. a single supplier
Ans. B
in the market
15. According the law of diminishing marginal utility, as you
receive additional units of a product the
A. total utility you receive from these products will
decline.
B. amount of utility you receive from additional
products will remain unchanged.
C. amount of utility you receive from additional
products.
D. amount of utility you receive from additional
Ans. D
products will become smaller.
16. Products that can be used in place of each other are
A. complements
C. substitutes
Ans. C
B. irreplaceable
D. unnecessary
17. If demand for a product is inelastic, then a price increase
will cause the quantity of the product demanded to ___ and
the product’s total revenue to ___.
A. fall/decline
C. grow/decline
Ans. B
B. fall/increase
D. grow/increase
18. Which of the following products is most likely to have a
demand that is inelastic?
A. a particular type of hand lotion.
Ans. D
B. a particular brand of aspirin.
C. a particular model of automobile.
D. a particular medicine that cures arthritis.
19. Over longer periods of time the demand for a particular
product is likely to be
Ans. A
A. more elastic
C. equally elastic
B. less elastic
D. unit elastic
20. When people desire more of a product regardless of price
there will be
A. movement up the product’s demand curve.
B. a shift of the product’s demand curve to the right.
C. movement down the product’s demand curve. Ans. C
D. a shift of the product’s demand curve to the left.
21. Demand indicates how much a product consumers _____
to buy at each possible price during a given period, other
things remaining constant.
A. are willing and able
C. like or desire Ans. A
B. want and need
D. are able to afford
22. If Mark is willing to pay $50 for one pair of jeans but will
only pay $80 for two pair of jeans, then the value of his
marginal utility for the second pair of jeans is
A. $30
C. $40
Ans. A
B. $50
D. $80
23. According to the law of diminishing marginal utility, if
Sandra is will to pay $50 for a sweater, the value of a second
sweater to her will be
A. more than $50
C. less than $50 Ans. C
B. exactly $50
D. nothing
24. Which of the following are examples of complements?
A. butter and margarine C. bread and butter
Ans. C
B. milk and water
D. cookies and cake
25. Which of the following is most likely to have inelastic
demand in the short run?
A. bananas
C. oatmeal cookies
B. natural gas
D. clock radios
Ans. B
26. When personal incomes fall there will be
A. movement up their demand curves for normal
products.
B. a shift to the right for their demand curves from
normal products.
C. movement down their demand curves for normal
products.
D. a shift to the left for their demand curves for normal
products.
Ans. D
DEMAND GRAPHING PRACTICE
(please graph the following)
• It becomes known that an electronics store is
going to have a sale on their computer games
3 months from now.
• The workers who produce the computer
games go on strike for over two months.
• When the average price of movie tickets rises,
it has an effect on the purchase of computer
games what will be the demand result.
DEMAND GRAPHING PRACTICE
(please graph the following)
• The workers who produce the computer
games negotiate a $20 per hour wage
increase.
• The price of business software, a product also
supplied by the computer games software
producers, rises.
• A reputable private research institute
announces that children who play computer
games also improve their grade in school.
DEMAND GRAPHING PRACTICE
(please graph the following)
• Because of the use of mass production
techniques, workers in the computer game
industry become more productive.
• The price of home computers decreases
significantly.
• The Federal government imposes a $5 per
game tax on the manufactures of the games.
• The manufacturer of the computer games
raises the price of the games.
DEMAND GRAPHING PRACTICE
(please graph the following)
• In order to promote American production,
Congress provides a subsidy to game producers.
• A large firm enters the game business with a
new line of games.
• In order to make computer games available to
low income families, Congress sets a price ceiling
for the games.
• The popularity of the computer games increase
in the world market. At the same time new
technology lower production costs.