Chapter 4
Demand
Chapter Objectives
Section 1: What Is Demand?
• Describe and illustrate the concept of
demand. 
• Explain how demand and utility are
related.
2
Chapter Objectives
Section 2: Factors Affecting Demand
• Explain what causes a change in quantity
demanded. 
• Describe the factors that could cause a
change in demand.
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Chapter Objectives
Section 3: Elasticity of Demand
• Explain why elasticity is a measure of
responsiveness. 
• Analyze the elasticity of demand for a
product. 
• Understand the factors that determine
demand.
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Study Guide
Main Idea
Demand is a willingness to buy a product at a
particular price. 
Reading Strategy
Graphic Organizer As you read this section,
use a graphic organizer like the one found on
page 89 of your textbook to note characteristics
of demand.
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information. Section 1 begins on page 89 of your textbook.
Study Guide (cont.)
Key Terms
– demand 
– microeconomics 
– demand schedule 
– demand curve 
– Law of Demand 
– market demand curve 
– marginal utility 
– diminishing marginal
utility
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information. Section 1 begins on page 89 of your textbook.
Introduction
• People sometimes think of demand as
the desire to have or to own a certain
product. 
• In this sense, anyone who would like to
own a swimming pool could be said to
“demand” one. 
• In order for demand to be counted in the
marketplace, however, desire is not
enough; it must coincide with the ability and
willingness to pay for it.
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Introduction (cont.)
• Only those people with demand—the
desire, ability, and willingness to buy a
product-can compete with others who
have similar demands. 
• Demand, like many other topics in Unit 2
is a microeconomic concept. 
• Microeconomics is the area of
economics that deals with behavior and
decision making by small units, such as
individuals and firms.
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Introduction (cont.)
• Collectively, these concepts of
microeconomics help explain how prices
are determined and how individual
economic decisions are made.
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Did You Know?
• In the summer 1999, the American
Automobile Association announced that
gasoline prices in Illinois had reached a
20-month high. A spokesperson for the
gasoline industry explained that this rise in
prices had several causes, including
unexpected problems at refinery plants
and decisions from oil-producing countries
to cut back on production. Regardless of
the reasons, it was expected that people
living in Illinois would respond to the
higher prices by limiting the time they
spent driving, thus reducing their demand
for gas.
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An Introduction to Demand
• Demand is the desire, ability, and
willingness to buy a product. 
• An individual demand curve illustrates
now the quantity that a person will
demand varies depending on the price of
a good or service. 
• Economists analyze demand by listing
prices and desired quantities in a demand
schedule (chart). When the demand data
is graphed, it forms a demand curve with
a downward slope.
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An Introduction to Demand (cont.)
Figure 4.1
The Demand for Compact Discs
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An Introduction to Demand (cont.)
Figure 4.1
The Demand for Compact Discs
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Discussion Question
Think about something you have been
wanting to buy. What is its price? At
what price would you be willing to buy
the item?
Answers will vary, but students
should demonstrate an
understanding of the concept of
demand.
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The Law of Demand
• The Law of Demand states that the
quantity demanded of a good or service
varies inversely with its price. When
price goes up, the quantity demanded
goes down; when price goes down, the
quantity demanded goes up. 
• 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.
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Discussion Question
Why is price a consumer’s obstacle to
buying?
Answers will vary, but may include
that a consumer’s money is limited,
and the price of a product forces the
consumer to determine how much his
or her demand is for the product.
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The Law of Demand (cont.)
Figure 4.2
Individual and Market Demand Curves
Demand and Marginal Utility
• Marginal utility is the extra usefulness or
satisfaction a person receives from getting
or using one more unit of a product. 
• 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.
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Discussion Question
You have read about buying a cola as
an example of diminishing marginal
utility. What is another case in which
more product gives less satisfaction?
Answers will vary, but students
should demonstrate an
understanding of the concept of
diminishing marginal utility.
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Section Assessment
Main Idea Using your notes from the
graphic organizer activity on page 89,
write a definition of demand in your
own words.
Answers should include the desire,
ability, and willingness to buy a
product.
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Section Assessment (cont.)
Describe the relationship between the
demand schedule and demand curve.
Both provide information about
demand–the schedule in the form of
a table and the curve in the form of a
graph.
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Section Assessment (cont.)
Describe how the slope of the demand
curve can be explained by the principle
of diminishing marginal utility.
Diminishing marginal utility says that
as we use more of a product, we are
not willing to pay as much for it.
Therefore, the demand curve is
downward sloping. People will not
pay as much for the second and third
product as they will for the first.
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Section Assessment (cont.)
Using Graphs Create your own
demand schedule for an item you
currently purchase. Next, plot your
demand schedule on a demand curve.
Be sure to include correct labels.
Answers should reflect an
understanding of demand schedules
and curves.
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Section Assessment (cont.)
Analyzing Information Analyze
several magazine or newspaper ads to
determine how the ads reflect or use
the law of diminishing marginal utility.
Answers should show an
understanding of the law of
diminishing marginal utility.
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Section Close
Choose an item that you buy
regularly, for example a food item or
jeans, and create a simple demand
schedule and curve for that item.
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Study Guide
Main Idea
There are a number of factors that will cause
demand to either increase or decrease. 
Reading Strategy
Graphic Organizer As you read about the
determinants of demand, list each on a table
similar to the one on page 95 of your textbook
and provide an example of each.
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information. Section 2 begins on page 95 of your textbook.
Study Guide (cont.)
Key Terms
– change in quantity demanded 
– income effect 
– substitution effect 
– change in demand 
– substitutes 
– complements
29
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information. Section 2 begins on page 95 of your textbook.
Study Guide (cont.)
Objectives
After studying this section, you will be able to: 
– Explain what causes a change in quantity
demanded. 
– Describe the factors that could cause a
change in demand. 
Applying Economic Concepts
Change in Demand Would you buy more
clothes if your employer doubled your salary?
Read to find out what causes a change in
demand.
Click the Speaker button to
listen to the Cover Story.
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Click the mouse button or press the Space Bar to display the
information. Section 2 begins on page 95 of your textbook.
Introduction
• The demand curve is a graphical
representation of the quantities that people
are willing to purchase at all possible prices
that might prevail in the market. 
• Occasionally something happens to
change people’s willingness and ability to
buy. 
• These changes are usually of two types: a
change in the quantity demanded, and a
change in demand.
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Did You Know?
• In 1983, the first audio compact discs were
introduce to U.S. consumers. Within five
years, record companies had begun to
phase out the vinyl albums on which music
was traditionally played because sales
figures had shown that consumers
preferred CD technology.
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Change in Quantity Demanded
• The change in quantity demanded shows
a change in the amount of the product
purchased when there is a change in
price. 
• The income effect means that as prices
drop, consumers are left with extra real
income. 
• The substitution effect means that price
can cause consumers to substitute one
product with another similar but cheaper
item.
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Change in Quantity Demanded (cont.)
Figure 4.3
A Change in Quantity Demanded
Discussion Question
Imagine you have a weekly budget for
groceries. When you shop one week,
certain items you needed were on
sale, and after you paid the cashier,
you had $20 left. What would you do
with the extra money?
Answers will vary. Students should
explain how their responses illustrate
the income effect.
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Change in Demand
• A change in demand is 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 number of buyers.
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Change in Demand (cont.)
Figure 4.4
A Change in Demand
Discussion Question
Although CDs are by far today’s most
popular form of musical recording,
interest in “vinyls” (the word people
now use to refer to the old vinyl
albums) is growing. What might
happen to the demand for vinyls as
interest increases?
Students should indicate that
increased interest probably will lead
to an increase in demand for vinyls.
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Section Assessment
Main Idea How does the income
effect explain the change in quantity
demanded that takes place when the
price goes down?
Because of the decrease in price,
consumers have more real income,
leading to an increase in the quantity
demanded of a product.
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Section Assessment
Describe the difference between a
change in quantity demanded and a
change in demand.
A change in quantity demanded
reflects a change in the quantity of
the product purchased in response to
a change in price. A change in
demand reflects a willingness to buy
different amounts of the product at
the same price.
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Section Assessment (cont.)
Explain how a change in price
affects the demand for a product’s
substitute(s).
The demand for a product tends to
increase if the price of its substitutes
goes up, and vice versa.
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Section Assessment (cont.)
Understanding Cause and Effect
What happens to the price and the
quantity of goods and services sold
when a store runs a sale? How do
these factors relate to the downwardsloping curve?
A reduction in prices during a sale
leads to an increase in quantity of
products sold. The downward slope
of the demand curve reflects these
trends as prices decrease and
quantity increases.
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Section Close
Write a paragraph explaining all of
the determinants that can lead to a
change in individual demand.
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Study Guide
Main Idea
Consumers react differently to price changes
depending on whether the good is a necessity
or a luxury. 
Reading Strategy
Graphic Organizer As you read about price
elasticity, complete a web like the one on page
101 of your textbook to illustrate what effect a
change in price has on products that are elastic,
inelastic, or unit elastic.
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information. Section 3 begins on page 101 of your textbook.
Study Guide (cont.)
Key Terms
– elasticity 
– inelastic 
– demand elasticity 
– unit elastic 
– elastic 
Objectives
After studying this section, you will be able to: 
– Explain why elasticity is a measure of
responsiveness. 
– Analyze the elasticity of demand for a
product. 
– Understand the factors that determine demand
elasticity.
46
Click the mouse button or press the Space Bar to display the
information. Section 3 begins on page 101 of your textbook.
Study Guide (cont.)
Applying Economic Concepts
Elasticity of Demand What are you willing to pay
to see a popular movie? Read to find out about
the elasticity of demand for a product and what
factors influence your willingness and ability to pay
for a product.
Click the Speaker button to
listen to the Cover Story.
Section 3 begins on page 101 of your textbook.
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Introduction
• Cause-and-effect relationships are
important in the study of economics. 
• For example, we often ask, “if one thing
happens, how will it affect something
else?” 
• An important cause-and-effect
relationship in economics is elasticity, a
measure of responsiveness that tells us
how a dependent variable such as
quantity responds to a change in an
independent variable such as price.
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Introduction (cont.)
• Elasticity is also a very general concept
that can be applied to income, the
quantity of a product supplied by a firm,
or to demand.
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Did You Know?
• The drugs needed to get or stay well can
take a large portion of a consumer’s
income, especially if that income is fixed.
However, the use of generic drugs had
offered consumers a cheaper alternative
to drugs with brand names. After the
founding drug company’s patent on a
brand-name drug has expired, another
drug company can create a generic drug.
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Demand Elasticity
• Elasticity measures how sensitive
consumers are to price changes. 
• Demand is elastic when a change in price
causes a large change in demand. 
• Demand is inelastic when a change in
price causes a small change in demand.
• Demand is unit elastic when a change in
price causes a proportional change in
demand.
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
Discussion Question
What are examples of items for which
an increase in price would cause you
or your family to reconsider buying
them?
Answers will vary but should illustrate
an understanding of price elastic
demand.
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The Total Expenditures Test
• Price times quantity demanded equals total
expenditures. 
• Changes in expenditures depend on the
elasticity of a demand curve—if the
change in price and expenditures move in
opposite directions on the curve, the
demand is elastic, if they move in the
same direction, the demand is inelastic; if
there is no change in expenditures,
demand is unit elastic. 
• Understanding the relationship between
elasticity and profits can help producers
effectively price their products.
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The Total Expenditures Test (cont.)
Figure 4.5
The Total Expenditures Test for Demand Elasticity
Discussion Question
What are examples of items for which
a drop in price would not encourage
you to buy more of an item?
Answers will vary but should reflect
an understanding of the relationship
between demand and elasticity.
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Determinants of Demand Elasticity
• Demand is elastic if the answer to the
following questions are “yes”. 
– Can the purchase be delayed? Some purchases
cannot be delayed, regardless of price changes.

– Are adequate substitutes available? Price
changes can cause consumers to substitute on
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.
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Determinants of Demand Elasticity
(cont.)
Figure 4.6
Estimating the Elasticity of Demand
Discussion Question
What are some things you buy for
which price is not the issue?
Answers will vary but should reflect
items whose purchases cannot be
delayed, regardless of price.
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Section Assessment
Main Idea What luxuries do you think
would have a higher price elasticity
than others? Give three examples and
explain why you think they would have
an exceptionally high elasticity.
Answers will vary but should reflect
an understanding of price elasticity.
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Section Assessment
Describe the three determinants of
demand elasticity.
Can the purchase be delayed? Are
adequate substitutes available? Does
the purchase use a large portion of
income?
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Section Assessment (cont.)
Explain why the demand for insulin is
inelastic.
There is a lack of adequate
substitutes for insulin.
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Section Assessment (cont.)
Explain why an item that has many
close substitutes tends to have an
elastic demand.
Because consumers can switch
among the various substitutes.
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Section Assessment (cont.)
Understanding Cause and Effect A
hamburger stand raised the price of its
hamburgers from $2.00 to $2.50. As a
result, its sales of hamburgers fell from
200 per day to 180 per day. Was the
demand for its hamburgers elastic or
inelastic? How can you tell?
The demand is inelastic because a 25
percent increase in price resulted in a
10 percent decrease in units sold.
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Section Close
Draw graphs representing the
various types of elasticity. Be
prepared to explain how each type
works.
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Section 1: What Is Demand?
• Microeconomics is the area of economic study
that deals with individual units in an economy,
such as households, business firms, labor unions,
and workers. 
• You express demand for a product when you are
both willing and able to purchase it. 
• Demand can be summarized in a demand
schedule, which shows the various quantities that
would be purchased at all possible prices that
might prevail in the market. 
• Demand can also be shown graphically as a
downward sloping demand curve.
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Section 1: What Is Demand? (cont.)
• The Law of Demand refers to the inverse
relationship between price and quantity
demanded. 
• Individual demand curves for a particular product
can be added up to get the market demand
curve. 
• Marginal utility is the amount of satisfaction an
individual receives from consuming one
additional unit of a particular good or service. 
• Diminishing marginal utility means that with
each succeeding unit, satisfaction decreases.
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Section 2: Factors Affecting Demand
• Demand can change in two ways–a change in
quantity demanded or a change in demand. 
• A change in quantity demanded means people
buy a different quantity of a product if that
product’s price changes, appearing as a
movement along the demand curve. 
• A change in demand means that people have
changed their minds about the amount they would
buy at each and every price. It is represented as a
shift of the demand curve to the right or left. 
• A change in consumer incomes, tastes and
expectations, and the price of related goods
causes a change in demand.
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Section 2: Factors Affecting Demand
(cont.)
• Related goods include substitutes and
complements. A substitute is a product that is
interchangeable in use with another product. A
complement is a product that is used in
conjunction with another product. 
• The market demand curve changes whenever
consumers enter or leave the market, or
whenever an individual’s demand curve
changes.
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Section 3: Elasticity of Demand
• Elasticity is a general measure of responsiveness
that relates changes of a dependent variable such
as quantity to changes in an independent variable
such as price. 
• Demand elasticity relates changes in the
quantity demanded to changes in price. 
• If a change in price causes a relatively larger
change in the quantity demanded, demand is
elastic. 
• If a change in price causes a relatively smaller
change in the quantity demanded, demand is
inelastic.
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Section 3: Elasticity of Demand (cont.)
• When demand is elastic, it stretches as price
changes. Inelastic demand means that price
changes have little impact on quantity
demanded. 
• Demand is unit elastic if a change in price causes
a proportional change in quantity demanded. 
• The total expenditures test can be used to
estimate demand elasticity. 
• Demand elasticity is influenced by the ability to
postpone a purchase, by the substitutes available,
and by the proportion of income required for the
purchase.
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Identifying Key Terms
Match the letter of the term best described by each statement.
___
B the desire, ability, and willingness to buy a product
___
F a movement along the demand curve showing
that a different quantity is purchased in response to
a change in price
___
G a statement that more will be demanded at lower
prices and less at higher prices
A. demand schedule
B. demand
C. microeconomics
D. change in demand
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E. demand curve
F. change in quantity demanded
G. Law of Demand
H. elastic demand
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answer. The Chapter Assessment is on pages 110–111.
Identifying Key Terms (cont.)
Match the letter of the term best described by each statement.
___
A a listing in a table that shows the quantity
demanded at all possible prices in the market at a
given time
___
D a principle illustrating that consumers demand
different amounts at every price, causing the
demand curve to shift to the left or the right
___
C the field of economics that deals with behavior and
decision making by individuals and firms
A. demand schedule
B. demand
C. microeconomics
D. change in demand
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E. demand curve
F. change in quantity demanded
G. Law of Demand
H. elastic demand
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Identifying Key Terms (cont.)
Match the letter of the term best described by each statement.
___
H a principle illustrating that a relatively small change
in price causes a relatively large change in the
quantity demanded
___
E a graph that shows the quantity demanded at all
possible prices in the market at a given time
A. demand schedule
B. demand
C. microeconomics
D. change in demand
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E. demand curve
F. change in quantity demanded
G. Law of Demand
H. elastic demand
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