CHAPTER 3
Demand
SECTION 1: Nature of Demand
SECTION 2: Changes in Demand
SECTION 3: Elasticity of Demand
1
SECTION 1
Nature of Demand
Objectives:
 How does demand differ from the quantity
demanded?
 What does the law of demand state?
 What do demand schedules and demand
curves illustrate?
2
SECTION 1
Nature of Demand
Difference between demand and the
quantity demanded:
 demand—amount of a good or service that a
consumer is willing and able to buy at various
prices during a given period of time.
 quantity demanded—amount of good or service
that a consumer is willing and able to buy at each
particular price during a given period of time.
 Notice, that in both definitions- you must be willing and able to
buy.
3
SECTION 1
Nature of Demand
Law of demand:
 As Price goes up, Quantity Demanded goes
down.
P
4
Qd
Income Effect
 Change in purchasing power because of a
change in price
 1 chocolate bar-$1.00
 On sale for $.50
5
Substitution Effect
 Substitute a similar lower priced product for
one that is more expensive.
 Hershey bars cost $7.00 a piece. What are you
going to do?
 If Nestle chocolate bars were free, would you
demand 1,000,000,000 of them?
6
Diminishing Marginal Utility
 As more units of a product are consumed,
the satisfaction received from each
additional unit declines.
 This is why demand for a product is not
limitless.
7
SECTION 1
Nature of Demand
What demand schedules illustrate:
 Demand schedules
show in table format:
the quantity of
products consumers are
willing and able to buy
at a series of possible
prices
8
Price
1.00
Quantity
Demanded
14000
2.00
9000
3.00
3000
What demand curves illustrate:
 Demand curves show in graph format the
data listed in demand schedules
9
Creating Demand Charts
1. Draw the appropriate Demand Curve for
each Demand Schedule.
2. At which price does the seller receive the
highest Total Revenue?
10
1.
2.
Draw the appropriate Demand Curve
for each Demand Schedule.
At which price does the seller receive
the highest Total Revenue?
#1
Demand for gasoline in one week period.
Quantity in gallons
Price
Q-Demanded
4.00
5000 gal
3.95
10000 gal
3.90
13000 gal
3.85
26000 gal
3.80
27000 gal
3.75
28000 gal
11
4.00
P
r
i
c
e
3.90
3.80
3.75
D1
5,000
10,000
15,000
20,000
Quantity
12
25,000
30,000
#2
Demand for Pepsi sold at Quick Stop
in one day.
Quantity in cups of Pepsi.
Price
Q-Demanded
1.75
1.70
1.65
1.60
1.55
1.50
13
20
25
45
55
70
75
1.75
P
r
i
c
e
1.65
1.55
D1
20
25
30
40
45
50
60
65
Quantity
14
70
75
80
85
#3
Demand for music CDs sold in one year.
Price
Q-Demanded
$25.00
10000
$23.00
12000
$20.00
15000
$18.00
25000
$15.00
27000
$10.00
30000
15
25.00
P
r
i
c
e
10.00
D1
10,000
30,000
Quantity
16
#4
Demand for flip-flops at the local
Target store in June.
Price
Q-Demanded
$15.00
180
$13.00
200
$11.00
300
$9.00
400
$7.00
850
$5.00
1000
17
15.00
P
r
i
c
e
5.00
D1
180
1,000
Quantity
18
P
Qd
 This is the law of demand
 Shown as movement along the Demand
Curve.
 This is caused only by change in price.
19
What a Change in Qd Looks Like:
3.00
P
r
i
c
e
2.00
1.00
2000
4000
6000
8000
10000
Quantity
20
12000
14000
SECTION 2
Changes in Demand
When a product’s demand shifts,
different quantities of a product are
demanded at each and every price.
21
P
r
i
c
e
D2
Quantity
22
D1
SECTION 2
Changes in Demand
Determinants of product demand
shifts:





consumer tastes and preferences
market size
income
consumer expectations
prices of related goods
 Substitute
 Complementary
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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
24
Headlines:
 For each Headline:
1. Determine what direction the demand curve
will move.
2. Determine which determinant of demand is
making the curve to move.
3. Draw the graph.
25
Product: Hot Dogs
 Price of Hot Dog Buns Sky Rocket because
Wheat Producers go on strike!!!!
To the Left
Direction? _____________
Prices of Related Goods- Complementary
Determinant? _____________
Draw Graph:
26
P
r
i
c
e
D1
D2
Quantity
27
Product: Hershey Chocolate
 Hershey Bars: Part of a Healthy Diet!
Shift?________
Det._________
Graph:
28
Product: Apple iPod
 Amid Strong Sales Apple Doubles Prices of
all iPods.
29
Product: Wal-Mart Stock
 Wal-Mart Expected to have Best 4th Quarter
Earnings in 10 Years.
Shift?________
Det._________
Graph:
30
Product: Televisions
 Study Shows U.S. Citizens Making 75%
More Than 10 Years Ago.
31
Product: Come up with your own
 Headline: Come up with your own.
 Trade with the person in-front of/behind
you.
32
SECTION 3
Elasticity of Demand
Objectives:
 What is demand elasticity?
 What is the difference between elastic and
inelastic demand?
 How is demand elasticity measured?
33
SECTION 3
Elasticity of Demand
Demand elasticity reflects the extent
to which changes in a product’s price
affect the quantity demanded by
consumers.
34
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
35
Elastic Demand Curve
P
r
i
c
e
P1
Small
change in
Price
P2
Q1
Q2
Large change in Qd
36
Quantity
Difference between elastic and
inelastic demand:
 inelastic demand—when a change in a
product’s price has only a slight effect on the
quantity demanded
37
Inelastic Demand Curve
P1
Big
Change
in Price
P2
Q1
Q2
Small Change in Qd
38
CHAPTER 3
Wrap-Up
1. State the law of demand in your own words. Be
sure to include how the income effect, the
substitution effect, and diminishing marginal utility
relate to the law of demand.
2. What causes movement along a demand curve—in
other words, a change in the quantity demanded?
How does this movement differ from a shift in
demand?
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CHAPTER 3
Wrap-Up
3. What is the difference between a complementary
good and a substitute good? Give an example of
each kind of good for each of these products: ice
cream, baseball game tickets, pencils.
4. Why is determining demand elasticity important to
business owners? How can business owners
measure demand elasticity?
41