Chapter 4
Demand
Contents
CHAPTER INTRODUCTION
SECTION 1 What Is Demand?
SECTION 2 Factors Affecting Demand
SECTION 3 Elasticity of Demand
CHAPTER SUMMARY
CHAPTER ASSESSMENT
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Chapter Introduction 1
In Chapter 4, you will learn that demand
is more than a desire to buy something: it
is the ability and willingness to actually
buy it.
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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.
• 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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• 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.
• Collectively, these concepts of
microeconomics help explain how prices
are determined and how individual
economic decisions are made.
• 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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Figure 4.1
The Demand for Compact Discs
Figure 4.1
The Demand for Compact Discs
• 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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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
• 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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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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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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Key Terms
– change in quantity demanded 
– income effect 
– substitution effect 
– change in demand 
– substitutes 
– complements
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• 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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• 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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• 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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Figure 4.3
Figure 4.3
A Change in Quantity Demanded
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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• 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
Section
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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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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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.
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• 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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• 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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• 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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
• 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
• 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
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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Continued on next slide.
Explain why the demand for insulin is
inelastic.
There is a lack of adequate
substitutes for insulin.
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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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Chapter Summary 2
• 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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Chapter Summary 3
• 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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Chapter Summary 4
• 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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Chapter Summary 5
• 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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Chapter Summary 6
• 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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Chapter Assessment 1
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
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.
Chapter
Assessment
2
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
E. demand curve
F. change in quantity demanded
G. Law of Demand
H. elastic demand
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Chapter Assessment 3
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
E. demand curve
F. change in quantity demanded
G. Law of Demand
H. elastic demand
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Chapter Assessment 7
Identify the five factors that can
cause a change in market demand.
The five factors that can cause a
change in market demand are:
–
–
–
–
–
consumer income
consumer tastes
substitutes and complements
change in expectations
number of consumers
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Chapter Assessment 8
Describe the difference between
elastic demand and inelastic
demand.
When demand is elastic, there is a
relatively large change in quantity
demanded when the price changes,
giving the demand curve a flat slope.
The change in quantity demanded is
much smaller for inelastic demand,
making the slope of the demand curve
steeper.
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