econ Ch 4 Demand Notes

Chapter 4 Demand
Essential Question: How do the laws of demand interact to establish prices
in the economy?
4.1 The Demand Curve
A. Demand
1. Law of Demand – higher the price, the smaller quantity demanded
2. Substitution Effect – replacing a good with another good, less
3. Income Effect – money and real income
B. Marginal Utility
1. Satisfaction you derive from additional unit of a product
2. Diminishing marginal utility – helps explain why buy more when the
price decreases
C. Demand Schedule and Demand Curve
1. Demand VS Quantity demanded
2. Individual and market demand
4.2 Elasticity of Demand
Percentage change in quantity demanded divided by the percentage change in
A. Total revenue
B. Determinants of Demand Elasticity
1. Substitutes – more subs for a good, greater good’s elasticity of
2. Share of consumer’s budget spent on good – more important the
item is as a share of consumer’s budget, other things constant, the
greater is the income effect of a change in price, so the more price
elastic is the demand for the item
3. The elasticity of demand is greater in the long run because
consumers have more time to adjust
4.3 Changes in Demand
A. Determinants of Demand
1. Consumer income – normal and inferior goods
2. Prices of related goods – substitutes and complements
3. Number and composition of consumers – population growth
4. Consumer expectations – change in price expectations
5. Consumer tastes – likes/dislikes
B. Demand Curve – movement along or shift of the curve