Meade- Economics- Section 4

CH. 4

I. Demand

A. Demand is the desire, ability and willingness to buy a product.

B. An individual demand curve illustrates how the quantity that a person

will demand varies depending on the price of a good or service.

C. Economists analyze demand by listing prices and desired quantities in a

demand schedule (chart). When demand is graphed it forms a demand
curve with a downward slope.

II. Law of Demand

A. The Law of Demand states that the quantity demanded of a good or

service varies inversely with its’ price. When price goes up, demand goes
down. When price goes down, demand goes up. Ceteris Paribus

B. A demand curve shows the quantities demanded at all possible prices.

C. A market demand curve illustrates how the quantity that all interested
persons (the market) will demand varies depending on the price.

D. A demand schedule is a table that shows how much of a product people

are willing to buy at all possible prices.

III.Why is price a consumer’s obstacle to buying?

IV. Demand and Marginal Utility

A. Marginal Utility is the extra usefulness or satisfaction a person receives

from getting or using one more unit of a product.

B. 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.
V. Change in Quantity Demanded

A. This change in quantity demanded shows the change in the amount of a product
purchased when there is a change in price.

B. The income effect means when prices drop, consumers are left with extra real
income.

C. The substitution effect means that price can cause consumers to substitute one
product for another similar, but cheaper item.

 Name an instance in which the substitution effect has happened to you?

VI. Changes in Demand

A. A change in demand is when people buy different amounts of the product at

the same prices.

B. A change in demand can be caused by a change in income, tastes, a price

change in a substitutes/complements or other related products, consumer
expectations and the number of buyers

 Are there any items for which demand dropped and then, at a later time rose
again?

VII. Demand Elasticity

A. Elasticity measures how sensitive consumers are to price changes.

B. Demand is elastic when a change in price causes a large change in demand.

C. Demand is inelastic when a change in price causes a small change in

demand.

D. Demand is unit elastic when a change in price causes a proportional change in

demand.
VIII. Total Revenue Test
A. Price times quantity demanded equals total revenue

B. Changes in revenue depend on the elasticity of the demand curve—if the

change in price and revenue move in opposite directions on the curve, the demand
is elastic; if they move in the same direction, the demand is inelastic; no change
equals unit elastic.

C. Understanding the relationship between elasticity and profits can help producers
effectively price their products.

 Give an example of an item in which a price drop would not encourage you to
purchase more of the item??

IX. Determinants of Demand Elasticity

A. Demand is elastic if you answer yes to the following questions.

1. Can the purchase be delayed? Some cannot be delayed regardless of price

2. Are adequate substitutions available? Price changes can cause consumers

to substitute one product for another.

3. Does the purchase use a large portion of income? Demand elasticity can
increase when a product commands a large portion of the consumers’
income.

 Name some items that you purchase in which price is not a primary issue?