Professional Documents
Culture Documents
Chapter 4 Demand in Graphics Picture Format
Chapter 4 Demand in Graphics Picture Format
Demand
CHAPTER 5
Supply
CHAPTER 6
Prices and Decision Making
CHAPTER 7
Market Structures
86 UNIT 2 MICROECONOMICS
To learn more about microeconomics through infor-
mation, activities, and links to other sites, visit the
Economics: Principles and Practices Web site at
epp.glencoe.com
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. To
learn more about how demand
operates in the marketplace,
view the Chapter 5 video lesson:
What is Demand?
Cover Story
P
eople sometimes think of demand as the
desire to have or to own a certain product. In
Forecasting Demand this sense, anyone who would like to own a
swimming pool could be said to “demand” one. In
s that he must pinpoint
Keith Clinkscales realize is order for demand to be counted in the marketplace,
his new magazine, Blaze,
what his readers want if however, desire is not enough; it must coincide with
a
to succeed. Blaze is the ability and willingness to pay for it. Only those
the hip ho p
magazine for people with demand—the desire, ability, and willing-
movement—focusing on ness to buy a product—can compete with others who
rap music and fashion. As
have similar demands.
reported in USA Today,
Clinkscales watches the
Demand, like many other topics in Unit 2, is a
comings and goings of microeconomic concept. Microeconomics is the
ge
teenagers at [nearby] Successful magazines gau area of economics that deals with behavior and deci-
Norman Thom as High dem and. sion making by small units, such as individuals and
s
School. He studie ir firms. Collectively, these concepts of microeconom-
s, and, of course, the
their clothes, hairstyle wa tch ics help explain how prices are determined and how
notes, “It’s amazing to
music. . . . Clinkscales, 34, their individual economic decisions are made.
passion they have about
them and observe the
rall lifestyle. . . .”
music and fashion and ove
get s rea ders ages 12 to 24. “Hip-
The magazine tar
hop is the octane of the
urban culture. We decid
on that cul
ed to
tur e,”
An Introduction to Demand
t will focus
create a publication tha A knowledge of demand is essential to
says Clinkscales. understand how a market economy works.
er 30, 1998
—USA Today, Decemb
As you read in Chapter 2, in a market economy
people and firms act in their own best interests to
CHAPTER 4: DEMAND 89
ECONOMICS answer the WHAT, HOW, and FOR WHOM ques-
AT A GLANCE
AT A GLANCE Figure 4.1 tions. Knowledge of demand is also important for
sound business planning. This is what an entrepre-
The Demand for neur like Keith Clinkscales must do: Find out what
type of magazine the hip-hop set is willing and able
Compact Digital Discs to buy in order for his project to become a success.
90 UNIT 2 MICROECONOMICS
The Individual Demand Curve and simple observation are consistent with the Law
The demand schedule information in Panel A of of Demand. This is the way people behave in normal
Figure 4.1 can also be shown graphically as the
everyday life. People ordinarily do buy more of a
downward-sloping line in Panel B. All we have to product at a low price than at a high price. All we
do to is to transfer each of the price-quantity obser- have to do is to observe the increased traffic and pur-
vations in the demand schedule to the graph, and chases at the mall whenever there is a sale.
then connect the points to form the curve.
Economists call this the demand curve, a graph The Market Demand Curve
showing the quantity demanded at each and every
Figure 4.1 shows a particular individual’s demand
price that might prevail in the market.
for a product. Sometimes, however, we are more
For example, point a in Panel B shows that
concerned with the market demand curve, the
three CDs are purchased at a price of $15 each,
demand curve that shows the quantities demanded
while point b shows that five will be bought at a
by everyone who is interested in purchasing the
price of $10. The demand schedule and the
product. Figure 4.2 shows the market demand
demand curve are similar in that they both show
curve DD for Larry and his friend Curly, the only
the same information—one just shows the data in
two people whom (for simplicity) we assume to be
the form of a table while the other is presented in
willing and able to purchase CDs.
the form of a graph.
CHAPTER 4: DEMAND 91
ECONOMICS
AT A GLANCE
AT A GLANCE Figure 4.2
+ =
Price
Price
15 15
10 10
5 5
0 1 3 5 8 0 1 2 3 5 7
Quantity Quantity
Quantity of CDs Demanded by: D
$30
Price Larry + Curly = Market
25 to get the Market
$30 0 0 0 Demand Curve.
20
25 0 1 1
Price
a
20 1 2 3 15
b
15 3 + 3 = 6 10
10 5 5 10 5
D
5 8 7 15
0 1 3 6 10 15
Quantity
Using Graphs The market demand curve, DD, is the sum of all individual demand curves in the market.
The market demand curve, like the individual demand curve, is also downward sloping. How does
diminishing marginal utility help explain the shape of the demand curve?
To get the market demand curve is a simple The market demand curve in Figure 4.2 is very
matter. All we need to do is add together the similar to the individual demand curve in Figure 4.1.
number of CDs that Larry and Curly would pur- Both show a range of possible prices that might pre-
chase at every possible price, and then plot them on vail in the market at a given time. Both are downward
a separate graph. To illustrate, point a in Figure 4.2 sloping, showing that more will be bought at lower
represents the three CDs that Larry would pur- prices, and fewer at higher prices. The only real dif-
chase at $15, plus the three that Curly would buy ference between the two is that the market demand
at the same price. Likewise, point b represents the curve shows the demand for everyone that is interested
quantity of CDs that both would purchase at a in buying the product. Thus, the market demand
price of $10. curve shows the demand for everyone in the market.
92 UNIT 2 MICROECONOMICS
Demand and Marginal Utility you buy a cola, why not buy two, or three, or even
more? The answer is that you get the most satisfac-
As you may recall from Chapter 1, econo- tion from the first purchase, and so you buy one.
mists use the term utility to describe the You get less satisfaction from the second purchase
amount of usefulness or satisfaction that someone and even less from the next—so you simply are not
gets from the use of a product. Marginal utility— willing to pay as much. When you reach the point
the extra usefulness or satisfaction a person gets where the marginal utility is less than the price, you
from acquiring or using one more unit of a prod- stop buying.
uct—is an important extension of this concept
because it explains so much about demand.
The reason we buy something in the first place
is because we feel the product is useful and that it
will give us satisfaction. However, as we use more
INFOBYTE
and more of a product, we encounter the principle
of diminishing marginal utility, which states that Housing Starts The number of housing starts
the extra satisfaction we get from using additional shows the demand for new homes. Economists
quantities of the product begins to diminish. forecast housing starts by using the current
month’s permits as a predictor. Building permits
Because of our diminishing satisfaction, we are
tend to move in tandem with starts on a month-to-
not willing to pay as much for the second, third, month basis. They are also considered to be a lead-
fourth, and so on, as we did the first. This is why our ing indicator of the economy in general. Increases
demand curve is downward-sloping, and this is why in building permits and starts are common during
Larry and Curly won’t pay as much for the second periods following a drop in mortgage rates.
CD as they did for the first. This is something that
happens to all of us all the time. For example, when
Checking for Understanding differently if the price of each item was twice
1. Main Idea Using your notes from the graphic as high? Would you have spent your money
organizer activity on page 89, write a defini- differently if each of the items cost half as
tion of demand in your own words. much as it did? Explain your responses.
2. Key Terms Define demand, microeconomics,
demand schedule, demand curve, Law of
Demand, market demand curve, marginal
utility, diminishing marginal utility. 6. Using Graphs Create your own demand
3. Describe the relationship between the schedule for an item you currently pur-
demand schedule and demand curve. chase. Next, plot your demand schedule on
4. Describe how the slope of the demand curve a demand curve. Be sure to include correct
can be explained by the principle of diminish- labels.
ing marginal utility. 7. Analyzing Information Analyze several
Applying Economic Concepts magazine or newspaper ads to determine
5. Demand Record the names and approximate how the ads reflect or use the law of dimin-
prices of the last two items you purchased. In ishing marginal utility.
general, would you have spent your money Practice and assess key social studies skills with
the Glencoe Skillbuilder Interactive Workbook,
Level 2.
CHAPTER 4: DEMAND 93
Wealth and Influence:
Oprah Winfrey
(1954–)
94 UNIT 2 MICROECONOMICS
095_GLENEPP 10/3/03 5:00 PM Page 95
T
he demand curve is a graphical representa-
Cover Story tion of the quantities that people are willing
to purchase at all possible prices that might
prevail in the market. Occasionally, however, some-
America’s Pastime? thing happens to change people’s willingness and
Myles Monaghan ability to buy, as exemplified in the cover story.
could almost be the These changes are usually of two types: a change in
next Alex Rodriguez. the quantity demanded, and a change in demand.
He’s got a cannon for
an arm. He almost
never drops the ball. Change in the Quantity Demanded
And on a good day, Point a on the demand curve in Figure 4.3
he can knock a pitch shows that six CDs are demanded when the
clear out of the park. price is $15. When the price falls to $10, however,
se
So how come he Consumer preferences cau
few nge in demand . 10 CDs are demanded. This movement from point
spent his last a cha
springs playing lacrosse?
a to point b shows a change in quantity
ld
NG,” says the 12-year-o demanded—a movement along the demand curve
“BASEBALL IS BORI
Larchmont, N.Y., jock. y- that shows a change in the quantity of the product
e number of children pla
Nationwide, the averag tum ble d purchased in response to a change in price.
orite pastime has
ing America’s once-fav ing Go od s We already know that the principle of dimin-
to the Sport
nearly 20% according rythin g fro m ishing marginal utility provides an intuitive
ion. Sales of eve
Manufacturers Associat explanation of why the demand curve is down-
cards are falling.
balls to baseball ward sloping. As we will see below, the income
and substitution effects can also add to our
), June 15, 2001
—MSNBC News (online understanding of demand.
CHAPTER 4: DEMAND 95
ECONOMICS The Substitution Effect
AT A GLANCE
AT A GLANCE Figure 4.3
A lower price also means that CDs will be rela-
tively less expensive than other goods and services
A Change in such as concerts and movies. As a result, consumers
will have a tendency to replace a more costly item—
Quantity Demanded say, going to a concert—with a less costly one—
D CDs. The substitution effect is the change in
$30 quantity demanded because of the change in the
relative price of the product. Together, the income
25
and substitution effects explain why consumers
20 Decrease in quantity increase consumption of CDs from 6 to 10 when
demanded
the price drops from $15 to $10.
Price
96 UNIT 2 MICROECONOMICS
products described in the cover story. When fewer
people play baseball, the demand for related prod-
ucts declines, with fewer items demanded at each
and every price.
Student Web Activity Visit the Economics: Principles In addition, the development of new products
and Practices Web site at epp.glencoe.com and click can have an effect on consumer tastes. Years ago,
on Chapter 4—Student Web Activities for an activity many students carried slide rules to school to work
on change in demand. out math and science problems. Now they use
pocket calculators instead of slide rules. The
demand for calculators has increased while the
Consumer Income demand for slide rules has decreased.
Changes in consumer income can cause a change Sometimes tastes and preferences change by
in demand. When your income goes up, you can themselves over time. In recent years, consumer
afford to buy more goods and services. As incomes concerns about health have greatly increased the
rise, consumers are able to buy more products at demand for healthier, less-fattening foods. Demand
each and every price. When this happens, the for smaller, more fuel-efficient cars has grown,
demand curve shifts to the right. Suppose, for driven by a change in tastes.
example, that Larry and Curly get a raise, which
allows them to buy more CDs. Instead of Larry and
Curly each buying 3 for a total of 6, they can now
each buy 5—for a total of 10. If we find out how
many CDs would be purchased at every possible
price in the market, and if we plot the information Statistician
as a demand curve as in Figure 4.4, then it appears
as if the curve has shifted to the right. Who will win the next
election? How many con-
Exactly the opposite could happen if there was a
sumers will buy a certain
decrease in income. If Larry and Curly’s raise
new product? People who
turned out to be temporary, then the loss in
try to answer such ques-
income would cause them to buy less of the good tions are statisticians.
at each and every price. The demand curve then
shifts to the left, showing a decrease in demand. The Work
Statisticians work for the
government and in industry gathering and interpreting
Consumer Tastes data about the economy, health trends, and so on. They
Consumers do not always want the same things. also work for industries and public opinion research
Advertising, news reports, fashion trends, the intro- organizations. One way statisticians gather information
duction of new products, and even changes in the is by taking samples. They cannot question all the adults
season can affect consumer tastes. For example, in this country about their activities, but they can get a
when a product is successfully advertised in the fairly accurate picture by asking a sample of a few hun-
media or on the Internet, its popularity increases dred people.
and people tend to buy more of it. If consumers Qualifications
want more of an item, they would buy more of it at To become a statistician, you should have an aptitude for
each and every price. As a result, the demand curve and an interest in mathematics and computers. Although
shifts to the right. some jobs are available for people with a bachelor's
On the other hand, if people get tired of a prod- degree, many jobs require a graduate degree in mathe-
uct, they will buy less at each and every price, caus- matics or statistics. If you think you want a career in sta-
ing the demand curve to shift to the left. This is tistics, you should take business, math, and science
exactly what happened to the demand for baseball courses.
CHAPTER 4: DEMAND 97
ECONOMICS
AT A GLANCE
AT A GLANCE Figure 4.4
A Change in Demand
Quantity Demanded D’
$30
Price Old (DD) New (D’D’)
25
$30 0 1 D
25 1 3 20
Decrease in
Price
a a’
20 3 6 15 demand
15 6 10
10 Increase in demand b b’
10 10 15
5 D D’
5 15 20
0 1 3 6 10 15 20
Quantity
Using Graphs A change in demand means that a different quantity is demanded at each and every
possible price in the market. An increase in demand appears as a shift of the demand curve to the right. A
decrease appears as a shift to the left. What might cause a change in demand for CDs?
98 UNIT 2 MICROECONOMICS
breakthrough that would allow more music to be
recorded on a smaller disk at a lower cost than
before. Even if the new product might not be avail- Shelling Out During colonial times, when a more
able for another year, some consumers might decide traditional economy existed, money was in short
to buy fewer musical CDs today simply because they supply. People often used shelled corn to pay for
want to wait for a better product. Purchasing less at goods and services. Although the practice of using
each and every price would cause demand to decline, shelled corn as money has not survived, the slang
which is illustrated by a shift of the demand curve to expression shell out—meaning pay for—has.
the left.
Of course, expectations can also have a very dif-
ferent effect on market demand. For example, if the
weather service forecasts a bad year for crops, people To illustrate, suppose Moe, one of Larry’s and
might stock up on some foods before they actually Curly’s old friends, now decides to purchase com-
become scarce. The willingness to buy more at each pact discs. If we add the number of CDs that Moe
and every price because of expected future shortages would demand at each and every possible price to
would cause demand to increase, which is demon- the others shown in Figure 4.2, the market
strated by a shift of the demand curve to the right. demand curve DD would shift to the right. This
would not affect the other individual demand
curves, of course, but, as we shall see later in
Number of Consumers Chapter 6, it will affect the prices that everyone
A change in income, tastes, and prices of related will pay for CDs. If Larry or Moe should leave the
products affects individual demand schedules and market the total number of CDs purchased at
curves—and hence the market demand curve, which is each and every price would decrease. This shifts
the sum of all individual demand curves. It follows, the market demand curve to the left. The result is
therefore, that an increase in the number of con- a decline in market demand whenever anyone
sumers can cause the market demand curve to shift. leaves the market.
CHAPTER 4: DEMAND 99
DECEMBER 14, 1998
Newsclip
McDonald’s opened its first restaurant in endangered menu item says Jack Greenberg,
Des Plaines, Illinois, in 1955. In 1967 CEO of McDonald’s: “No one can afford them.”
McDonald’s opened its first restaurants in The company has
long tailored menus at
cities in other countries. Today, the com-
its 24,000 worldwide
pany operates nearly 25,000 McDonald’s restaurants to local
restaurants in 115 countries on six conti- tastes, though not out
nents. Multinational companies, like of economic distress.
McDonald’s, are huge companies that In other Asian markets
carry out their activities on a global scale, weakened currencies
have made it cheaper
selling their products worldwide. Read to
to build new outlets:
find out how McDonald’s must adapt its 2,000 are anticipated
menu to local tastes. [by the year 2002].
But Indonesia’s situa-
tion is so disastrous,
says Greenberg, that
Holding the Fries McDonald’s will close
30 of its 100 stores
“At the Border” there.
C
ause-and-effect relationships are important in
Cover Story the study of economics. For example, we
often ask, “if one thing happens, how will it
affect something else?” The software manufacturer in
Setting Prices the cover story used a cause-and-effect relationship to
It is always a diffi- set the price for its product.
cult problem know- An important cause-and-effect relationship in eco-
ing how best to price nomics is elasticity, a measure of responsiveness that
a product. . . . When tells us how a dependent variable such as quantity
the product is one in price. responds to a change in an independent variable such
a new and rapidly Demand helps determine
as price. Elasticity is also a very general concept. It
evolving industry, deci-
industry in the 1980s, the can be applied to income, the quantity of a product
like the microcomputer a high
Was it best to charge supplied by a firm, or to demand.
sion is doubly difficult. cha rge a
number of disks or
price and sell a smaller sof twa re pro -
volume? One
lower price and aim for its new acc ou nt-
market for
ducer decided to [test] the
differ ent pri ces. The firm, Noumeno
n Demand Elasticity
ing program at ent s of $20 all the
Corporation, raised prices
in increm In the case of demand, you will consider
x-
$21 0. Th ey fou nd that total revenue was ma whether a given change in price will cause a
way up to me nt,
As a result of this experi
imized at a price of $90. uit relatively larger, a relatively smaller, or a proportional
ise and market the Int
they decided to advert er tha n the change in quantity demanded. Consumers are
$89.95, much low
Accounting program at sensitive to prices and that is why the Noumenon
softwa re programs.
prices of competing Corporation conducted so many experiments to
ley Mings,
dy of Economics, by Tur find the best price for its accounting software. An
—Adapted from The Stu Dushkin Publishing
understanding of demand elasticity—the extent to
which a change in price causes a change in the
quantity demanded—will help analyze these issues. amount they purchase. When prices are consider-
The demand for most products is such that con- ably higher in the winter, however, consumers nor-
sumers do care about changes in prices—and the mally buy fewer fresh vegetables and use canned
concept of elasticity tells us just how sensitive con- products instead.
sumers are to these changes.
Inelastic Demand
Elastic Demand For other products, demand may be largely
Economists say that demand is elastic when a inelastic, which means that a given change in price
given change in price causes a relatively larger causes a relatively smaller change in the quantity
change in quantity demanded. To illustrate, look at demanded. We can see the case of inelastic demand
how price and quantity demanded change between in Panel B of Figure 4.5. In this case, the one-third
points a and b on the demand curve in Panel A of drop in price from point a′ to b′ only causes quan-
Figure 4.5. tity demanded to increase by 25 percent, or from
As we move from point a to point b, we see that two to two and one-half units.
price declines by one-third, or from $3 to $2. At This is typical of the demand elasticity for a
the same time, the quantity demanded doubles product like table salt. A lower or higher price for
from two to four units. Because the percentage table salt does not bring about much change in the
change in quantity demanded was relatively larger quantity purchased. If the price was cut in half, the
than the percentage change in price, demand quantity demanded would not increase by much
between those two points is elastic. because people can consume only so much salt.
This type of elasticity is typical of the demand Or, if the price doubled, we would expect con-
for products like green beans, corn, tomatoes, or sumers to demand about the same amount because
other fresh garden vegetables. Because prices are the portion of a person’s budget that is spent on
lower in the summer, consumers increase the salt is so small.
ECONOMICS
AT A GLANCE
AT A GLANCE Figure 4.5
Price
2 D 2 Expenditure = $5
1 Expenditure = $8 1
D
0 1 2 3 4 5 0 1 2 3 4 5
Quantity Quantity
2
Elastic Opposite
1 D
Unit Elastic no change
0 1 2 3 4 5
Quantity Inelastic Same
Using Graphs The key to determining elasticity is to examine how expenditures change when the price
changes. If they move in opposite directions, then demand is elastic. If they move in the same direction,
then demand is inelastic. If there is no change in expenditures, then demand is unit elastic. Why is an
understanding of elasticity important for business?
Finally, and even though all the price changes This might actually work in the case of table salt,
discussed above were decreases, the results would or even medical services, because the demand for
be the same if prices had gone up instead of down. both products is generally inelastic. But, what if you
If the price rises from $2 to $3 in Panel A, spending sell a product that has an elastic demand? If you raise
falls from $8 to $6. Prices and expenditures still the price of your product, your total revenues—which
move in opposite directions, as shown in the table. is the same thing as consumer expenditures—will go
down instead of up. This outcome is exactly the
opposite of what you intend!
Elasticity and Profits This is exactly why the Noumenon Corporation
All of this discussion about elasticity may seem in the cover story experimented with so many differ-
technical and somewhat unnecessary, but knowledge ent prices when they introduced their accounting
of demand elasticity is extremely important to busi- software program. By discovering the elastic nature
nesses. Suppose, for example, that you are in busi- of demand for their new product, they were able to
ness and that you want to do something that will increase their total revenues by charging a relatively
raise your profits. Of course you could try to cut low price rather than a much higher one. This exam-
costs, or you could even try to advertise in order to ple illustrates that demand elas-
increase the number of units sold. You might, how- ticity is more important
ever, be tempted to raise the price of your product in than most people
order to increase total revenue from sales. realize.
Did You Know?
Internet Shopping According
to research analysts, two billion orders
were placed over the Internet in 1999,
generating $95 billion in revenue.
the same author appear, the company Researchers estimate e-commerce rev-
sends E-mail inviting people to buy them. Amazon’s Strategy enue will top $2.7 trillion globally
by 2004 (up from $15 billion
Growth and Development Bezos has • Make it easy for in 1997).
bigger plans for the future. He wants visitors to find
Amazon to serve as the gateway for more what they want.
products. Among its innovations, Amazon • Encourage visitor
added music in 1998 and auctions in 1999. participation.
Amazon’s Sales
Today it sells apparel and accessories, • Win repeat
office products, electronics, and kitchen customers.
and home products. To accommodate this
expansion, the company retooled its ware- $3,000,000,000
houses to offer faster service. Bezos
believes Amazon is successful because it $2,400,000,000
values its customers. “The Internet is this
$1,800,000,000
big, huge hurricane,” Bezos notes. “The
only constant in the storm is the cus- $1,200,000,000
tomers.” Today Amazon serves millions of
customers in more than 200 countries. $600,000,000
Amazon must be doing something right,
because in 1993, the American Society for $0
1996 1998 2000 2002
Quality announced that Amazon received 15.7 million 540 million 2.8 billion 3.9 billion
the highest American Customer Satis-
faction Index (ACSI) score ever recorded—
either online or offline.
Are adequate
substitutes yes no yes no no no yes
available?
Does purchase
use a large no no yes yes yes no no
portion of
income?
Type of Elastic Inelastic Elastic Inelastic Inelastic Inelastic Elastic
elasticity
Using Tables The elasticity of demand can usually be estimated by examining the answers to three key
questions. All three answers do not have to be the same in order to determine elasticity, and in some
cases the answer to a single question is so important that it alone might dominate the answers to the
other two. If you applied the three questions to a luxury product, what would be the elasticity
of demand for that product?
3. Describe the three determinants of demand 7. Understanding Cause and Effect A ham-
elasticity. burger stand raised the price of its hamburg-
ers from $2.00 to $2.50. As a result, its sales
4. Explain why the demand for insulin is
of hamburgers fell from 200 per day to 180
inelastic.
per day. Was the demand for its hamburgers
5. Explain why an item that has many close sub- elastic or inelastic? How can you tell?
stitutes tends to have an elastic demand. Practice and assess key social studies skills with
the Glencoe Skillbuilder Interactive Workbook,
Level 2.
Price