Demand concepts and definitions (chapter 4.1 & 4.2)
demand: The desire, ability, and willingness to buy a product. Demand can also be stated as the quantity demanded of a product or service at all prices in a particular market (see Market Demand Curve).
Quantity Demanded: The amount of a good or service that consumers demand at a particular price
Law of Demand: When the price of a good decreases, consumers demand a greater quantity, but when the good increases in price, the demand a lower quantity. There is an inverse relationship between price and quantity demanded
The Market Demand Curve represents quantity demanded of a product buyers want at all prices (it illustrates demand for pizza in an entire market).It is downward sloping
*Change in Quantity Demanded: Caused by a change in price
↑Price ↓QD↓Price ↑QD
The Income Effect:
The Substitution Effect:
*Changes//SHIFTS in Demand:
A shift to the right is an INCREASE
A shift to the left is a DECREASE
Things that cause demand shifts are called the DETERMINANTS of demand
Consumer Income: When peoples’ income changes, they have more or less money to buy goods and services
Normal goods: When peoples’ income increases they demand more normal goods
Inferior goods: when peoples income DECREASES they demand more inferior goods
Consumer Expectations: If consumers expect the price of a good to change in the future, then current demand will change
Consumers expect prices to rise in future – current demand increase
Consumers expect prices to decrease, current demand decreases
Change in Consumer Population: changes in population size change demand for things such as housing, food, etc.
Consumer Tastes and advertising: peoples’ perceptions of products can become more positive or negative based on news reports and/or advertising
Prices of Related Products:
Substitutes: Things that can be bought instead of another rthing/ replacements
When demand decreases for a product, its substitute INCREASES in demand
Complements: Things that go together –
WHEN DEMAND decreases for a product, its compliment decreases in demand also
*Demand Elasticity (chapter 4.3)*
Elasticity of Demand is a measure of how consumers react to a change in price
Or put another way….
Demand Elasticity: the extent to which changes in price cause changes in the quantity demanded
Elastic (Demand) – Products with elastic demand – there is a big change in quantity demanded with a change in price
Inelastic (Demand) for products with inelastic demand, there is very little change in quantity demanded when price changes
Unitary Elastic (Demand)
Factors Affecting Demand Elasticity
Availability of Substitutes If a product has adequate substitutes, then demand will likely be elastic
Relative ImportanceHow essential is the product? More essential, more inelastic. Less essential, more elastic
Necessities versus LuxuriesLuxury goods tend to have elastic demand
Necessities have inelastic demand
Change over time (Long-run demand vs. short-run demand)
The best way to determine price elasticity is to ask these questions:
Can the purchase be delayed? Yes = elastic, No = inelastic
Are adequate substitutes available? Yes = elastic, No = inelastic
Does the good take up a large portion of income/are you on a limited budget? Yes = elastic, No = inelastic
Total Revenue: the total amount of money a firm receives by selling goods or services
Total revenue is determined by multiplying the price of a product by the quantity sold.
Sometimes this is called Total Receipts
Total Revenue Test
PRICE x QUANTITY DEMANDED = TOTAL RECEIPTS (REVENUE)
Elastic = price goes up, and total receipts go down
Elastic = price goes down, and total receipts go up
Inelastic = price goes up, and total receipts go up
Inelastic = price goes down, and total receipts go down
Unit Elastic = price goes either up or down, total receipts stay the same