1 Describe illustrate the concept of demand 2

1. Describe & illustrate the concept of demand. 2. Explain how demand & utility are related. 3. Explain what causes a change in quantity demanded 4. Describe the factors that can cause a change in demand.

• demand schedule • demand curve Law of Demand • marginal utility • diminishing marginal utility • change in quantity demanded • income effect substitution effect • change in demand substitutes

• Demand is NOT just the desire to have or own a certain product • DEMAND is the DESIRE, ABILITY, and WILLINGNESS to BUY a product – When I want or need something, do I demand it? – No, I must buy it.

• A demand schedule is a listing that shows the number demanded at different prices (table form) Price Quantity Demanded

• A demand curve shows the quantity demanded at each & every possible price that may prevail in the market (line graph form) • The line is ALWAYS downward sloping – Lower quantity will be demanded at higher prices – Higher quantity demanded at lower prices • A change in price reflects movement along the curve (change in quantity demanded)

• There is an inverse relationship between price & quantity demanded – If price increases, demand decreases – If price decreases, demand increases

• Utility is the amount of usefulness or satisfaction someone gets from the use of a product • Marginal utility is the extra satisfaction one gets from getting one more unit of the product • Diminishing marginal utility is the decreasing satisfaction as additional units of a product are acquired

• A change in price will cause a change in the quantity demanded, which is represented by movement along the demand curve • This may occur because of 2 reasons: 1. The Income Effect: change in price alters consumers’ real income (prices drop, you have more income to spend) 2. The Substitution Effect: change in the relative price of the product (as compared with prices of other products) • Together, they explain why consumers increase consumption when prices drop

If a change in demand is NOT caused by a change in PRICE, the entire demand curve will shift = CHANGE IN DEMAND

• People are now willing to buy different amounts of the product at the same prices • Entire demand curve shifts – To the RIGHT shows an increase in demand – To the LEFT shows a decrease in demand • Change in demand results in an entirely new curve

Factors that cause a change in demand (other than price): Write at least 3 facts for each. 1. Consumer Income 2. Consumer Tastes 3. Prices of Related Goods q Substitute Goods q Complementary Goods 4. Change in Expectations 5. Number of Consumers

• Elasticity is an important cause-and -effect relationship in economics • Demand elasticity is the extent to which a change in price causes a change in the quantity demanded • Will a change in price cause a relatively larger, a relatively smaller, or a proportional change in quantity demanded?

• Demand is ELASTIC: a change in price causes a relatively larger change in quantity demanded • Demand is INELASTIC: a change in price causes a relatively smaller change in quantity demanded • Demand is UNIT ELASTIC: a change in price causes a proportional change in quantity demanded

What determines demand elasticity? Ø Can the purchase be delayed? ØYes: tends to be elastic ØNo: tends to be inelastic Ø Are adequate substitutes available? ØYes: tends to be elastic ØNo: tends to be inelastic Ø Does the purchase use a large portion of income? ØYes: tends to be elastic ØNo: tends to be inelastic