Chapter 4 Demand Demand The desire ability and

Chapter 4 Demand

Demand • The desire, ability, and willingness to buy a product.

Demand Curve Demonstrates how the quantity that a person will demand varies depending on the price of a good or service.

Law of Demand The quantity of demand of a good or service varies inversely with its price. When price goes up, the quantity demanded goes down; when price goes down, the quantity demanded goes up.

Demand marginal utility Marginal utility is the extra usefulness or satisfaction a person receives from getting or using one more of a product. 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.

Olive Garden’s Never Ending Pasta Bowl

Changes in the quantity demanded A movement from point a to point b that shows a change in quantity demanded A movement along the demand curve that shows a change in the quantity of the product purchased in response to a change in price ceteris paribus (all other things being equal).

A change in quantity demanded is a movement along the demand curve IN RESPONSE TO PRICE

Government says You da man. . . d The government can play a crucial role in the creation of demand John Maynard Keynes came up with a theory to improve economic conditions Demand-Side economics Reduce interest rates Causes people to borrow money Increase government spending on infrastructure Works Progress Administration of Franklin Roosevelt Investment by government injects income, which results in more spending in the general economy, which in turn stimulates more production and investment involving still more income and spending and so forth. This is known as a capital injection The initial stimulation starts a cascade of events, whose total increase in economic activity is a multiple of the original investment

It’s not a panacea Problems with Demand side/Keynesian Economic theory Creates large amounts of debt Considering that it is used in times of economic disparity, the country is probably in bad shape to begin with Makes big government EVEN BIGGER Putting more money in the bureaucracy Wasteful?

The American Recovery and Reinvestment Act Plainly known as “The Stimulus Package. ” The stimulus was intended to create jobs and promote investment and consumer spending during the recession. The rationale for the stimulus comes out of the Keynesian economic tradition that argues that government spending should be used to cover the output gap created by the drop in consumer spending during a recession Criticisms: It’s$ 787, 000, 000!!! That’s a lot to add to the overall debt Actually, it’s not enough? !

How consumers figure in the puzzle

Income effect The change in the quantity demanded because of a change in price that alters consumers’ real income.

Substitution effect The price can cause consumers to substitute one product with another similar but cheaper item.

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

Change in Demand: Change in Quantity Demand Relative the Amazon Kindle® A change in quantity demanded would be if Amazon lowered the price of the item A change in demand would be if the government decided to give US consumers a tax credit for buying a Kindle®

Other factors that can change demand… Consumer Income

Consumer Tastes

Substitutes Margarine vs. butter

Complements Peanut butter/jelly

Changes in expectations

Elasticity Measures how sensitive consumers are to price changes. Demand is elastic when a change in price causes a large change in demand. Demand is inelastic when a change in price causes a small change in demand. Demand is unit elastic when a change in price causes a proportional change in demand. (Example, 5% decrease in cost equals 5% increase in demand) What are examples of items for which an increase in price would cause you or your family to reconsider buying an item?

Determinants of Demand Elasticity Can the purchase be delayed? Some purchases cannot be delayed, regardless of changes. Are adequate substitutions available? Price changes can cause consumers to substitute one product for a similar product. Does the purchase use a large portion of income? Demand elasticity can increase when a product commands a large portion of a consumer’s income.

What would Perfectly Inelastic Demand look like?

What would Perfectly Elastic Demand look like?