Chapter 4 DEMAND Section 1 Understanding Demand Demandthe

Chapter 4 • DEMAND

Section 1 Understanding Demand • Demand-the desire to own something & the ability to pay for it. • Law of Demand-customers buy more of a good when its price decreases and less when its price increases

Law of Demand

Substitution Effect • When consumers react to an increase in the price of a good by consuming less of that good and more of other goods.

Income Effect • The change in consumption resulting from a change in real income.

Demand Schedule • A table that lists the quantity of a good a person will buy at each different price.

Ceteris Paribus • Latin phrase meaning all things held constant!

Causes of Shifts in the Demand Curve • • • Income Consumer Expectations Population Consumer Tastes Advertising

Elasticity of Demand • A measure of how consumers react to a change in price.

Inelastic • Describes demand that is not sensitive to a change in price.

Elastic • Describes demand that is very sensitive to a change in price.

Factors that Influence Elasticity • • • Price Range Values of Elasticity Availability of Substitutes Relative Importance Necessity vs. Luxury Changes Over Time

Unitary Elastic • Demand whose elasticity = 1 • Example: – Arizona Iced Tea. 99, elasticity of demand is unitary at 99 cents – The price increases to $1. 98 -What will happen to the demand? – It will decrease by 50%

Elasticity & Revenue • Elasticity of demand determines how the change in price will affect a company’s total revenue or income.

The Man In Black

Do Now • Page 83 #1 -6 • Page 88 #1 -9 • Page 96 #1 -7