Chapter 4: Demand

A demand curve relates the quantity demanded with changes in price

Downward sloping (negative slope)

Reflects the inverse relationship between quantity demanded and price

Three reasons for downward slope:

1. Diminishing marginal utility as quantity demanded rises

2. Income Effect: Buying power changes as price changes

3. Substitution Effect: Substitutes are purchased when prices rise

Change in Quantity Demanded: Changes in price result in movement along the demand curve

Change in Demand: Changes in something other than price result in a shift in the demand curve

Δ$ => ΔQD (movement along)           Δ~$ => ΔD (shift)

Factors that Change Demand (shift the demand curve):

· Consumer income goes up or down

Income increases, shift demand right for normal goods

Income increases, shift demand left for inferior goods

· Tastes and preferences change

More popular, shift demand right

Less popular, shift demand left

· Price of substitutes change

Price of a substitute goes up, shift demand right

Price of a substitute goes down, shift demand left

· Price of complementary goods change

Price of a complement goes up, shift demand left

Price of a complement goes down, shift demand right

· Expectations change

If price is expected to rise in future, shift demand right now (hoarding effect)

· Weather or season changes

During summer, demand for gasoline shifts right

During winter, demand for gasoline shifts left

· Population changes

Population increases, shift demand right

Population decreases, shift demand left

Elasticity of demand indicates how responsive quantity demanded is to price changes

Steep demand curves = inelastic demand

Flat demand curves = elastic demand

Factors that determine elasticity:

Elastic Inelastic

Many substitutes (soft drinks) Few substitutes (insulin)

Expensive (house or car) Inexpensive (salt)

Time to decide (vacation) Must buy now (snake anti-venom)

Revenue test for elasticity:

If as prices go up, total revenue goes up, demand is inelastic

If as prices go up, total revenue goes down, demand is elastic

If as prices go up, total revenue is unchanged, demand is unit elastic