CHAPTER
4
DEMAND
DEMAND
-
def – THE
DESIRE, WILLINGNESS AND ABILITY TO BUY A PRODUCT AT A CERTAIN PRICE AT A
CERTAIN POINT IN TIME
-
DEMAND SCHEDULE AND DEMAND CURVE
o
TOOLS USED TO SHOW THE AMOUNT DEMANDED AT EACH AND
EVERY PRICE
o
THE DEMAND CURVE SLOPES DOWNWARD AND TO THE RIGHT
§
MORE WILL BE DEMANDED AT A LOWER PRICE
o
WHEN DOLLAR VOTES ARE CAST YOU EXPRESS DEMAND
-
LAW OF DEMAND
o
DEMAND FOR A PRODUCT VARIES INVERSELY WITH
PRICE
o
MOVEMENT ALONG THE DEMAND CURVE REPRESENTS CHANGE IN THE QUANTITY
DEMANDED IN RESPONSE TO A CHANGE IN PRICE
o
FACTORS THAT INFLUENCE THE QUANTITY DEMANDED
§
INCOME EFFECT – THE QUANTITY DEMANDED REFLECTS A CHANGE IN REAL
INCOME
§
SUBSTITUTION EFFECT – AS THE RELATIVE PRICE OF A PRODUCT GOES UP OR
DOWN, CONSUMERS WILL LOOK TO SUBSTITUTE PRODUCTS
o
A CHANGE IN DEMAND (AGGREGATE DEMAND) REFLECTS PEOPLES
WILLINGNESS TO BUY A DIFFERENT QUANTITY AT EACH AND EVERY PRICE
§
THE ENTIRE DEMAND CURVE SHIFTS TO THE RIGHT
§ FACTORS THAT AFFECT A CHANGE
IN DEMAND
·
CONSUMER INCOME
·
CONSUMER TASTES
o
INFLUENCED BY ADVERTISING AND MARKETING
·
PRICES OF RELATED PRODUCTS
o
PRICE OF SUBSTITUTES –
INVERSE RELATIONSHIP
§
EXAMPLE – BUTTER AND MARGARINE
o
PRICE OF COMPLIMENTS – DIRECT
RELATIONSHIP
§
EXAMPLE – BAGELS AND CREAM CHEESE
· DIMINISHING MARGINAL UTILITY
o
THE MORE UNITS OF A PRODUCT THAT AN INDIVIDUAL
UTILIZES WILL CAUSE A DECREASE IN CONSUMER SATISFACTION
o
MARGINAL UTILITY IS THE INCREASE IN SATISFACTION GENERATED FROM AN
INCREASE IN ONE MORE UNIT OF A PRODUCT
ELASTICITY OF DEMAND
-
def – THE
RESPONSIVENESS TO WHICH DEMAND FOR A PRODUCT RESPONDS TO A CHANGE IN PRICE
-
ELASTIC DEMAND
o
A RELATIVE SMALL CHANGE IN PRICE CAUSES A RELATIVELY
LARGE CHANGE IN DEMAND
-
INELASTIC DEMAND
o
A CHANGE IN PRICE CAUSES A RELATIVELY SMALL CHANGE
IN THE QUANTITY DEMANDED
§
EXAMPLE – SALT
o
CHARACTERISTICS OF PRODUCTS WITH INELASTIC DEMAND
§
NECESSITY
§
PURCHASE CANNOT BE DELAYED
§
REPRESENTS A SMALL % OF INCOME
§
AVAILABILITY AND ADEQUACY OF SUBSTITUTES
-
THE ELASTICITY OF DEMAND CAN BE AFFECTED BY THE TYPE
OF MARKET
o
IN GENERAL, THE DEMAND FOR GASOLINE IN INELASTIC BUT
THE DEMAND FOR GASOLINE AT A SPECIFIC STATION IS ELASTIC
-
THE TOTAL RECEIPTS TEST
o
Def – AN ANALYSIS OF THE EFFECTS OF A CHANGE IN
PRICE HAS ON TOTAL RECEIPTS
o
IF DEMAND IS ELASTIC, TOTAL RECEIPTS WILL GO IN THE
OPPOSITE DIRECTION OF A CHANGE IN PRICE
o
IF DEMAND IS INELASTIC, TOTAL RECEIPTS WILL GO IN THE
SAME DIRECTION AS A CHANGE IN PRICE
o
UNIT ELASTIC – TOTAL RECEIPTS DO NOT CHANGE RELATIVE TO A CHANGE
IN PRICE
§ CONSUMERS
KEEP BUYING A PRODUCT UNTIL THEY REACH A POINT WHERE THE LAST UNIT CONSUMED GIVES ENOUGH SATISFACTION TO
JUSTIFY THE PRICE
·
THIS ACCOUNTS FOR THE DOWNWARD SLOPE OF THE DEMAND
CURVE
-
PRICING POLICIES AND DEMAND ELASTICITY
o
TELEPHONE COMPANIES CAN MAKE MORE MONEY BY CHARGING
HIGH PRICES FOR LOCAL SERVICE
§
LOCAL PHONE SERVICE IS INELASTIC
§
LONG DISTANCE SERVICE IS ELASTIC
o
GOVERNMENT CAN GENERATE MORE INCOME BY TAXING
PRODUCTS WITH INELASTIC DEMAND
§
EXAMPLE – ALCOHOL AND CIGARETTES