Notes: Chap 3 Demand

1. Demand:Amount of goods or services consumers will

buy at various prices.

2. Law of Demand:There is an opposite relationship between price and

quantity demanded.

3. Substitution Effect:Consumers will replace an expensive product with a

similar lower priced product.

$9 per pound

$6.50 per pound

4. Diminishing Marginal Utility:As more units are consumed, satisfaction declines

(lunch tacos)

5. Demand Schedule:Lists the quantity of goods consumers will buy at each

price.

6. Demand Curve:Plots a Demand Schedule on a graph.

7. Demand Shifts:Factors other than price that cause a change in demand.

8. What can cause a shift in demand?a. Consumer Tastes and Preferences - Example: iPhone

8. What can cause a shift in demand?a. Consumer Tastes and Preferences

$550

$150

9.7-inch screen; 1024-by-768-pixel resolution

7 Inch Screen; 800x600 pixel resolution

8. What can cause a shift in demand? b. Market Size - Example: China - Oil lamps from Rockefeller (1882)

8. What can cause a shift in demand?c. Income - Example: Recession

8. What can cause a shift in demand?d. Prices of Related Goods

i. Substitute Good:Replace expensive good with similar lower prices good.

1. Substitute Good Example: CVS brand eye drops

8. What can cause a shift in demand? ii. Complementary Good:

Goods that are used with other goods.1. Complementary Good Example: Running Accessories

$75

$30

$90

$120

$135

8. What can cause a shift in demand?e. Consumer Expectations:

Consumers make decisions based on anticipated earnings.

9. Elastic Demand:When a change in price makes an opposite change in

demand.a. Required for Elasticity:

1. Product is not necessary2. Substitute products are available

3. Costly?i. Example: Pizza (for students)

10. Inelastic Demand:When a change in price has no impact on demand.

a. Required for Inelasticity:1. Product is necessary

2. No substitutes are available3. Not costly

i. Example: Salt, Soap, heart medication, gasoline

11. Total Revenue:Income that a business receives from selling its products at a

given price. It is the simplest way to determine elasticity.