breakthrough that would allow more music to berecorded on a smaller disk at a lower cost thanbefore. Even if the new product might not be avail-able for another year, some consumers might decideto buy fewer musical CDs today simply because theywant to wait for a better product. Purchasing less ateach and every price would cause demand to decline,which is illustrated by a shift of the demand curve tothe left.

Of course, expectations can also have a very dif-ferent effect on market demand. For example, if theweather service forecasts a bad year for crops, peoplemight stock up on some foods before they actuallybecome scarce. The willingness to buy more at eachand every price because of expected future shortageswould cause demand to increase, which is demon-strated by a shift of the demand curve to the right.

Number of ConsumersA change in income, tastes, and prices of related

products affects individual demand schedules andcurves—and hence the market demand curve, which isthe sum of all individual demand curves. It follows,therefore, that an increase in the number of con-sumers can cause the market demand curve to shift.

To illustrate, suppose Moe, one of Larry’s andCurly’s old friends, now decides to purchase com-pact discs. If we add the number of CDs that Moewould demand at each and every possible price tothe others shown in Figure 4.2, the marketdemand curve DD would shift to the right. Thiswould not affect the other individual demandcurves, of course, but, as we shall see later inChapter 6, it will affect the prices that everyonewill pay for CDs. If Larry or Moe should leave themarket the total number of CDs purchased ateach and every price would decrease. This shiftsthe market demand curve to the left. The result isa decline in market demand whenever anyoneleaves the market.

Checking for Understanding1. Main Idea How does the income effect

explain the change in quantity demandedthat takes place when the price goes down?

2. Key Terms Define change in quantitydemanded, income effect, substitution effect,change in demand, substitutes, complements.

3. Describe the difference between a change inquantity demanded and a change in demand.

4. Explain how a change in price affects thedemand for a product’s substitute(s).

Applying Economic Concepts5. Change in Demand Name a product that you

recently purchased because it was on sale.

Identify one substitute and one complementfor that product. What happened to yourdemand for the substitute good when theitem you bought went on sale? What hap-pened to your demand for the complemen-tary good when that item went on sale?

6. Understanding Cause and Effect Whathappens to the price and the quantity ofgoods and services sold when a store runs a sale? How do these factors relate to thedownward-sloping curve?

Practice and assess key social studies skills withthe Glencoe Skillbuilder Interactive Workbook,Level 2.

Shelling Out During colonial times, when a moretraditional economy existed, money was in shortsupply. People often used shelled corn to pay forgoods and services. Although the practice of usingshelled corn as money has not survived, the slangexpression shell out—meaning pay for—has.

CHAPTER 4: DEMAND 99

DECEMBER 14, 1998 N e w s c l i pMcDonald’s opened its first restaurant inDes Plaines, Illinois, in 1955. In 1967McDonald’s opened its first restaurants incities in other countries. Today, the com-pany operates nearly 25,000 McDonald’srestaurants in 115 countries on six conti-nents. Multinational companies, likeMcDonald’s, are huge companies thatcarry out their activities on a global scale,selling their products worldwide. Read tofind out how McDonald’s must adapt itsmenu to local tastes.

Holding the Fries“At the Border”

Your stomach starts growling and you want aquick fix, so you head to the nearest Gold Archesfor a Big Mac and . . . rice?

Rice is what you’ll probably end up withthese days if your local McDonald’s is inIndonesia. With the collapse of the Indonesiancurrency, the rupiah, in 1998, potatoes, theonly ingredient McDonald’s importsto the island nation, have quintu-pled in price. That means rice isturning with an increasing fre-quency as an alternative to thefrench fry. In September 1998McDonald’s introduced a riceand eggs dish, and its valuemeals now consist of justchicken and a drink—but nopotatoes. It’s not hard tofathom why fries are an

endangered menu item says Jack Greenberg,CEO of McDonald’s: “No one can afford them.”

The company haslong tailored menus atits 24,000 worldwiderestaurants to localtastes, though not outof economic distress.In other Asian marketsweakened currencieshave made it cheaperto build new outlets:2,000 are anticipated[by the year 2002].But Indonesia’s situa-tion is so disastrous,says Greenberg, thatMcDonald’s will close30 of its 100 storesthere.

Examining the Newsclip1. Understanding Cause and Effect Why did

McDonald’s change its menu in Indonesia?

2. Synthesizing Information Did McDonald’sintroduce rice to its Indonesian menu inresponse to a change in consumer tastes?Explain your reasoning.

3. Making Predictions What will happen ifthe change in the menu increases demand?Explain your answer.

—Reprinted from December 14, 1998 issue of Business Week, by specialpermission, copyright © 1998 by The McGraw-Hill Companies, Inc.

100 UNIT 2 MICROECONOMICS

Cover Story

Setting PricesIt is always a diffi-

cult problem know-

ing how best to price

a product. . . . When

the product is one in

a new and rapidly

evolving industry,

like the microcomputer industry in the 1980s, the deci-

sion is doubly difficult. Was it best to charge a high

price and sell a smaller number of disks or charge a

lower price and aim for volume? One software pro-

ducer decided to [test] the market for its new account-

ing program at different prices. The firm, Noumenon

Corporation, raised prices in increments of $20 all the

way up to $210. They found that total revenue was max-

imized at a price of $90. As a result of this experiment,

they decided to advertise and market the Intuit

Accounting program at $89.95, much lower than the

prices of competing software programs.

—Adapted from The Study of Economics, by Turley Mings,

Dushkin Publishing

Elasticity of Demand

Main IdeaConsumers react differently to price changes depend-ing on whether the good is a necessity or a luxury.

Reading StrategyGraphic Organizer As you read about price elasticity,complete a web like the one below to illustrate whateffect a change in price has on products that are elas-tic, inelastic, or unit elastic.

Change in price

Effects

Key Termselasticity, demand elasticity, elastic, inelastic, unit elastic

ObjectivesAfter studying this section, you will be able to:1. Explain why elasticity is a measure of responsiveness.2. Analyze the elasticity of demand for a product.3. Understand the factors that determine demand

elasticity.

Applying Economic ConceptsElasticity of Demand What are you willing to pay tosee a popular movie? Read to find out about the elas-ticity of demand for a product and what factors influ-ence your willingness and ability to pay for a product.

C ause-and-effect relationships are important inthe study of economics. For example, weoften ask, “if one thing happens, how will it

affect something else?” The software manufacturer inthe cover story used a cause-and-effect relationship toset the price for its product.

An important cause-and-effect relationship in eco-nomics is elasticity, a measure of responsiveness thattells us how a dependent variable such as quantityresponds to a change in an independent variable suchas price. Elasticity is also a very general concept. Itcan be applied to income, the quantity of a productsupplied by a firm, or to demand.

Demand ElasticityIn the case of demand, you will considerwhether a given change in price will cause a

relatively larger, a relatively smaller, or a proportionalchange in quantity demanded. Consumers aresensitive to prices and that is why the NoumenonCorporation conducted so many experiments tofind the best price for its accounting software. Anunderstanding of demand elasticity—the extent towhich a change in price causes a change in the

Demand helps determine price.

CHAPTER 4: DEMAND 101

quantity demanded—will help analyze these issues.The demand for most products is such that con-sumers do care about changes in prices—and theconcept of elasticity tells us just how sensitive con-sumers are to these changes.

Elastic DemandEconomists say that demand is elastic when a

given change in price causes a relatively largerchange in quantity demanded. To illustrate, look athow price and quantity demanded change betweenpoints a and b on the demand curve in Panel A ofFigure 4.5.

As we move from point a to point b, we see thatprice declines by one-third, or from $3 to $2. Atthe same time, the quantity demanded doublesfrom two to four units. Because the percentagechange in quantity demanded was relatively largerthan the percentage change in price, demandbetween those two points is elastic.

This type of elasticity is typical of the demandfor products like green beans, corn, tomatoes, orother fresh garden vegetables. Because prices arelower in the summer, consumers increase the

amount they purchase. When prices are consider-ably higher in the winter, however, consumers nor-mally buy fewer fresh vegetables and use cannedproducts instead.

Inelastic DemandFor other products, demand may be largely

inelastic, which means that a given change in pricecauses a relatively smaller change in the quantitydemanded. We can see the case of inelastic demandin Panel B of Figure 4.5. In this case, the one-thirddrop in price from point a′ to b′ only causes quan-tity demanded to increase by 25 percent, or fromtwo to two and one-half units.

This is typical of the demand elasticity for aproduct like table salt. A lower or higher price fortable salt does not bring about much change in thequantity purchased. If the price was cut in half, thequantity demanded would not increase by muchbecause people can consume only so much salt.Or, if the price doubled, we would expect con-sumers to demand about the same amount becausethe portion of a person’s budget that is spent onsalt is so small.

102 UNIT 2 MICROECONOMICS

TRADING GOLD FOR SALTWhat determines how much demand there willbe for a good or service? The scarcity of the goodor service plays an important role.

If you could choose between a pile of salt and apile of gold, you would probably choose the gold.After all, you know that you can always buy a con-tainer of salt for about forty-five cents at the localsupermarket. But what if you could not easily getsalt?

Throughout history, salt has been very difficultto obtain in many parts of the world. Salt was usedin food as a preservative and for flavor. Peoplefeared a lack of salt as we fear a shortage of fuel oiltoday.

Long ago, the Akan people of West Africa couldnot mine salt and always needed to trade for it.Gold, however, was much easier to come by. Thepeople who lived in the desert of North Africa couldeasily mine salt, but not gold. These mutual differ-ences led to the establishment of long-distancetrade routes that connected very different cultures.Trade centers, such as Djenne and Timbuktu on theNiger River, flourished, as a demand for goods wassatisfied.

—Adapted from Smithsonian In Your Classroom

1. Analyzing Information How did the Akanpeople meet their demand for salt?

2. Drawing Conclusions Suppose the Akanfound a method to produce all the salt theyneeded. What changes in trade do youthink might occur? Explain your reasoning.

Critical Thinking

Unit Elastic DemandSometimes demand for a product or service

falls midway between elastic and inelastic. Whenthis happens, demand is unit elastic, meaning thata given change in price causes a proportionalchange in quantity demanded. In other words,when demand is unit elastic, the percent change inquantity roughly equals the percent change inprice. For example, a five percent drop in pricewould cause a five percent increase in quantitydemanded. Unit elastic demand is illustrated inPanel C of Figure 4.5.

The Total Expenditures TestTo estimate elasticity, it is useful to look atthe impact of a price change on total expen-

ditures, or the amount that consumers spend on aproduct at a particular price. This is sometimescalled the total expenditures test.

Determining Total ExpendituresTotal expenditures are found by multiplying the

price of a product by the quantity demanded for anypoint along the demand curve. To illustrate, the total

CHAPTER 4: DEMAND 103

Type ofElasticity

Changein Price

Elastic

Change inExpenditure

no change

Movement ofPrice and

Expenditure

Opposite

$4

3

2

1

a’

b’

D

D

1 2 3 4 51 2 3 4 5

Pric

e

Quantity

BB Inelastic DemandAA Elastic Demand

Using

E C O N O M I C SA T A G L A N C EE C O N O M I C SA T A G L A N C E Figure 4.5Figure 4.5

The Total Expenditures Test for Demand Elasticity

Expenditure = $5

$4

3

2

1

a’’

b’’

D

D

1 2 3 4 5

Pric

e

Quantity

CC Unit Elastic Demand DD Determining Elasticity

Expenditure = $6

Expenditure = $6

$4

3

2

1

a

b

D

DPric

e

Expenditure = $8

Expenditure = $6

Quantity

Unit Elastic

Inelastic Same

Expenditure = $6

GraphsUsing Graphs The key to determining elasticity is to examine how expenditures change when the price changes. If they move in opposite directions, then demand is elastic. If they move in the same direction, then demand is inelastic. If there is no change in expenditures, then demand is unit elastic. Why is an understanding of elasticity important for business?

0 0

0

104 UNIT 2 MICROECONOMICS

Revolution in E-Commerce

Innovations in shopping are nothing new. The growth ofthe department store at the turn of the century answeredthe needs of the growing number of urban consumers.Meanwhile, generations of Americans, especially those inremote farming communities, depended upon catalog shop-ping through Montgomery Ward and Sears & Roebuck toget the latest in fashion, housewares, appliances, and evenhome-building kits. The shopping centers of the mid-twentieth century were replaced by gigantic shoppingmalls. In the 1990s, new technologies provided convenienceand ease of use for customers. Home shopping—catalog, TV,and Internet—has grown into a multibillion dollar business.Today, entrepreneurs such as Jeff Bezos of Amazon.com Inc.are transforming our shopping habits.

Birth of an Internet Company Just as Sears andMontgomery Ward reached customers through their cat-alogs, today’s entrepreneurs do the same online. Few,however, have been as successful as Jeff Bezos with

Amazon. In 1994, Bezosdecided to stake aclaim on the unknownfrontier of Internetretail. He quit his jobon Wall Street andmoved to Seattle. Herented a garage andborrowed money tostart a business wherepeople could make theirbook purchases overthe Internet. Amazondebuted on the WorldWide Web in July 1995.

Unique Appeal to Customers What are the rea-sons for Amazon’s success? An important factor is thatAmazon provides services that regular stores don’t.People who search for a book at the Amazon site oftenfind a description accompanied by excerpts fromreviews—not only from print sources but from cus-tomers. Authors, too, are invited to comment on theirown works. And Amazon asks customers which kinds ofbooks they like. When books in the same category or by

Jeff Bezos, founder ofAmazon.com

expenditure under point a in Panel A of Figure 4.5 is$6, which is determined by multiplying two unitstimes the price of $3. Likewise, the total expenditureunder point b in Panel A is $8, or $2 times fourunits. By observing the change in total expenditureswhen the price changes, we can test for elasticity.

Three ResultsThe relationship between changing prices and

total expenditures is summarized in Figure 4.5. Foreach of the demand curves, the impact on totalexpenditures for a decrease in price from $3 to $2is shown. In each case, the change in expendituresdepends on the elasticity of the demand curve.

The demand curve in Panel A is elastic. Whenthe price drops by $1 per unit, the increase in thequantity demanded is large enough to raise totalexpenditures from $6 to $8. The relationship

between the change in price and total expendituresfor the elastic demand curve is described as“inverse.” In other words, when the price goesdown, total expenditures go up.

The demand curve in Panel B is inelastic. In thiscase, when the price drops by $1, the increase inthe quantity demanded is so small that total expen-ditures fall below $6. For inelastic demand, totalexpenditures decline when the price declines.Finally, the demand curve in Panel C is unit elastic.This time, total expenditures remain unchangedwhen the price decreases from $3 to $2.

The relationship between the change in priceand the change in total expenditures is shown inPanel D of Figure 4.5. As you can see, if the changein price and expenditures move in opposite direc-tions, demand is elastic. If they move in the samedirection, demand is inelastic. If there is no changein expenditure, demand is unit elastic.

Finally, and even though all the price changesdiscussed above were decreases, the results wouldbe the same if prices had gone up instead of down.If the price rises from $2 to $3 in Panel A, spendingfalls from $8 to $6. Prices and expenditures stillmove in opposite directions, as shown in the table.

Elasticity and ProfitsAll of this discussion about elasticity may seem

technical and somewhat unnecessary, but knowledgeof demand elasticity is extremely important to busi-nesses. Suppose, for example, that you are in busi-ness and that you want to do something that willraise your profits. Of course you could try to cutcosts, or you could even try to advertise in order toincrease the number of units sold. You might, how-ever, be tempted to raise the price of your product inorder to increase total revenue from sales.

This might actually work in the case of table salt,or even medical services, because the demand forboth products is generally inelastic. But, what if yousell a product that has an elastic demand? If you raisethe price of your product, your total revenues—whichis the same thing as consumer expenditures—will godown instead of up. This outcome is exactly theopposite of what you intend!

This is exactly why the Noumenon Corporationin the cover story experimented with so many differ-ent prices when they introduced their accountingsoftware program. By discovering the elastic natureof demand for their new product, they were able toincrease their total revenues by charging a relativelylow price rather than a much higher one. This exam-ple illustrates that demand elas-ticity is more importantthan most peoplerealize.

the same author appear, the companysends E-mail inviting people to buy them.

Growth and Development Bezos hasbigger plans for the future. He wantsAmazon to serve as the gateway for moreproducts. Among its innovations, Amazonadded music in 1998 and auctions in 1999.Today it sells apparel and accessories,office products, electronics, and kitchenand home products. To accommodate thisexpansion, the company retooled its ware-houses to offer faster service. Bezosbelieves Amazon is successful because itvalues its customers. “The Internet is thisbig, huge hurricane,” Bezos notes. “Theonly constant in the storm is the cus-tomers.” Today Amazon serves millions ofcustomers in more than 200 countries.Amazon must be doing something right,because in 1993, the American Society forQuality announced that Amazon receivedthe highest American Customer Satis-faction Index (ACSI) score ever recorded—either online or offline.

CHAPTER 4: DEMAND 105

Amazon’s Sales

$3,000,000,000

$2,400,000,000

$1,800,000,000

$1,200,000,000

$600,000,000

$01996

15.7 million1998

540 million2002

3.9 billion2000

2.8 billion

Amazon’s Strategy

• Make it easy forvisitors to findwhat they want.

• Encourage visitorparticipation.

• Win repeatcustomers.

Did You Know?Internet Shopping According

to research analysts, two billion orderswere placed over the Internet in 1999,generating $95 billion in revenue.Researchers estimate e-commerce rev-

enue will top $2.7 trillion globallyby 2004 (up from $15 billion

in 1997).

105_GLENEPP 10/3/03 5:12 PM Page 105

Determinants of Demand ElasticityWhat makes the demand for a specific goodelastic or inelastic? To find out, we can ask

three questions about the product. The answerswill give us a reasonably good idea as to the prod-uct’s demand elasticity.

Can the Purchase Be Delayed?A consumer’s need for a product is sometimes

urgent and cannot be put off. Whenever this hap-pens, demand tends to be inelastic, meaning thatthe quantity of the product demanded is not espe-cially sensitive to changes in price.

For example, persons with diabetes need insulinto control the disorder. An increase in its price is notlikely to make diabetes sufferers delay buying andusing the product. Likewise, the demand for tobacco

also tends to be inelastic because the product isaddictive. As a result, a sharp increase in price willlower the quantity purchased by consumers, but notby very much. The change in quantity demanded isalso likely to be relatively small for these productswhen their prices go down instead of up.

If the product were corn, tomatoes, or gasolinefrom a particular station, however, people mightreact differently to price changes. If the prices ofthese products increase, consumers could delaybuying any of these items without suffering anygreat inconvenience. Being able to delay or post-pone the purchase of a product, then, is a charac-teristic of elastic demand.

Figure 4.6 summarizes some of these observa-tions. Note that if the answer is yes to the question“Can the purchase be delayed?” then the demandfor the product is likely to be elastic. If the answeris no, then demand is likely to be inelastic.

106 UNIT 2 MICROECONOMICS

Freshtomatoes,corn, or

green beans

Determinantsof elasticityYes (elastic)

No (inelastic)

Can purchasebe delayed?

Tablesalt

Gasolinefrom a

particularstation

Gasoline ingeneral

Services ofmedicaldoctors

Insulin Butter

E C O N O M I C SA T A G L A N C EE C O N O M I C SA T A G L A N C E Figure 4.6Figure 4.6

Estimating the Elasticity of Demand

Type ofelasticity

Are adequatesubstitutesavailable?

Does purchaseuse a largeportion ofincome?

yes no yes no no no yes

yes no yes no no no yes

no no yes yes yes no no

Elastic Inelastic Elastic Inelastic Inelastic Inelastic Elastic

Products

Using TablesUsing Tables The elasticity of demand can usually be estimated by examining the answers to three key questions. All three answers do not have to be the same in order to determine elasticity, and in somecases the answer to a single question is so important that it alone might dominate the answers to the other two. If you applied the three questions to a luxury product, what would be the elasticity of demand for that product?

Are Adequate Substitutes Available?If adequate substitutes are available, consumers

can switch back and forth between a product andits substitute to take advantage of the best price. Ifthe price of beef and butter goes up, buyers canswitch to chicken and margarine. With enough sub-stitutes, even small changes in the price of a prod-uct will cause people to switch, making the demandfor the product elastic. The fewer substitutes avail-able for a product, the more inelastic the demand.

Sometimes the consumer only needs to have asingle adequate substitute in order to make thedemand for the product elastic. Historically, forexample, there were few adequate substitutes for aletter sent through the post office. As technologyhas progressed, fax machines allow messages to betransmitted over phone lines, and, perhaps mostsignificantly, the personal computer has helpedmake electronic mail (E-mail) popular. As a result,it is extremely difficult for the U.S. Postal Serviceto increase its total revenues by significantly raisingthe price of a first-class letter.

Also, note that the availability of substitutes alsodepends on the extent of the market. For example,the demand for gasoline from a particular stationtends to be elastic because the consumer can buy

gas at another station. If we ask about the demandfor gasoline in general, however, demand is muchmore inelastic because there are few adequate sub-stitutes for gasoline.

Does the Purchase Use a Large Portion ofIncome?

The third determinant is the amount of incomerequired to make the purchase. Whenever theanswer to the question “Does the purchase use alarge portion of income?” is yes, then demandtends to be elastic. Demand tends to be inelasticwhenever the answer to this question is no.

Finally, you may have noticed that for any givenproduct, the answer is not necessarily yes or no. Forexample, some products such as salt or insulin maybe easy to classify, but we have to use our judgmenton others. For example, the demand for medicalservices tends to be inelastic even though theseservices require a large portion of income. As far asmost people are concerned, the lack of adequatesubstitutes and the reluctance to put off seeing adoctor when they are sick are more important thanthe relatively large portion of income that medicalservices consume.

CHAPTER 4: DEMAND 107

Checking for Understanding1. Main Idea What luxuries do you think would

have a higher price elasticity than others?Give three examples and explain why youthink they would have an exceptionally highelasticity.

2. Key Terms Define elasticity, demand elasticity,elastic, inelastic, unit elastic.

3. Describe the three determinants of demandelasticity.

4. Explain why the demand for insulin isinelastic.

5. Explain why an item that has many close sub-stitutes tends to have an elastic demand.

Applying Economic Concepts6. Elasticity of Demand Why are airlines reluc-

tant to offer reduced round-trip airfares dur-ing holidays such as Christmas, Easter, andThanksgiving? Refer to the three determi-nants of demand elasticity in your answer.

7. Understanding Cause and Effect A ham-burger stand raised the price of its hamburg-ers from $2.00 to $2.50. As a result, its salesof hamburgers fell from 200 per day to 180per day. Was the demand for its hamburgerselastic or inelastic? How can you tell?

Practice and assess key social studies skills withthe Glencoe Skillbuilder Interactive Workbook,Level 2.

Understanding Cause and EffectUnderstanding cause and effect involves considering why an event occurred.A cause is the action or situation that produces an event. What happens as aresult of a cause is an effect.

Practicing the SkillAnalyze the statements below. Then, on a separate

piece of paper, list the causes and effects found in eachstatement.

1. Historically, prices have shown their greatestfluctuations in times of war.

2. The government also is confronted with scarcity, andmust make choices.

3. Because of scarcity, people, businesses, and thegovernment must all make trade-offs in choosing theproducts they want the most.

4. When a choice is made, an opportunity cost is paid.

5. It is impossible for us to produce all the products wewould like to have because the factors of productionexist in limited quantities.

6. Because consumers don’t always want the same things,items that are popular now may not sell in the future.

7. If income increases, people can afford to buy moreproducts.

8. If the price of butter goes up, more people would buymargarine instead.

Learning the SkillTo identify cause-and-effect relationships, follow

these steps:

• Identify two or more events or developments.

• Decide whether one event caused the other. Lookfor clue words such as because, led to, brought about,produced, as a result of, so that, since, and therefore.

• Look for logical relationships between events, suchas “She overslept, and then she missed her bus.”

• Identify the outcomes of events. Remember thatsome effects have more than one cause, and somecauses lead to more than one effect. Also, aneffect can become the cause of yet another effect.

In your local newspaper, read an article describinga current event. Determine at least one cause andone effect of that event. Show the cause-and-effect relationship in a diagram like the one here.

EffectCause

Practice and assess key social studies skills with theGlencoe Skillbuilder Interactive Workbook, Level 2.

One of the key factors that determinesdemand is people’s tastes.

108 UNIT 2 MICROECONOMICS

S e c t i o n 1

What Is Demand? (pages 89–93)

• Microeconomics is the area of economic study thatdeals with individual units in an economy, such ashouseholds, business firms, labor unions, and workers.

• You express demand for a product when you areboth willing and able to purchase it.

• Demand can be summarized in a demand schedule,which shows the various quantities that would bepurchased at all possible prices that might prevail inthe market.

• Demand can also be shown graphically as a down-ward sloping demand curve.

• The Law of Demand refers to the inverse relation-ship between price and quantity demanded.

• Individual demand curves for a particular productcan be added up to get the market demand curve.

• Marginal utility is theamount of satisfactionan individual receivesfrom consuming oneadditional unit of a par-ticular good or service.

• Diminishing marginalutility means that with each succeeding unit, satisfaction decreases.

S e c t i o n 2

Factors Affecting Demand (pages 95–99)

• Demand can change in two ways—a change in quan-tity demanded or a change in demand.

• A change in quantity demanded means people buya different quantity of a product if that product’sprice changes, appearing as a movement along thedemand curve.

• A change in demand means that people havechanged their minds about the amount they would

buy at each and every price. It is represented as ashift of the demand curve to the right or left.

• A change in consumer incomes, tastes and expecta-tions, and the price of related goods causes a changein demand.

• Related goods include substitutes and complements.A substitute is a product that is interchangeable inuse with another product. A complement is a prod-uct that is used in conjunction with another product.

• The market demand curvechanges wheneverconsumers enter orleave the market, orwhenever an individ-ual’s demand curvechanges.

S e c t i o n 3

Elasticity of Demand (pages 101–107)

• Elasticity is a general measure of responsiveness thatrelates changes of a dependent variable such as quan-tity to changes in an independent variable such asprice.

• Demand elasticity relates changes in the quantitydemanded to changes in price.

• If a change in price causes a relatively larger changein the quantity demanded, demand is elastic.

• If a change in price causes a relatively smaller changein the quantity demanded, demand is inelastic.

• When demand is elastic, it stretches as price changes.Inelastic demand means that price changes have littleimpact on quantity demanded.

• Demand is unit elastic if a change in price causes aproportional change in quantity demanded.

• The total expenditures test can be used to estimatedemand elasticity.

• Demand elasticity is influenced by the ability to post-pone a purchase, by the substitutes available, and bythe proportion of income required for the purchase.

CHAPTER 4: DEMAND 109

Identifying Key TermsOn a separate sheet of paper, match the letter of the term bestdescribed by each statement below.

a. demand scheduleb. demandc. microeconomicsd. change in demande. demand curvef. change in quantity demandedg. Law of Demandh. elastic demand

1. the desire, ability, and willingness to buy a product

2. a movement along the demand curve showing thata different quantity is purchased in response to achange in price

3. a statement that more will be demanded at lowerprices and less at higher prices

4. a listing in a table that shows the quantity demandedat all possible prices in the market at a given time

5. a principle illustrating that consumers demand dif-ferent amounts at every price, causing the demandcurve to shift to the left or the right

6. the field of economics that deals with behavior anddecision making by individuals and firms

7. a principle illustrating that a given change in pricecauses a relatively large change in the quantitydemanded

8. a graph that shows the quantity demanded at allpossible prices in the market at a given time

Reviewing the FactsSection 1 (pages 89–93)

1. Describe a demand schedule and a demand curve.How are they alike?

2. Explain how the principle of diminishing marginalutility is related to the downward-sloping demandcurve.

Section 2 (pages 95–99)

3. Describe the difference between the income effectand the substitution effect.

4. Identify the five factors that can cause a change inmarket demand.

Section 3 (pages 101–107)

5. Describe the difference between elastic demand andinelastic demand.

6. Explain how the total expenditures test can be usedto determine demand elasticity.

Thinking Critically1. Making Generalizations Do you think the Law of

Demand accurately reflects most people’s behaviorregarding certain purchases? Explain.

2. Drawing Conclusions What would normally hap-pen to a product’s market demand curve in a grow-ing and prosperous community if consumer tastes,expectations, and the prices of related productsremained unchanged? Create a web like the onebelow to explain your answer.

No change in price of related

products

No change inconsumer tastes

Effect on Product A

Self-Check Quiz Visit the Economics: Principlesand Practices Web site at epp.glencoe.com andclick on Chapter 4—Self-Check Quizzes to preparefor the chapter test.

110 UNIT 2 MICROECONOMICS

Applying Economic Concepts1. Demand Why do you think a knowledge of

demand would be useful to an individual like your-self? To a businessperson like Keith Clinkscales(cover story, page 89)?

2. Demand How do you think the market demandcurve for pizza would be affected by (1) an increasein everyone’s pay, (2) a successful pizza advertisingcampaign, (3) a decrease in the price of hamburgers,and (4) new people moving into the community?Explain your answers.

3. Demand Elasticity How would you, as a businessowner, use your knowledge of demand elasticity todetermine the price of your product?

Math PracticeMindy is trying to estimate the elasticity of demandfor a product she wants to sell at a craft fair. She hasbeen told that she can expect to sell 10 items if shecharges a price of $10, six items if she charges a priceof $20, and 18 items at a price of $5.

1. Make a demand schedule to show the quantitiesdemanded at each price.

2. Use the information in the demand schedule tocreate a demand curve and to graph the results.

3. At which price would the total expenditures byconsumers be greatest for the product? At whatprice would expenditures be the smallest?

Thinking Like an EconomistWrite a paragraph describing a business that youmight like to own and the major product that thebusiness would produce. Next, use the three determi-nants of demand elasticity to predict the elasticity ofdemand for that product. Describe the pricing policyyou would use to get consumers to maximize theirexpenditures on that product.

Technology SkillUsing the Internet Use a search engine to find theWeb site for the U.S. Department of Commerce. Selectthe option “Economics and Statistics Administration.”Next select “STAT-USA.” Then click on “State ofthe Nation.” From the options on the screen, select“Manufacturing and Trade, Inventories and Sales.”Locate the information on “Apparel and accessorystores,” and answer the questions that follow.

1. How many months does the data cover?

2. Compare the monthly data on inventory. Is theinventory increasing, decreasing, or about thesame? Then, compare the data on sales.

3. Are there any sharp fluctuations in inventory orsales from one month to the next? If so, whatmight have caused these changes?

4. Do you think demand for apparel increases ordecreases according to the season or time of year?How do you think this change in demand relates toinventory and sales?

Understanding Cause and Effect Draw thetwo demand curves below on separate sheetsof paper. Then, show how the rise in the costof razor blade handles affects the demandcurve for its complementary and its substituteproducts.

Practice and assess key social studies skills withthe Glencoe Skillbuilder Interactive Workbook,Level 2.

Pric

e

QuantityDemand for double-edged razor blades

D

D

Pric

e

QuantityDemand for

electric razors

D

D

Sharp increase in theprice of double-edged

razor blade handles

CHAPTER 4: DEMAND 111