ECON CH 4-1 DEMAND

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ECON CH 4-1 DEMAND

Study the introduction above. Explain what you expect to learn from this lesson. Also, pay attention to the vocabulary words as you work through this assignment. You will be tested on the vocab words.

In Chapter 2, you read about economic
systems, which are different ways of
answering the three economic questions of
what to produce, how much to produce,
and who gets what. In the United States,
most goods are allocated through a market
system. In a market system, the interaction
of buyers and sellers determines the prices
of most goods as well as what quantity of a
good will be produced. Buyers demand
goods, sellers supply those goods, and the
interactions between the two groups lead
to an agreement on the price and the
quantity traded.

Demand is the desire to own something
and the ability to pay for it. We will look at
the demand side of markets in this chapter.
In the next chapter we will look at the
actions of sellers, which economists call the
supply side. In Chapter 6, we will look at
supply and demand together and study
how they interact to establish the prices
that we pay for most goods.

How are goods alocated in the United States

a.	Presidential directives	c.	government planning
b.	the market system	d.	congressional action

What is the interaction of buyers and sellers to determine the price of products and what is going to be produced?

a.	the socialist model	c.	the market system
b.	the budget system	d.	central planning

You want a new cell phone and since you just got $500 for your birthday, you are happy that you can make the purchase. What is this called?

a.	supply	c.	a budget
b.	demand	d.	greed

The Law of Demand
Anyone who has ever spent money will easily understand the law of demand. The law of demand says that when a good’s price is lower, consumers will buy more of it. When the price is higher, consumers will buy less of it. All of us act out this law of demand in our everyday purchasing decisions. Whether your income is $10 or $10 million, the price of a good will strongly influence your decision to buy.

Ask yourself this question: Would you buy a slice of pizza for lunch if it cost $1 Many of us would, and some of us might even buy more than one slice. But would you buy the same slice of pizza if it cost $2 Fewer of us would buy it at that price. Even real pizza lovers might reduce their consumption from 3 or 4 slices to just 1 or 2. How many of us would buy a slice for $10 Probably very few. As the price of pizza gets higher and higher, fewer of us are willing to buy it. That is the law of demand in action.

The law of demand is the result of not one pattern of behavior, but of two separate patterns that overlap. These two behavior patterns are the substitution effect and the income effect. The substitution effect and income effect describe two different ways that a consumer can change his or her spending patterns. Together, they explain why an increase in price decreases the quantity purchased. Figure 4.2 describes how the substitution effect and the income effect can change a consumer’s buying habits.

What is the law of demend?

a.	whan the price of a good or service is low people tend to buy more of them	c.	when the supply of a good or service is low people tend to buy more of them
b.	when the price of a good or service is high people tend to buy more of them	d.	when the supply of a good or service is high people tend to buymore of them

You own a Philly cheese steak restaurant. You decide to raise the price of a sandwich from $5.00 to $6.00, According to the law of demand, what can you expect to happen to your sales?

a.	You will sell more steak sandwiches	c.	Sandwich sales will stay about the same
b.	You will sell fewer steak sanwiches	d.	You will sell fewer steak sandwiches but make more money

You own a shoe store. You steadily increase your prices a little bit at a time until the price of a pair of shoes is much higher. According to the law of demand, what can you expect to happen.

a.	you will sell fewer shoes but make more money	c.	you will sell more shoes
b.	you will sell fewer shoes	d.	sales will remain constant

Which two things explain why an increase in price decreases the quantity purchased? (pick two)

a.	supply side economics	c.	substitution effect
b.	income effect	d.	price effect

What does the graphic above illustrate?

a.	cheap people eat more pizza	c.	the effect of demand on price
b.	girls like guys who eat pizza	d.	the effect of price on demand

The Substitution Effect
When the price of pizza rises, pizza
becomes more expensive compared to
other foods, such as tacos and salads. So, as
the price of a slice of pizza rises, consumers
have an incentive to buy one of those alternatives as a substitute for pizza. This causes a drop in the amount of pizza demanded. For example, instead of eating pizza for lunch on Mondays and Fridays, a student could eat pizza on Mondays and a bagel on Fridays. This change in spending is known as the substitution effect. The substitution effect takes place when a consumer reacts to a rise in the price of one good by consuming less of that good and more of a substitute good.

The substitution effect can also apply to
a drop in prices. If the price of pizza drops,
pizza becomes cheaper compared to other
alternatives. Consumers will now substitute
pizza for tacos, salads, and other lunch
choices, causing the quantity of pizza
demanded to rise.

10.

Which situation below is an example of the substitution effect?

a.	KFC keeps raising their prices so you stop eating	c.	KFC keeps raising their prices so you eat more often at Jack in the Box
b.	KFC keeps raising their prices so you decide to eat fewer calories each day	d.	KFC keeps raising their prices so you stop buying your heart medication

11.

According to the Substitution Effect, what is likely to happen if KFC lowers their prices?

a.	You will buy more KFC	c.	You will eat more often at McDonalds
b.	You will buy less KFC	d.	You will eat more chicken McNuggets

The Income Effect

Rising prices have another effect that we
have all felt. They make us feel poorer. When
the price of movie tickets, shoes, or pizza
increases, your limited budget just won’t buy
as much as it used to. It feels as if you have
less money. You can no longer afford to buy
the same combination of goods, and you
must cut back your purchases of some
goods. If you buy fewer slices of pizza
without increasing your purchases of other
foods, that is the income effect.

One important fact to remember is that
economists measure consumption in the
amount of a good that is bought, not the
amount of money spent to buy it. Although
you are spending more on pizza, you are
consuming fewer slices, so your consumption
has gone down. If the price rises from
$1 a slice to $2 a slice, you may decide to
pay extra and order your usual lunch, but
you certainly would not choose to buy
more slices than before. Although people
spend more of their money on pizza, when the price goes up, the quantity demanded
goes down. In this sense, the income effect
leads to the law of demand.

Remember, too, that the income effect
also operates when the price is lowered. If
the price of pizza falls, all of a sudden you
feel wealthier. If as a result you buy more
pizza, that’s the income effect.

12.

Which is an example of the income effect?

a.	KFC raises prices so you buy less KFC and more McDonalds	c.	McDonalds raises prices so you but more KFC
b.	KFC raises prices so you stop buying KFC	d.	McDonalds raises prices so you but less KFC

13.

The Income Effect depends on

a.	the price of an obnect	c.	how much money you make
b.	the quantity produced	d.	the quantity consumed

Both the substitution effect and the income effect lead consumers to buy less of good A when it becomes more expensive. However, the income effect leads consumers to spend less on other goods so they can afford good A, while the substitution effect encourages consumers to replace expensive good A with other, less expensive substitutes.

14.

Look at the graphic above. What will the substitution effect and the income effect lead consumers to do when the price of good A increases?

a.	the substitution effect and the income effect will cancel each other out	c.	consumers will buy more of it
b.	consumers will buy less of it	d.	consumtion will not be effected

15.

Look at the chart above. If the price of product A increases what will the substitution effect be on the consumption of other goods?

a.	will increase	c.	will remain the same
b.	will decrese	d.	will increase and decrease

A Demand Schedule
The law of demand explains how the price
of any item affects the quantity demanded
of that item. Before we look at the relationship
between price and quantity
demanded for a specific good, we need to
look more closely at how economists use
the word demand.

Understanding Demand
To have demand for a good, you must be
willing and able to buy it at the specified
price. This means that you want the good,
and you can afford to buy it. You may
desperately want a new car, a laptop

computer, or a trip to Alaska, but if you
can’t truly afford any of these goods, then
you do not demand them. You might
demand compact discs, though, if at the
current price you have enough money and
want to buy some.

A demand schedule is a table that lists
the quantity of a good that a person will
purchase at each price in a market. For
example, the table on the left in Figure 4.3
illustrates individual “demand for pizza.”
The schedule shows specific quantities that
a student named Ashley is willing and able
to purchase at specific prices. For example,
at a price of $2.00, Ashley’s “quantity
demanded” of pizza is two slices per day.

Demand schedules show that demand for a good falls as the price rises.

16.

How does the market demand for pizza change when the price falls from $2.50 to $1.00 a slice?

a.	decreases	c.	increases
b.	stays the same	d.	increases and decreases

17.

You want to purchase a new I phone but you just don’t have the money to buy it.

a.	Economists call this demand	c.	Economists would call this supply
b.	Economist would not call this demand	d.	Economist would call this supply and demand

18.

Look at the Demand Schedule above. If the price of a slice of pizza is $1.00, Mr Schneemann is likely to eat 4 slices a day. How many slices is he likely to eat if the price increases to $2.00 a slice?

a.	3	c.	1
b.	2	d.	0

Market Demand Schedules
If you owned a store, knowing the demand
schedule of one customer might not be very
helpful. You would want to know how customers as a whole would react to price
changes. When you add up the demand
schedules of every buyer in the market, you
can create a market demand schedule. A
market demand schedule shows the quantities demanded at each price by all consumers in the market. A market demand schedule for pizza would allow a restaurant owner to predict the total sales of pizza at several different prices.

The owner of a pizzeria could create a
market demand schedule for pizza slices by
surveying his or her customers and then
.

adding up the quantities demanded by all
individual consumers at each price. The
resulting market demand schedule will look
like Ashley? ’s demand schedule, but the quantities will be larger, as shown in Figure 4.3

Note that the market demand schedule
on the right in Figure 4.3 contains the same
prices as Ashley? ’s individual demand
schedule, since those are the possible prices
that may be charged by the pizzeria. The
schedule also exhibits the law of demand.
At higher prices the quantity demanded is
lower. The only difference between the two
demand schedules is that the market
schedule lists larger quantities demanded.
This is the case, since now we are talking
about the purchase decisions of all potential
consumers in the market.

Demand schedules show that demand for a good falls as the price rises.

19.

You own a pizza shop. You increase the price of a slice a pizza from $.50 to $2.50. How will this effect demand.

a.	There willbe 200 fewer slices demanded	c.	There will be 50 more slices demanded
b.	There will be 200 more sliced demanded	d.	There will be little or no effect on demand

20.

How does the market demand for pizza change when the price falls from $2.50 to $1.00 a slice?

a.	quantity demanded increaes by 250 slices	c.	quantity demended decreases by 150 slcies
b.	quantity demanded decreades by 250 slices	d.	quantity demanded increases by 150 slices

21.

If you own a business, which demand schedule are you likely to use?

a.	individual demand schedule	c.	individual supply schedule
b.	market demand schedule	d.	market supply schedule

The Demand Graph
What if you took the numbers in Ashley’s demand schedule in Figure 4.3 and plotted them on a graph? The result would be a demand curve. A demand curve is a graphic representation of a demand schedule.

How do economists create a demand curve? When they transfer numbers from a demand schedule to a graph, they always label the vertical axis with the lowest possible prices at the bottom and the highest at the top. Likewise, they always label the quantities demanded on the horizontal axis with the lowest possible quantity at the left and the highest possible quantity at the right. As Figure 4.4 shows, each pair of price and quantity-demanded numbers on the schedule is plotted as a point on the graph. Connecting the points creates a demand curve.

22.

How many slices per day is Ashley likely to consume at $1.50 a slice?

a.	1	c.	3
b.	2	d.	4

23.

Which axis in the chart above shows demand?

a.	left Y axis	c.	top w axis
b.	right z axis	d.	bottom x axis

Reading a Demand Curve
Note two facts about the graph shown in
Figure 4.4. First, the graph shows only the
relationship between the price of this good
and the quantity that Ashley will purchase.
It assumes that all other factors that would
affect Ashley’s demand for pizza—like the
price of other goods, her income, and the
quality of the pizza—are held constant.

Second, the demand curve on the graph
slopes downward to the right. If you follow
the curve with your finger from the top left to the bottom right, you will notice that as
price decreases, the quantity demanded
increases. This is just another way of
stating the law of demand, which states
that higher prices will always lead to lower
quantities demanded. All demand schedules
and curves reflect the law of demand.

The demand curve in Figure 4.4 shows
Ashley’s demand for slices of pizza. A
market demand curve shows the quantities
demanded by all consumers at the same
prices. Thus, in Figure 4.5, the prices listed
on the vertical axis are identical to those in
Ashley? ’s demand curve. The quantities
listed on the horizontal axis are much
larger, corresponding to those in the
market demand schedule in Figure 4.3.

24.

In the real world many factors effect how many slices are likely to be consumed. Are people concerned about their weight, do they make enough money that price is not important, do they prefer Mexican food over Italian food. The charts above only consider two things. What are they?

a.	quantity demanded	c.	quantity supplied
b.	price	d.	the substitution of other foods

Limits of a Demand Curve The market demand curve can be used to predict how people will change their buying habits when the price of a good rises or falls. For example, if the price of pizza is $1.50 a slice, the pizzeria will sell 200 slices a day.	This market demand curve is only accurate for one very specific set of market conditions. If a nearby factory were to close, so that fewer people were in the area at lunchtime, the pizzeria would sell less pizza even if the price stayed the same. In the next section, you will read about how demand curves can shift because of changes in factors other than price.

25.

The demand curve only measures one specific thing. What is it?

a.	how demand effects price	c.	how individuals effect demand
b.	how price effects demand	d.	how markets effect demand

a.	income effect	e.	law of demand
b.	demand schedule	f.	market demandschedule
c.	demand	g.	substitution effect
d.	demand curve

26.

a graphic representation of a demand schedule

27.

a table that lists the quantity of a good all consumers in a market will buy at each different price

28.

the desire to own something and the ability to pay for it

29.

a table that lists the quantity of a good a person will buy at each different price

30.

when consumers react to an increase in a good? ’s price by consuming less of that good and more of other goods

31.

the change in consumption resulting from a change in real income

32.

consumers buy more of a good when its price decreases and less when its price increases