Explorations

in Economics
Alan B. Krueger & David A. Anderson
 Chapter 4: The Demand for Goods and Services
- Module 10: Determining Demand
- Module 11: Shifts of the Demand Curve
- Module 12: Elasticity of Demand
 MODULE 10:
Determining Demand
KEY IDEA:
When the price of a good or service increases, consumers buy
less of it for two reasons: (1) they substitute the good with other
goods whose prices haven t increased, and (2) their income will
buy less of the good at the higher price.

OBJECTIVES:
•To describe the law of demand and the role of the substitution
effect and the income effect.
•To explain what economists mean by all else equal.
•To show the relationship between a demand schedule and a
demand curve.
THE LAW OF DEMAND
 THE LAW OF DEMAND
The quantity demanded is the amount of a good that
consumers are willing and able to purchase at a particular
price over a given period of time.

There are two distinct reasons why a consumer buys less of a

good after its price increases: the substitution effect and the
income effect.

The substitution effect arises when an increase in the price of a good

causes a consumer to switch away from that good and toward other
goods that do not experience a price increase.
Likewise, a decrease in the price of a good causes consumers to switch
toward that good.
 THE LAW OF DEMAND
The quantity demanded is the amount of a good that
consumers are willing and able to purchase at a particular
price over a given period of time.

There are two distinct reasons why a consumer buys less of a

good after its price increases: the substitution effect and the
income effect.

The income effect is the change in consumption

that occurs when a price increase causes
consumers to feel poorer or when a price
decrease causes them to feel richer.
THE LAW OF DEMAND
 THE LAW OF DEMAND AND THE
ALL ELSE EQUAL ASSUMPTION

Economists use the Latin term ceteris paribus,

meaning all else equal, to indicate that they
are looking only at a specified relationship, such
as the one between price and quantity
demanded.
 THE DEMAND SCHEDULE &
THE DEMAND CURVE
A demand schedule is a table that relates the quantity
demanded of a particular good to its price.
 INDIVIDUAL DEMAND SCHEDULE
& THE DEMAND CURVE
A demand curve is a graphical representation of the demand
schedule for a good, showing the quantity demanded at each
price.
 THE DEMAND SCHEDULE
& THE DEMAND CURVE
The market demand curve for a good is a graphical
representation of how the quantity demanded by ALL
consumers in the market varies with the price.
 THE DEMAND SCHEDULE
& THE DEMAND CURVE
The market demand curve for a good is a graphical
representation of how the quantity demanded by ALL
consumers in the market varies with the price.
 THE DEMAND SCHEDULE
& THE DEMAND CURVE
The market demand curve for a good is a graphical
representation of how the quantity demanded by all
consumers in the market varies with the price.
 Module 10 Review

What is…

A. Substitution effect?
B. Income effect?
C. Law of demand?
D. Market demand curve?
E. Demand schedule?
F. Demand curve?
G. Quantity demanded?
H. Ceteris paribus?
 MODULE 11:
Shifts of the Demand Curve
KEY IDEA:
The demand curve for a good can shift due to changes in tastes
income, the prices of related goods, expectations about the
future, and the number of buyers in a market.

OBJECTIVES:
• To identify what shifts the demand curve to the left and
what shifts it to the right.
• To distinguish between the terms quantity demanded and
demand.
• To explain how goods are categorized as normal goods,
inferior goods, substitutes, and complements.
 MOVEMENTS ALONG A
DEMAND CURVE
A movement along a demand curve caused by a price
change is called a change in the quantity demanded,
not to be confused with a change in demand.
 SHIFTS OF THE
DEMAND CURVE

A shift of the
demand curve
represents a change
in the amount people
are willing and able
to buy at every price.
 SHIFTS OF THE
DEMAND CURVE
 SHIFTS OF THE
DEMAND CURVE
 WHAT CAUSES THE
DEMAND CURVE TO SHIFT?

All of the following shift the demand curve:

• Tastes and preferences
– More popular demand shifts right
• Income (if income increases)
- normal good (the demand shifts right)
- inferior good (the demand shifts left)

If more people demand a good, the price will increase.

 WHAT CAUSES THE
DEMAND CURVE TO SHIFT?

All of the following shift the demand curve:

• Tastes and preferences
• Income
- normal good
- inferior good
The Prices of Related Goods (if the price increases)
- substitute goods (demand will increase)
- complementary goods (demand will decrease)
 WHAT CAUSES THE DEMAND
CURVE TO SHIFT?

All of the following shift the demand curve:

• Tastes and preferences
• Income
- normal good
- inferior good
• The Prices of Related Goods
- substitute goods
- complementary goods
• Expectations (a predicted shortage will increase demand)
 WHAT CAUSES THE DEMAND
CURVE TO SHIFT?

All of the following shift the demand curve:

• Tastes and preferences (more popular demand shifts right)
• Income (if income increases)
- normal good (the demand shifts right)
- inferior good (the demand shifts left)
• The Prices of Related Goods (if the price increases)
- substitute goods (demand will increase)
- complementary goods (demand will decrease)
• Expectations (a predicted shortage will increase demand)
• The Number of Buyers (more buyers increases demand)
 Module 11 Review

What is…
A. Change in the quantity demanded?
B. Change in demand?
C. Normal goods?
D. Expectations?
E. Substitutes?
F. Complements?
G. Conspicuous consumption?
H. Taste?
I. Inferior goods?
J. Income?
 MODULE 12:
Elasticity of Demand
KEY IDEA:
An important aspect of demand is how sensitive quantity
demanded is to price changes.

OBJECTIVES:
• To explain how economists measure the sensitivity of
quantity demanded to price changes.
• To identify what makes the demand for a good more or
less sensitive to changes in its price.
• To show the connection between price sensitivity and the
total revenue of firms in a market.
 WHAT IS ELASTICITY?
Elasticity of demand is a measure of how strongly consumers
respond to a change in the price of a good, calculated as the
percentage change in the quantity demanded divided by the
percentage change in price.

• Demand is elastic if consumers respond to a change in PRICE

with a relatively large change in the quantity demanded
• Demand is inelastic if consumers respond to a change in PRICE
with a relatively small change in the quantity demanded.
• Demand is unit-elastic if consumers respond to a change in
price by changing the quantity demanded by the same
percentage.
 WHAT MAKES DEMAND
MORE OR LESS ELASTIC?

• Necessities versus luxuries: If you need it, your

demand is relatively inelastic.

• The availability of close substitutes: No substitutes

means your demand is inelastic.

• The share of income spent on the good: If It is a large

expense, your demand is elastic.

• Time: If you can wait, your demand is elastic.

Perfectly Elastic Demand
Perfectly Inelastic Demand
PREDICTING ELASTICITY
 COMPARING ELASTICITIES

By calculating the value of elasticity, economists can

categorize the demand for goods according to how
sensitive consumers are to price changes.
We can specify whether demand is elastic, inelastic, or
unit elastic, depending on the value of elasticity.

The larger the elasticity, the greater the percentage

change in quantity demanded relative to the
percentage change in price and the stronger the
response to a price change.
COMPARING ELASTICITIES
SPENDING, REVENUE,
AND ELASTICITY
 ELASTICITY, TOTAL SPENDING,
& TOTAL REVENUE

Total revenue is all the money consumers spend on

a good, and firms receive for a good, during a
particular period of time: it is the price of the good
multiplied by the quantity of the good sold.

Changes in Total Revenue with Elastic Demand

Price increases = total revenue decreases
Price decreases = total revenue increases
 ELASTICITY, TOTAL SPENDING,
& TOTAL REVENUE

Total revenue is all the money consumers spend on

a good, and firms receive for a good, during a
particular period of time: it is the price of the good
multiplied by the quantity of the good sold.

Changes in Total Revenue with Inelastic Demand

Price increases = total revenue increases
Price decreases = total revenue decreases
 ELASTICITY, TOTAL SPENDING,
& TOTAL REVENUE

Total revenue is all the money consumers spend on

a good, and firms receive for a good, during a
particular period of time: it is the price of the good
multiplied by the quantity of the good sold.

Constant Total Revenue with Unit-Elastic Demand

Price increases or decreases = total revenue
unchanged.
 ELASTICITY, TOTAL SPENDING,
& TOTAL REVENUE
Changes in Total Revenue with Elastic Demand
Changes in Total Revenue with Inelastic Demand
Constant Total Revenue with Unit- Elastic Demand
 Module 12 Review

What is…

A. Elasticity of demand?
B. Elastic demand?
C. Inelastic demand?
D. Necessity?
E. Unit- elastic demand?
F. Total revenue?
G. Luxury?
H. Close substitute?