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Study Guide: Demand - Chapter 4

1. What is Demand?

• Definition: The combination of quantities that someone is willing and able to buy at various prices at a given time.

• Key Elements:

• Desire to buy

• Willingness to buy

• Ability to buy

Significance:

• Helps answer key economic questions:

• WHAT to produce

• HOW to produce

• FOR WHOM to produce

2. Individual Demand Schedule and Curve

• Demand Schedule: A table showing quantities a person is willing to buy at various prices.

• Demand Curve: A graphical representation of the demand schedule.

3. Law of Demand

• Definition: Quantity demanded of a good or service varies inversely with its price.

• When price increases: Quantity demanded decreases ($ ↑  # ↓)

• When price decreases: Quantity demanded increases ($ ↓  # ↑)

4. Market Demand Schedule and Curve

• Market Demand: The total quantity demanded by everyone interested in buying the product.

• Difference from Individual Demand: It aggregates demand from all individuals.

5. Demand and Marginal Utility

• Utility: Satisfaction gained from using a product.

• Marginal Utility: Additional satisfaction from consuming more of a product.

• Diminishing Marginal Utility: Satisfaction decreases with additional quantities consumed.

6. Factors Affecting Demand

• Change in Quantity Demanded: Caused only by a change in price (movement along the demand curve).

• Change in Demand: Caused by factors other than price (shifts the entire demand curve).

Factors Causing Change in Demand:

• Consumer Income: Higher income increases demand.

• Consumer Tastes: Popularity increases demand.

• Substitutes: Availability of alternatives can reduce demand.

• Complements: Price changes in related goods can impact demand.

• Future Expectations: Anticipated changes in prices or availability.

• Number of Consumers: More buyers increase market demand.

7. Elasticity of Demand

• Definition: The degree of responsiveness in quantity demanded due to a change in price.

Types of Demand Elasticity:

1. Elastic Demand: Quantity demanded changes significantly with price changes.

2. Inelastic Demand: Quantity demanded changes little with price changes.

3. Unit Elastic Demand: Proportional change in quantity demanded to price.

Determinants of Demand Elasticity:

• Can the purchase be delayed? (Yes → Elastic, No → Inelastic)

• Are substitutes available? (Yes → Elastic, No → Inelastic)

• Does the purchase use a large portion of income? (Yes → Elastic, No → Inelastic)

This study guide covers the key points on demand, including its definition, law, factors affecting it, and demand elasticity. Use this guide to prepare for quizzes, discussions, or exams on economic demand concepts.