Chapter 6
Demand: Achieving Consumer Satisfaction
Demand: refers to the
quantities of a good that consumers are willing and able to purchase at various
prices during a given period of time.
Components of Demand-
1. able to make a purchase – you
must have enough money to make the purchase.
2. willing to make the purchase
3. during a given period of time – weekly,
monthly, or yearly demand.
A demand schedule shows a listing of the
quantities that would be purchased at various prices. See chart on page 125
A demand curve is a graphic illustration of
the relationship between price and the quantity demanded at each price.
See page 127
For most goods, consumers are willing to
purchase more units at a lower price than at a higher price. The inverse
relationship between price and the quantity consumers will buy is called
the law of demand.
The
Law of Demand states that the quantity demanded of a good
will be greater at lower prices than will be the quantity demanded at higher
prices (as long as other influences stay
constant – such as income)
1. Diminishing Marginal Utility
– The amount that a person gets from one additional unit of a product is called
marginal utility. As a person consumes more and more units of
a particular product, the satisfaction gained from each additional unit starts
to lessen.
One additional Hershey’s Kiss does not
bring as much satisfaction as the first one did. Diminishing marginal
utility – is the principle that as additional units of a product are
consumed during a given time period, the additional satisfaction decreases.
2. The Income Effect – the
effect that increasing or decreasing prices has on the buying power of
income. As the price of a product
changes, your buying power changes as well.
As price goes down, quantity demanded goes up.
3. The Substitution Effect – is
the change in the mix of goods purchased as a result of increasing or
decreasing relative prices. It works in two ways:
1. if
the price of a good (CD’s) falls, you may substitute it for other items.
2. if
the price of a good (CD’s) increases, you may find other goods on the market to
buy instead such as cassettes.
1. changes
in consumers’ incomes
2. changes
in consumers’ attitudes
3. changes
in the price of a complementary product
4. changes
in the price of substitute products
1. The Effect of Changing Incomes – people
with higher incomes can be expected to buy more clothes, records, theater
tickets etc… than people with lower incomes.
These goods are called Normal
Goods. These are goods for which demand
goes up as income goes up. Goods that
are not normal goods are called inferior goods. Inferior Goods – are
goods for which demand goes down as income goes up.
2. The
Effect of Changing Attitudes – a change in
consumers’ attitudes (tastes and preferences) can cause demand to increase or
decrease. Demand will go up if, for
some reason, consumers develop a more favorable attitude about a product.
3. The Effect of Changing Prices of
Substitute Goods – changes in the prices of other prices
of other products can cause a change in demand for a good. A rise in the price of margarine might cause
an increase in the demand for butter. Substitute products – are products
whose uses are similar enough that one can replace another.
4. The Effect of Changing Prices of
Complementary Goods – Complementary products are products
that are used together such as (pasta and tomato sauce). For example, suppose that the price of computers
goes down. More people could afford to
buy computers. Thus the demand for
computer software and printers would go up.
Graphing
Increases in Demand – an increase in demand causes the
entire demand curve to shift to the right.
Graphing
Decreases in Demand – a decrease in demand can be
illustrated by a shift of the whole demand curve to the left.
the price
elasticity of demand measures the change in demand as a result of a change
in price. The term elastic means
responsive. When we say that a product
is price elastic, they mean that the quantity demanded is quite responsive to a
change in price. The more substitutes that
are available, the more price elastic is demand.
1. number
of substitute products
2. importance
of the product in the consumer’s budget; and
3. time
period considered
1. Number of Substitute Products – the
most important factor in determining the elasticity of a product with respect
to the price is the number of substitute products available. The more substitutes available, the more
price elastic we can expect demand to be.
If there are few substitute products available, we would expect demand
to be inelastic. What are some products that are considered to
have inelastic demand?
2. Importance of the product in the
Consumer’s Budget – If expenditures on a product are a small
fraction of a consumers budget, demand will tend to be price inelastic. On the other hand, products that represent
major purchases would be expected to have
demand that is more elastic.
3. The Time Period Considered –
the shorter the time period, the more inelastic demand will be. When consumers have more time to adjust to
price changes and perhaps to find substitute products demand tends to be
elastic.