Economics Principles and Practices © 2012 GeorgiaChapter 4:
DemandChapter OverviewsSection 1: What Is Demand?
Demand is easy to understand because it involves only two variables—the price and quantity of a specific product at a given point in time. Demand does not always stay the same and can be determined by a demand schedule, which shows the various quantities demanded of a particular product at all prices that might prevail in the market at a given time. The Law of Demand states that when the price of something goes up, the quantity demanded goes down, and vice versa.
Section 2: Factors Affecting Demand
Only a change in price can cause a change in quantity demanded. When the price goes up, less is demanded; when the price goes down, more is demanded. The following factors affect demand: the income effect and the substitution effect. Furthermore, demand can change because of changes in the determinants of demand: consumer income, consumer tastes, the
price of related goods, expectations, and the number of consumers.
Section 3: Elasticity of Demand
Elasticity is a general measure of responsiveness— an important cause-and-effect relationship in economics. There are three different forms of elasticity: elastic demand, inelastic demand, and unit elastic demand. To estimate elasticity, it is useful to look at the impact of a price change on total expenditures, or the amount that consumers spend on a product at a particular price. This is sometimes called the total expenditures test. The answers to three questions help determine a product's demand elasticity. Can the purchase be delayed? Are adequate substitutes available? Does the purchase use a large portion of income?
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