Chapter 7

The Demand Curve and

Elasticity of Demand

Graphing the Demand Curve

• A demand schedule is a table reflecting quantities demanded at different possibleprices.

• A demand curve shows the quantitydemanded of a good or service at each possible price. Demand curves slope downward, clearly showing the inverse relationship.

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Determinants of Demand

• Main Idea: A change in the demand for a particular item shifts the entire demand curve to the left or right.

• *Increase moves right• *Decrease moves left

Highlight this in your notes!!

1. Population

• D1 – represents the original demand for TV’s

• D2 – represents the demand after the population increased

• If population decreased, demand would also decrease

2. Income

If Income increases, demand also increases.

3. Tastes & Preferences

*This refers to what people like and prefer to choose.

*Fads (trends)

This Beanie Baby graph represents the demand in the early 1990’s. As the popularity died down, the demand curve shifted back to the left.

FYI-There are Beanie Babies 2.0 now in stores featuring Cartoon characters (Madagascar, Diego & Dora, WonderPets)

4. SubstitutesDetermined by availability & price of substitute

Think it through!If the price of the substitute decreases, then you’ll buy that instead of the original item.

Vice versa:If the price of the substitute increases, you’ll be more of the original item.

5. Compliments

*Things that are bought and sold together

If the price of one decreases, the demand of BOTH complimentary items increases.

This examples shows:If the price of a digital camera decreases, the demand of the camera AND the flash memory increases.

The Price Elasticity of Demand

• Main Idea: Elasticity of demand measures how much the quantity demanded changes when price goes up or down.

• For some goods, a rise or fall in price greatly affects the amount people are willing to buy. This economic concept is referred to as elasticity.

• The measure of how much consumers respond to a given change in price is referred to as price elasticity of demand.

ExamplesElastic Demand• Luxury items, vacations,

high-end electronics, even coffee are examples of elastic goods/services and have a very elastic demand.

Inelastic Demand• Staple foods, medicine,

spices have an inelastic demand. A price change has little impact on the quantity demanded by consumers.

Three factors determine the price elasticity of demand for an item:

– The existence of substitutes

– The percentage of a person’s total budget devoted to the purchase of that good

– The time consumers are given to adjust to a change in price

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