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This chapter introduces and discusses a very important concept in economics: demand. This is the first of three chap- ters in which students learn about demand, supply, and the ways demand and supply work together in markets. The following statements provide brief Why It Matters descriptions of the major concepts cov- ered in each section of this chapter. ertain people and institutions play impor- Ctant roles in your life. For example, your parents, teachers, and friends are impor- Understanding tant. Government is an institution that also plays an Demand important part in your life. It determines such things as when you can get a driver’s license, the amount of taxes Section 1 discusses the basic concepts of you must pay, and when you will be able to vote. the law of demand. It also introduces the Markets also have a major impact on your life. A mar- elements of the demand curve. ket is any place where people come together to buy and sell goods or services. Markets determine what The Demand Curve prices you pay for computers, cars, television sets, Shifts books, and clothes. Markets also determine what peo- ple earn as teachers, truck Section 2 explores the factors that cause drivers, television and movie the demand curve to shift. These factors stars, baseball players, and include income, preferences, prices of nurses. How much money related goods, number of buyers, and you earn in the future will buyers’ expectations of future price. Sec- depend on markets. Shopping for a more pow- tion 2 also explains the difference If you are interested in the erful computer and the lat- prices you pay for the goods between a change in demand and a est software program can change in quantity demanded. and services you buy, or in be fun. Whether or not why some people earn these shoppers decide to higher salaries than others, make a purchase will then you will be interested in Elasticity of Demand depend on their willing- learning how markets work. ness and ability to buy, conditions you will learn The first step is to learn about Section 3 covers the relationship more about in this chapter. demand, the subject of this between the percentage change in quan- chapter. tity demanded and the percentage change in price. This is the elasticity of demand.

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Teaching Suggestions from the Author

This is the first chapter of the book that begins to use they understand the numbers in a demand schedule, diagrams in a big way. Most students will be unaccus- but when it comes to understanding what a demand tomed to translating what they know into diagrams. For curve says, they initially go blank. example, in this chapter we discuss the law of demand I know of no better way of getting students to and a demand schedule, and then translate each into a understand a diagram than to have them repeatedly demand curve. Students seem to have little trouble put into their own words what the diagram says. What understanding what the law of demand states, and does a demand curve say? What does a movement

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Introducing the Chapter You might want to open the chapter by telling students that many objects, such as buildings and computers, are com- The following events occurred one day posed of separate parts or building in June. blocks. Ask them to provide examples of objects and their component parts. Then 9:03 A.M. Sam is a student at a technical college in New tell them that a subject like economics is York City. He is currently working on one of the computers in the like those objects, and that a major school library. He’s not doing any research right now; instead, building block of economics is demand. he’s online checking the prices of various stocks. He recently You may also want to mention that inherited some money and is thinking of investing it in the stock another key component of economics is market. He checks the share price of various stocks: Georgia Pacific, General Motors, Microsoft, and Dell. He is thinking supply, which students will learn about about buying 100 shares of Dell, current price $39.35. He is in the next chapter. Write the definition about to place his order online with his online broker, when of demand (see page 90) on the board, he has second thoughts. A friend of his told him that the stressing the two parts of that defini- price of tech stocks, including Dell, would probably be tion—“willingness” and “ability.” going down this week. Maybe, Sam thinks, I should wait until later to buy this stock. Teaching with Visuals • What does the (expected) future price of a share of stock have to do with buying stock today? Demand is a concept with which stu- dents are familiar, even though the term 10:41 A.M. A U.S. senator is in his office talking with his staff. He is concerned about teenage demand may be new to them. Have them smoking in America. He wonders whether he, as a look at the photo on this spread and U.S. senator, can do anything to reduce the amount explain how demand is at work in it. of teenage smoking. One member of his staff says Students will probably say that the buy- that the federal government should increase the tax ers want the goods they are buying. An on a pack of cigarettes. “That way,” he says, “a lot of economist would say that the buyers are these kids will stop smoking.” “How so?” asks the expressing their demand for the goods— senator. “The tax will push up the overall price of their willingness and ability to purchase cigarettes,” the staffer says, “and that will lead to the goods. teens buying fewer cigarettes.” Another staffer enters the conversation. “I am not so sure many teens will stop smoking,” she says. “If they are really hooked on cigarettes, I think they may keep Economics in Action: on buying just as many cigarettes, even at the Student CD higher price.” • Will higher taxes on cigarettes cut down on Chapter Review the number of packs of cigarettes teens pur- After you have finished this chapter, chase? Will higher taxes cut down on the amount before you assign the Chapter Assess- of money teens spend on cigarettes? ment, you might want to suggest that 11:35 P.M. Evan is sitting up in bed reading a students use the activities and quizzes on magazine. He turns the page of the magazine and looks the Economics in Action: Student CD to at an ad about a hotel in Dallas. Under the name of the review the chapter content. Point out hotel are the words “The greatest hotel in the world.” that the quizzes may be taken in Review Evan reads the magazine for a few more minutes, then turns out the light in his bedroom, and goes to sleep. mode or in Practice Test mode. If you • What is the purpose of the Dallas hotel calling itself would like students to report their scores “the greatest hotel in the world”? to you, request that they use the Practice Test mode. 89

from one point on a demand curve to another point on demand curve says, “Buyers are willing and able to buy the same demand curve say? What does a shift right- more units of the good or service at each and every ward in the demand curve say? What does a shift left- price.” One shift in a curve as opposed to 19 words. ward say? Only by repeatedly going from the diagram Must be that economists use diagrams because they to their own words, will students come to understand like to economize. that a diagram is no more than a form of shorthand. For example, simply drawing a rightward shift in a

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Focus Questions ᮣ What is demand? ᮣ What is the difference between demand and quantity demanded? Understanding ᮣ Why do price and quantity demanded move in opposite directions? Demand ᮣ What is the law of diminishing marginal utility? Focus and Motivate ᮣ What is the difference between a demand schedule and a demand curve? Section Objectives Key Terms After completing this section, students market will be able to demand explain the law of demand; law of demand describe the difference between quantity demanded demand and quantity demanded; law of diminishing marginal utility provide examples of the law of demand schedule diminishing marginal utility; and demand curve create demand curves from given demand schedules. What Is Demand? Cruz has the willingness (she wants the car), but not the ability (not enough money) to A market is any place where people come buy the car. Under these circumstances together to buy and sell goods or services. (willingness, but not ability, to buy), Cruz Economists often say a market has two sides: does not have a demand for the car. ࡗ a buying side and a selling side. In econom- EXAMPLE: Molly is shopping for a new ics, the buying side is referred to as demand, Kickoff Activity cell phone. The one she likes is $129, which and the selling side is referred to as supply. In is within her price range. She was worried Tell students to reread the 9:03 A.M. this chapter, you will learn about demand; in that she wouldn’t have enough money, but scenario in Economics Around the market the next chapter, you will learn about supply. she has set aside just enough for the new Any place where people The word demand has a specific meaning Clock (page 89) and then write their phone. Because Molly has the willingness come together to buy in economics. It refers to the willingness and answers to the accompanying question. and sell goods or and the ability to buy the cell phone, ability of buyers to purchase different quan- Invite students to share their services. demand does exist. ࡗ answers with the class. Students should demand tities of a good at different prices during a specific time period. Willingness to purchase see that there is a direct relationship The willingness and abil- What Does the Law of ity of buyers to purchase a good refers to a person’s want or desire for between price and quantity demanded. different quantities of a the good. Having the ability to purchase a Demand “Say”? good at different prices good means having the money to pay for the during a specific time Suppose the average price of a compact good. Both willingness and ability to pur- period. disc rises from $10 to $15. Will customers chase must be present for demand to exist. It Activating Prior Knowledge law of demand want to buy more or fewer compact discs at is important for you to remember that if Students often instinctively understand A law stating that as the higher price? Most people would say that the price of a good either one of these conditions is absent, demand and the law of demand. They customers would buy fewer CDs. increases, the quantity there is no demand. refer to the willingness to pay for a prod- demanded of the good Now suppose the average price of a com- uct and the understanding that as price decreases, and that as EXAMPLE: Cruz doesn’t have the pact disc falls from $10 to $5. Will cus- the price of a good $34,000 needed to buy a particular car. If she tomers want to buy more or fewer compact increases, demand decreases. Ask stu- decreases, the quantity discs at the lower price? Most people would dents to identify situations in which the demanded of the good did have the money, though, she says that increases. she certainly would buy the car. Notice that say more. price of a good or service increased and their own demand for that good or ser- 90 vice decreased, or vice versa. Chapter 4 Demand

Differentiating Instruction English Language Learners tences on their own that show that they understand the This chapter contains a number of terms that are diffi- meaning of the word and how to use the word cor- cult for ELL students or others who have difficulty read- rectly in English. You might also want to ask them to ing English. Assign these students to work in pairs, and provide clear, concrete examples of the terms on their have them make a list of the key terms. Students lists. Ask students to turn in their lists to you or make a should define the terms both in English and in their copy for you so that you can individually quiz them on native language, if appropriate, and then write new sen- the terms at the end of the study of the chapter.

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If you answered the questions the way isfaction gained from each “The main reason economists most people would, you instinctively under- additional unit of the good believe so strongly in the law Teach stand the law of demand. This law says that decreases. For example, you of demand is that it is so as the price of a good increases, the quantity may receive more utility plausible, even to Clarifying Terms demanded of the good decreases. The law of (satisfaction) from eating noneconomists.” Students might confuse the meanings of demand also says that as the price of a good your first hamburger at — David R. Henderson the words want and demand, which they decreases, the quantity demanded of the good lunch than your second increases. In other words, price and quantity and, if you continue, more utility from your might think of as synonymous. For demanded move in opposite directions. This second hamburger than your third. example, a person who says “I want the relationship (you have probably heard it What does this have to do with the law of television set” could be thought to be referred to as an inverse relationship in your demand? Economists state that the more saying “I demand the television set.”In math classes) can be shown in symbols: utility you receive from a unit of a good, the quantity demanded economics, however, want and demand higher price you are willing to pay for it; and The number of units of Law of Demand a good purchased at a mean two different things. The person the less utility you receive from a unit of a specific price. who demands something is expressing a If P ↑ then Q ↓ d good, the lower price you are willing to pay willingness and ability to pay for some- If P↓ then Q ↑ for it. According to the law of diminishing law of diminishing d marginal utility quantity demanded) thing. The person who simply uses the ؍ price and Q ؍ where P) d marginal utility, individuals eventually A law stating that as a obtain less utility from additional units of a word want is not expressing willingness If you were reading closely, you probably person consumes addi- good (such as hamburgers), so it follows that tional units of a good, and ability to pay. For example, a person noticed two words that sound alike: demand they will buy larger quantities of a good only eventually the utility may say “I want a car.”That does not and quantity demanded. Don’t make the gained from each addi- at lower prices. And this is what the law of mistake of thinking they mean the same tional unit of the good mean that the person has the ability to demand states. decreases. thing. Demand, as you learned earlier, refers buy a car. to both the willingness and ability of buyers to purchase a good or service. For example, Thinking Like an Economist if an economist said that Karen had a Tell students that many people believe demand for popcorn, you would know that that the more money a person has, the Karen has both the willingness and ability to more expensive version of a product the purchase popcorn. Quantity demanded is a new and dif- person will buy. Point out that those ferent concept. It refers to the number of people are assuming that someone who units of a good purchased at a specific has the ability to buy something also has price. For example, suppose the price of the willingness to buy it. Economists do popcorn is $5 a bag, and Karen buys two not think this way. The economist knows bags. In this case two bags of popcorn is the that most people try to find the best deal quantity demanded of popcorn at $5 a bag. available to them. As you work your way through this chapter, Encourage students to survey family you will see why it is important to know the members and friends to find out difference between demand and quantity demanded. whether they buy the most expensive items available when they can afford them, or look for the best buys even Why Do Price and Quantity when they have more than enough Demanded Move in money for the most expensive items. Opposite Directions? Tabulate the results of all the students. Discuss the findings, focusing on will- The law of demand says that as price rises, ingness as well as ability as elements of quantity demanded falls, and that as price demand. falls, quantity demanded rises. Why? According to economists, it is because of the ᮡ Harry Potter and the Order of the Phoenix was in great demand hours law of diminishing marginal utility, which after its release in Russia in early 2004. Do these people have both Teaching with Visuals states that as a person consumes additional willingness and ability to purchase? Answers will vary. It appears that the units of a good, eventually the utility or sat- people pictured have both the willing- ness and the ability to purchase; they Section 1 Understanding Demand 91 seem to be making an effort to obtain the book, and smiling while doing so. Background Information: Diminishing Marginal Utility and Advertising

Students have probably not paid much attention to the supermarket may offer 3 pounds of oranges for $2, concept and pricing associated with diminishing mar- and charge $1 per pound for any quantity less than 3 ginal utility, a key economic concept in this section. To pounds. Ask students to create visuals to accompany emphasize this concept, instruct students to spend the their logs and to present both to the class. When the next week keeping a log of goods and services that presentations are finished, guide students in a discus- appear to have diminishing marginal utility in stores, sion of diminishing marginal utility and advertising prac- advertisements, and other places. For example, a tices.

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After students read this feature, invite them to describe personal experiences $126. Disneyland does not charge it might be that you would only at amusement parks or other recre- Are the Prices visitors double its one-day ticket have to pay 25 cents more. ational sites. Ask if they enjoyed their price for visiting two days; it charges Why does Disneyland charge at Disneyland $85. Similarly, triple the price of a less for the second day than the first visits more, the same, or less on each day? It’s because of the law succeeding hour or day. Find out if Goofy? ??? of diminishing marginal util- they agree or disagree with the theory ity, which states that as a per- of diminishing marginal utility. son consumes additional ANSWERS TO Answers will vary. The Walt Disney units of a good, eventually THINK ABOUT IT Company operates two the utility (satisfaction or Encourage students major theme parks in the happiness) from each addi- to share their personal experiences United States: Disneyland in tional unit of the good with the class. You might list their Anaheim, California, and Walt decreases. Disneyland can’t responses under the heading “Goods Disney World in Orlando, charge as high a price when and Services with Diminishing Mar- Florida. Each year millions utility is low as when it is ginal Utility.” of people visit each park. high. If you have never been Regardless of which park to Disneyland, or haven’t you visit, the price you pay for been for five years, your first Reinforcement Activity your ticket will depend on how one-day ticket would be $189, but day is likely to be quite enjoyable. If many days you want to spend at the Disneyland charges $109 for a you’ve already spent, say, two days Direct students to create price change park. For example, Disneyland’s Web three-day ticket. at Disneyland, your third consecu- examples from their own everyday expe- site lists prices for one- to five-day Disneyland seems to be telling tive day isn’t likely to give you as riences that demonstrate the law of tickets. On the day we checked, the visitors that if they want to visit the much utility as your first. demand. Begin by urging them to imag- various ticket prices were as follows: theme park for one day, they have to pay $63, but a second day will THINK Can you think of a ine that the prices of movie tickets at • One-day ticket, $63 ABOUT IT cost only $22 more, not $63 more. good or service that is local theaters have dropped from over $7 • Two-day ticket, $85 Notice that the price Disneyland priced the way visits to Disneyland to below $5, and to decide whether they • Three-day ticket, $109 charges to stay a fifth day is only are priced (for two units of the good • Four-day ticket, $129 would be more likely to go to the $10 more than staying four days. or service, you pay less than double • Five-day ticket, $139 movies. Now ask them to name several Do you wonder how much what you pay for one unit)? goods and services that they typically Notice that the price of a one- Disneyland would charge to stay, purchase, imagine specific price change day ticket ($63), when doubled, is say, a tenth day? By the tenth day, situations for each of those goods and services, and describe how those changes would affect the quantities they would demand. The Law of Demand in tity demanded are moving in opposite direc- Numbers and Pictures tions? The economic term for this type of numerical chart showing the law of demand The law of demand can be represented is demand schedule. both in numbers and pictures. Look at Now let’s see how you would illustrate Audio Activity Exhibit 4-1(a), which has a “Price” column the law of demand in picture form. The and a “Quantity demanded” column. Notice simple way is to plot the numbers from a Prius Envy demand schedule The numerical represen- that as the prices fall (from $4 to $3 to $2 to demand schedule in a graph. Look at At this point, you may want to play the tation of the law of $1), the quantity demanded rises (from 1 to Exhibit 4-1(b), which shows how the com- segment “Prius Envy,”in Track 5 of the demand. 2 to 3 to 4). Do you see that price and quan- binations of price and quantity demanded Marketplace® Audio CD.See Activity 5, on pages 20–22 of the Marketplace® 92 Chapter 4 Demand Activities Book, for suggestions on tying the segment to the material in Chapter 4, Sections 1 and 2. Differentiating Instruction

Kinesthetic Learners any difference between their level of satisfaction from The law of diminishing marginal utility is a fun eco- the first, to the second, on to the last mint. (You might nomic concept to show students. Call on five student post a chart with a 10-point enjoyment scale on the volunteers to come to the front of the class. Give each vertical axis and the number of mints on the horizontal of them a breath mint and then offer each of them axis, and ask each volunteer to plot his or her satisfac- another mint. Continue to offer mints until one student tion level after each mint.) Explain that this is an exam- has had enough. Ask your volunteers if they noticed ple of the law of diminishing marginal utility. 92 Chapter 4 Demand Economics ATE_Ch04.qxd 5/9/06 2:43 PM Page 93

in Exhibit 4-1(a) are plotted. The first com- EXHIBIT 4-1 Demand Schedule and Demand Curve Teaching with Visuals bination (a price of $4 and a quantity demanded of 1) is labeled as point A. The The law of demand says that price and Price Quantity demanded second price and quantity demanded com- (in dollars) (in units) quantity demanded move in opposite bination ($3 and a quantity demanded of 2) directions. Exhibit 4-1(a) shows this in is labeled B. The same process continues for $4 1 numbers and 4-1(b) shows this as a points C and D. If we connect all four 3 2 graph. points, from A to D, we have a line that 2 3 slopes downward from left to right. This 1 4 line, called a demand curve, is the graphic (a) representation of the law of demand. You might be wondering why we use the You may want to expand this A Stu- word curve when, as you can see in Exhibit dent Asks to make sure students are 4-1(b), we ended up drawing a straight line not confused by the fact that some A to represent demand. The answer has to do $4 demand “curves” are actually straight with the standard practice in economics,

) lines. s D a which is to call the graphic representation of B em nd $ u the relationship between price and quantity 3 c rve demanded a demand curve, whether it is a C $ curve or a straight line. 2 Some students think that Price (in dollar D the law of demand and the $1 downward-sloping demand curve hold only in the United QUESTION: I’ve seen a car, a radio, and a States, only in rich countries, or only in 0 1234 diamond ring in the real world, but I’ve free enterprise countries. Not true. The Quantity demanded never seen a demand curve in real life. (I (in units) law of demand and the downward- have seen one in this textbook, though.) (b) sloping demand curve are relevant all Do demand curves exist in the real over the world. Whenever the price of a world? good rises, people will buy fewer units ANSWER: If you go outside and look up (a) A demand schedule for a good. Notice that as price decreases, of the good. The law of demand is uni- into the sky, you’re not going to see a quantity demanded increases. (b) Plotting the four combinations of price versal. demand curve. If you look under your and quantity demanded from part (a) and connecting the points gives us bed or in the school auditorium, you a demand curve. Price, on the vertical axis, represents price per unit of a won’t see a demand curve, which doesn’t good. Quantity demanded, on the horizontal axis, always applies to a Teaching with Visuals mean that demand curves don’t exist in specific time period (a week, a month, a year, and so on). A market demand curve is the sum of the real world. (You also can’t see a virus different individual demand curves with the naked eye, but that doesn’t added together. To further illustrate the mean viruses don’t exist.) point in Exhibit 4-2 (page 94), have stu- The data (numbers) that make up a demand curve—combinations of price Individual Demand Curves dents work in groups of three or four to and quantity demanded—do exist in and Market Demand Curves create individual and market demand the real world. When people (in the real curves for a similar good. Arrange for world) buy more of a good (such as a can An individual demand curve and a mar- them to share their demand curves with of soda or a new pair of jeans) at a lower ket demand curve are different. An individ- the class. price than at a higher price, they are ual demand curve is what it sounds like: the expressing the law of demand, which is demand curve that represents an individ- graphically portrayed as a demand curve ual’s demand. For example, Harry’s demand Application Activity (in a textbook). So what do you think? curve represents Harry’s (and only Harry’s) demand curve Do demand curves exist in the real demand for, say, DVDs. A market demand After reading and discussing Section 1, The graphical represen- world? curve is simply the sum of all the different tation of the law of you may want to assign the Section individual demand curves added together. demand. Activity in the Applying the Principles Workbook, pages 36–38. Section 1 Understanding Demand 93 Assess Internet Research Quick Quiz Direct students to find an online news article, an online curves for those products and services. Ask, How will The following true-or-false quiz will press release, or a corporate Web page describing a this product facilitate the production of other items or help you assess student understanding of new technological product. Tell them to name two or help people provide better services? the material covered in this section. three related products and services, and to explain how the advancement in technology will affect demand 1. Both willingness and ability to pur- chase must be present for demand to exist. (True)

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2. As price decreases, the quantity EXHIBIT 4-2 From Individual Demand Curves to Market Demand Curve demanded decreases. (False)

3. The more utility you receive from a Harry’s Sally’s Elizabeth’s Market $10 $10 $10 $10 good, the higher the price you are will- demand demand demand demand s curve curve ing to pay for that good. (True) curve ++=curve

D D Harry Sally DElizabeth DAll buyers Assessment Book Price of DVD 0 2 0 1 0 3 0 6 You will find a quiz for this section in Quantity demanded of DVDs the Assessment Book, page 35. (a) (b) (c) (d)

Reteaching Activity In parts (a) through (c) you see the individual demand curve for Harry, Sally, and Elizabeth. Guide students in examining the defini- The market demand curve, shown in part (d), is simply the sum of the individual demand curves. tions of demand, quantity demanded, law Stated differently, we know that at a price of $10 per DVD, the quantity demanded of DVDs is 2 for of demand, and law of diminishing mar- Harry, 1 for Sally, and 3 for Elizabeth. It follows that all three buyers together would like to buy 6 ginal utility. Then instruct students to DVDs at a price of $10 per DVD. This point is identified on the market demand curve in part (d). create and share with the class their own sentences using these terms. EXAMPLE: Suppose that the whole vidual demand curves for Harry, Sally, and world has only three buyers of DVDs: Elizabeth, respectively. (To keep things sim- Guided Reading Harry, Sally, and Elizabeth. At a price of $10 ple, we identify only one point on the per DVD, quantity demanded is 2 for Harry, demand curve for each person.) Now look at For further reteaching of the key con- 1 for Sally, and 3 for Elizabeth. As a result, panel (d). Here you can see the market cepts in this section, assign the Outlining the market demand curve would include a demand curve (for all buyers—Harry, Sally Activity and the Just the Facts Handout point representing a price of $10 per DVD and Elizabeth—of DVDs). Notice that the from the Guided Reading and Study and a market quantity demanded of 6 point we identify on the market demand Guide, pages 54–55. DVDs (2 ϩ 1 ϩ 3). curve simply represents the quantity To see this graphically, look at Exhibit 4-2. demanded of all three buyers together if the In panels (a) through (c) you see the indi- price of a DVD is $10.

Defining Terms 4. Give an example of a 6. What does the law of 1. Define: demand schedule. diminishing marginal a. demand utility have to do with b. quantity demanded Critical Thinking the law of demand? c. market 5. Yesterday the price of a d. demand schedule good was $10, and the Applying Economic e. demand curve quantity demanded was Concepts Defining Terms 7. f. law of demand 100 units. Today the Assume that the law of 1. a. demand: the willingness and ability 2. Use the terms demand price of the good is $12, demand applies to crimi- to purchase a good; b. quantity and quantity demanded and the quantity nal activity. What might demanded: the number of units a per- correctly in a sentence demanded is 87 units. community leaders do to reduce the number of son purchases at a certain price; c. mar- about concert tickets. Did quantity demanded crimes committed in the ket: any place where people come fall because the price Reviewing Facts increased, or did the community? together to buy and sell goods or ser- and Concepts price rise because quan- vices; d. demand schedule: the numeri- 3. State the law of demand. tity demanded fell? cal representation of the law of demand; e. demand curve: the graphical represen- tation of the law of demand; f. law of 94 Chapter 4 Demand demand: a law stating that as the price of a good increases, the quantity demanded decreases, and vice versa. 6. The law of diminishing mar- Applying Economic Concepts of the good decreases, and that as the 4. Answers will vary. Ensure that ginal utility states that individuals 7. Answers will vary. Students price of a good decreases, the quantity students provide a numerical rep- eventually obtain less utility from might mention that increasing demanded of the good increases. resentation. additional units of a good, so it the punishment for a crime 2. Answers will vary. follows that they will buy larger Critical Thinking (price) is likely to decrease peo- quantities of a good only at lower ple’s willingness to commit the Reviewing Facts and Concepts 5. The increase in price (from $10 prices. The law of demand states crime (demand). 3. As the price of a good increases, the to $12) is the cause, and the fall in that individuals will buy more of quantity demanded of the good quantity demanded (from 100 a good at lower prices. units to 87 units) is the effect. 94 Chapter 4 Demand Economics ATE_Ch04.qxd 5/9/06 11:13 AM Page 95

Focus Questions What does it mean when a demand curve The Demand shifts to the right? What does it mean when a demand curve shifts to the left? Curve Shifts What is a normal good? An inferior good? A neutral good? What factors can change demand? What factor can change quantity demanded? Focus and Motivate Key Terms Section Objectives normal good inferior good After completing this section, students neutral good will be able to substitute ᮣ explain why a demand curve shifts to complement the right or the left; ᮣ distinguish between normal, inferior, and neutral goods; ᮣ list the factors that cause a change in demand; and ᮣ identify the factor that causes a change in quantity demanded. When Demand Changes, EXHIBIT 4-3 Shifts in a Demand Curve the Curve Shifts Original Kickoff Activity Demand can go up, and it can go down. a u

t) dem nd c rve For example, the demand for orange juice Before instructing students to open their can rise or fall. The demand for CDs can rise books to this page, explain that econo- or fall. Every time the demand changes for a mists often tell economic stories with good, any good, the demand curve for that graphs. For example, a demand curve shift good shifts. By we mean that it moves; it CAB tells a story about the relationship moves either to the right or to the left. $1 between the price of a good and the For example, if the demand for orange D2 Price (dollars per quar quantity demanded of that good. Ask D juice increases, the demand curve for orange 1 students to draw a picture of a demand juice shifts to the right. If the demand for D3 curve, and to illustrate what happens to orange juice decreases, the demand curve 0 100200 300400 500 600 for orange juice shifts to the left. that curve when demand increases and Quantity demanded of orange juice (quarts) when demand decreases. Demand increases → Demand curve shifts rightward Demand decreases → Demand curve shifts leftward Moving from D (original demand curve) to D represents a rightward Activating Prior Knowledge We can understand shifts in demand 1 2 shift in the demand curve. Demand has increased. Moving from D to D curves better with the aid of Exhibit 4-3. 1 3 Tell students that to learn how to tell sto- represents a leftward shift in the demand curve. Demand has decreased. ries with graphs, as economists do, they Look at the curve labeled D1 in Exhibit 4-3. Suppose this demand curve represents the can start by translating graphs in the text original and current demand for orange into their own words. Have them pick a juice. Notice that the quantity demanded people want to buy more orange juice. This graph from the preceding section and at a price of $1 is 400 quarts of orange increase in demand is shown by the tell its story in their own words. juice. Now suppose that the demand for demand curve D1 shifting to the right and orange juice increases. For whatever reason, becoming D2. Teach Section 2 The Demand Curve Shifts 95 Teaching with Visuals To make sure that students understand Differentiating Instruction Exhibit 4-3, display a new graph—per- haps showing the demand curve for Kinesthetic Learners factors to better understand their functions. You could kayaks or bungee cords. Illustrate both a To help kinesthetic learners understand the factors that put each factor on a scale to show it rising and falling, rightward shift and a leftward shift in the create shifts in demand curves, you might prepare a and encourage students to demonstrate the changes in demand curve. Call on student volun- felt or sticky board, and provide materials for students the demand curve. teers to explain what is happening with to use in creating demand curves and symbols repre- demand as the curve shifts. senting the factors that would cause the curves to shift. Kinesthetic learners could manipulate these curves and Section 2 The Demand Curve Shifts 95 Economics ATE_Ch04.qxd 5/9/06 2:44 PM Page 96

What does it mean for a demand curve to What Factors Cause Demand shift to the right? The answer is easy if you You may want to use this A Student again look at Exhibit 4-3, focusing on the Curves to Shift? Asks to make sure students understand horizontal axis and the numbers on it, along Demand curves do not shift to the right or the difference between demand chang- the bottom of the graph. What is the quan- left without cause. They shift because of tity demanded on curve D at the price of ing and quantity demanded changing. 2 changes in demand, which can result from $1? The answer is 600 quarts of orange juice. changes in several factors. These factors include In other words, an increase in demand (or a income, buyer preferences, prices of related shift righward in the demand curve) is the goods, number of buyers, and future price. Thinking Like an Economist same thing as saying, “Buyers want to buy An economist believes that if the more of a good at each and every price.” In Income demand rises for a good, there must be a our example, buyers want to buy more quarts of orange juice at $1. As their income changes, people may buy cause. Prompt students to identify the more or less of a particular good. You might most popular holiday gifts last year. Ask: How would we graphically represent a decrease in demand? In Exhibit 4-3, again think that if income goes up, demand will go What are some of the reasons that the up, and if income goes down, demand will let’s suppose that D1 is our original and demand for these items was so high last current demand curve. A decrease in go down. This relationship is not necessarily year? Do you think the demand will be demand would then be represented as a the case, however. Much of what happens as high again this year? Why or why not? shift leftward in the demand curve from depends on what goods are involved. If a person’s income and demand change D1 to D3. A decrease in demand means that buyers want to buy less of the good at each in the same direction (both go up, or both go and every price. Specifically, if we look at down), then the good is called a normal the price $1, we see that buyers once good. For example, if Robert’s income rises wanted to buy 400 quarts of orange juice at and he buys more CDs, then CDs are a nor- Audio Activities $1 a quart, but now they want to buy only mal good for Robert. If, however, income and 200 quarts at $1 a quart. demand go in different directions (one goes Rental Car Revenue Shift up, while the other goes down), the good is At this point, you may want to play the called an inferior good. If a person buys the segment “Rental Car Revenue Shift,”in same amount of the good when income Track 6 of the Marketplace® Audio CD. changes, the good is called a neutral good. See Activity 6, on pages 23–27 of the QUESTION: Is saying that demand EXAMPLE: On the average, each Marketplace® Activities Book,for sugges- has increased for a good the same as month Simon bought and consumed five tions on tying the segment to the mate- saying that buyers are buying more hot dogs, one steak, and one tube of tooth- rial in Chapter 4, Section 2. of the good? paste when he was a college student earning $100 a week. Now that he has graduated Real Estate’s Come-from-Behind ANSWER: Yes, but with one important from college, and is earning $700 a week, he Win in Park City qualification. Buyers are buying more of buys two hot dogs, three steaks, and one At this point, you may want to play the the good at the same price at which tube of toothpaste a month. During this segment “Real Estate’s Come-from- they earlier bought less. For example, time, prices have been stable, meaning no suppose that on Monday buyers bought changes in prices. So, for Simon, hot dogs Behind Win in Park City,”in Track 7 of normal good 100 units of a good at $3 per unit. Then the Marketplace® Audio CD.See Activity A good for which the are an inferior good (he buys less as his on Tuesday they bought 150 units of the income rises), steak is a normal good (he 7, on pages 28–32 of the Marketplace® demand rises as income rises and falls as income same good at $3 per unit. An economist buys more as his income rises), and tooth- Activities Book, for suggestions on tying falls. would say that demand for the good paste is a neutral good (he buys the same the segment to the material in Chapter inferior good increased between Monday and Tuesday amount as his income rises). ࡗ 4, Section 2. A good for which the because the buyers bought more at the demand falls as income same price. If the good’s price changed, If you’re wondering if a good can be a rises and rises as income normal good for one person and an inferior falls. the economist would describe the situa- Economics in Action: tion differently. The economist would good for another person, the answer is yes. neutral good say that the quantity demanded People, not economists, decide whether a Student CD A good for which the good is normal or inferior for them. If Bob’s demand remains changed, rather than any change in unchanged as income demand. income goes up and he buys fewer potato Tutorial: Chapter 4, Script 1, rises or falls. chips, then potato chips are an inferior good “Demand Schedules/Curves” Students usually need to see, hear, and 96 Chapter 4 Demand apply a concept more than once before they understand and remember it. In the Chapter 4 activities on the Economics in Cooperative Learning Action: Student CD, they will be able to Divide the class into groups, and tell each group to cre- the form of a television or radio piece (either of which see and hear an animated, narrated tuto- ate an advertisement to increase the demand for a can be acted out in front of the class, or videotaped rial on demand schedules and curves, good of its choice. The advertisement should speak to and played for the class), a print piece, a billboard, an and complete a matching exercise apply- the factors that cause demand curves to shift. For Internet pop-up—anything that might catch the public’s ing the major ideas presented in the example, “Buy a tennis racket, and get a free tube of eye. Each group should provide a written copy or out- tutorial. tennis balls!” reflects the connection between two line of its presentation for your evaluation. goods as complements. The advertisement may take

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for Bob. If Georgia’s income goes up and she Teaching with Visuals buyers more potato chips, then potato chips are a normal good for Georgia. The demand for fuel will increase. Preferences Reinforcement Activity People’s preferences affect how much of a Divide the class into groups of four or good they buy. A change in preferences in five students. Direct each student to find favor of a good shifts the demand curve to out from the others in the group what the right. A change in preferences away from they would consider a normal good, an a good shifts the demand curve to the left. inferior good, and a neutral good. Then EXAMPLE: People begin to favor (pre- have volunteers share their findings with fer) small, gas-efficient cars more than they the class. You might chart the students’ did in the past. As a result, the demand curve responses and note any trends. for small, gas-efficient cars shifts rightward. At the same time, people may begin to favor several new brands of computers and stop Discussion Starter buying Dell computers, which had been the tennis rackets rises, for example, the demand ᮡ If Southwest Brainstorm with students a list of goods most popular computer for several years. As for tennis balls falls. Other examples of Airlines expects that they would demand, and write their a result, the demand curve for Dell comput- complements (or complementary goods) the price of fuel to responses on the board. Help the class ers shifts leftward. ࡗ include cars and tires, lightbulbs and lamps, rise, and decides create a list of substitute goods for each Prices of Related Goods and golf clubs and golf balls. to buy fuel now item. Then guide the class in developing instead of later, a list of complements. Discuss the differ- Number of Buyers what will happen Demand for goods is affected by the prices ences to make sure students understand of related goods. The two types of related to the current The demand for a good in a particular both categories. goods are substitutes and complements. demand for fuel? market area is related to the number of buy- When two goods are substitutes, the ers in the area. The more buyers, the higher demand for one good moves in the same Prediction Activity the demand; the fewer buyers, the lower the direction as the price of the other good. In demand. The number of buyers may increase Present students with a comparison other words, if the price for a good, say because of a higher birthrate, increased between a local bookstore (at the mall peanuts, goes up, the demand for that good’s immigration, or the migration of people perhaps) and an online bookstore. Ask substitutes, say pretzels, will also go up. For from one region of the country to another. students to predict what will happen to many people coffee is a substitute for tea. Factors such as a higher death rate or the Thus, if the price of coffee increases, the the demand for books at the local book- migration of people can also cause the num- demand for tea increases as people substitute store if the online store offers the same ber of buyers to decrease. tea for the higher-priced coffee. titles at a lower price. (Answer: Demand will fall at the local store.) EXAMPLE: Jessica is in the supermar- Future Price ket looking at the soft drinks. She usually Buyers who expect the price of a good buys a six-pack of Coke a week. She notices to be higher in the future may buy the that the price of Coke has risen from what it good now, thus increasing the current A change in the price of a was last week. So, instead of buying a six- substitute demand for the good. Buyers who expect good produced and sold in pack of Coke, she buys a six-pack of Pepsi. A similar good. With the price of a good to be lower in the substitutes, the price of a foreign country can For Jessica, Coke and Pepsi are substitutes, future may wait until the future to buy the one and the demand for change the demand for a related good which means that as the price of Coke goes the other move in the good, thus decreasing the current demand up, so does Jessica’s demand for Pepsi. ࡗ same direction. produced and sold in the United States. for the good. To illustrate: Suppose X and Y are sub- complements complement Two goods are if they are Suppose Brandon is willing and able to A good that is consumed stitute goods, and X is produced and consumed together. For example, tennis buy a house (demand exists), but he thinks jointly with another sold in Mexico and Y is produced and rackets and tennis balls are used together to the price of houses on average will be lower good. With comple- play tennis. With complementary goods, the next month. As a result, Brandon is likely to ments, the price of one sold in the United States. Now suppose opposite and the demand for the the price of X rises. Consequently, the demand for one moves in the direc- hold off on making a purchase, which has other move in opposite tion as the price of the other. As the price of the effect of decreasing current demand. directions. demand for Y rises. It rises because people in Mexico are likely to switch Section 2 The Demand Curve Shifts 97 from buying the higher-priced X to buying (importing) the lower-priced Y. Internet Research Tell students that some products, such as books, are more or fewer books on the Internet? What could these Application Activity increasingly sold online. Have them visit two major online booksellers do to increase the demand for books on After reading and discussing “What booksellers, Amazon.com and Barnesandnoble.com, and their sites? Factors Cause Demand Curves to Shift?” compare prices and offerings. They’ll probably find the (pages 96–97), you may want to assign sites to be very similar. Ask them to discuss the factors the Section 2 Activity in the Applying the that could contribute to a change in the demand curve Principles Workbook, pages 39–43. for books sold online. What might make people buy

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After students read this feature, ask them which of the two soft drinks— New Coke, was beating Pepsi. In other words, Coke and Pepsi—they prefer and why. Coca-Cola thought it had found the Document their responses. Then Classic Coke, way to gain market share in the soft administer your own taste test like the or Pepsi? drink market. So, it undertook to one Coca-Cola conducted, and poll replace its old, original Coke with students again. Compare your class’s ?????????????????? what was called “New Coke.” On April 23, 1985, Coca-Cola results with Coca-Cola’s results. In the early 1980s, the Pepsi com- launched New Coke. It was a disaster. ANSWERS TO Answers will vary. pany started asking people to take Coke consumers across the country THINK ABOUT IT the “taste test.” The taste test con- turned their backs on New Coke. One Students might say hundreds of teaspoons contained in sisted of two small paper cups with a person said replacing the old Coke that Coca-Cola could have conducted a an entire bottle. few teaspoons of Coke in one cup with New Coke was like “spitting on Coca-Cola obviously thought controlled study in which people tasted and a few teaspoons of Pepsi in the the flag.” Another said, “At first I was that its taste tests indicated a strong more than a few teaspoons of Coke. other. Members of the public didn’t numb. Then I was shocked. Then I demand for New Coke. That interpre- know which cup contained Pepsi and started to yell and scream and run tation was wrong. What the taste which cup contained Coke. It is up and down.” tests actually showed was a strong important to note here that Pepsi is Coca-Cola experienced a backlash Reinforcement Activity demand for a few teaspoons of New a slightly sweeter cola than Coke. from consumers. What had gone The difference between a change in Coke, not a demand for a six-pack of Members of the public were wrong? The company hadn’t realized demand and a change in quantity New Coke, especially when it meant asked to drink the contents of both a fundamental problem with these taking old Coke off the market. Coca- demanded may be difficult for students cups and then state which cola they taste tests. As it turns out, asking peo- Cola made a mistake in thinking that to grasp. Have them cite particular situa- preferred. Pepsi won the “taste test” ple to decide between a few tea- buyers had a demand for New Coke tions that show a change in demand and more often than Coke. This news spoons of different sodas is quite when they didn’t. On July 11, 1985, scared Coca-Cola, which, at the time, different from asking them to decide others that show a change in quantity Coca-Cola brought old Coke back as was holding on to a small lead in between entire bottles of soda. Often, demanded. Ensure that they understand Classic Coke. And over time it did sales over Pepsi. Coca-Cola decided when only a small amount of a cola the difference and can articulate it. away with New Coke. to undertake its own taste test. During is consumed, people choose the its taste test, it experimented with the sweeter of the two colas. But when THINK What might Coca-Cola taste of Coke. One option consisted of people have to drink larger amounts, ABOUT IT Assess have done during its sweetening the taste of Coke to lure they often find that the sweetness taste test to reduce the chances of more teenagers to its brand. they liked in a teaspoon becomes Quick Quiz making such a costly mistake? In its own taste tests, Coca-Cola “too sweet” before they finish the The following true-or-false quiz will learned that its new, sweeter Coke help you assess student understanding of the material covered in this section. 1. When a demand curve shifts to the What Factor Causes a right, demand has decreased. (False) orange juice is a change in the price of orange juice; the only thing that can cause a 2. Demand has increased when the Change in Quantity change in the quantity demanded of pencils demand curve shifts to the right. (True) Demanded? is a change in the price of pencils. 3. The prices of related goods affect the We identified the factors (income, prefer- As we stated earlier, a change in demand demand curve. (True) ences, etc.) that can cause demand to change, is represented as a shift in the demand curve. 4. A change in the number of buyers cre- but what factor can cause a change in quan- The curve moves either right or left. See ates a change in the quantity demanded. tity demanded? Only one: price. For exam- Exhibit 4-4(a). So how do we represent a (True) ple, the only thing that can cause customers change in quantity demanded? When quan- to change their quantity demanded of tity demanded changes, the curve doesn’t

98 Chapter 4 Demand

Differentiating Instruction

English Language Learners To help ELL students, use the following resources, which are provided as part of the Economics: New Ways of Thinking program: • a Spanish glossary in the Student Text • Spanish versions of the Chapter Summaries on an audio CD 98 Chapter 4 Demand Economics ATE_Ch04.qxd 5/9/06 11:13 AM Page 99

EXH IBIT 4-4 A Change in Demand Versus a Change in Quantity Demanded Assessment Book You will find a quiz for this section in the Assessment Book, page 36. B Reteaching Activity A Direct students to work in pairs to list Price Price five examples of goods that are substi- D 2 tutes and five examples of goods that are

D1 D1 complements. Ask the pairs to each pre- pare brief statements describing what 0 0 will happen to demand if prices are Quantity demanded Quantity demanded (a) (b) increased on the substitute goods and on the complement goods. Ask a pair to share its statements, and invite the class (a) A change in demand refers to a shift in the demand curve. A change in demand can be to fine-tune them if necessary. brought about by a change in a number of factors (income, preferences, prices of related goods, number of buyers, future price). (b) A change in quantity demanded refers to a movement along a given demand curve, which is brought about only by a change in the price of the good. Guided Reading For further reteaching of the key con- move right or left. Instead, the only move- that Ian’s quantity demanded of bananas has cepts in this section, assign the Outlining ment is to a different point along a given increased (from three to five) as a result of Activity and the Just the Facts Handout demand curve, which stays in the same place the price of bananas falling. from the Guided Reading and Study on the graph. See Exhibit 4-4(b). EXAMPLE: The price of a book was $10 Guide, pages 56–59. EXAMPLE: Ian notices that the price of in July and Jeff bought three. The price bananas has fallen; as a result, he goes from was $10 in August and Jeff bought four. buying three bananas a week to buying five Economists would say that Jeff’s demand for bananas a week. An economist would say books increased between July and August.

television series. As he another. (Hint: A Coca- Defining Terms goods, number of buyers, and expecta- 1. went from stand-up Cola may be a substitute Define: tions of future prices. a. normal good comedian to TV star, his for a Pepsi and a comple- b. inferior good income increased sub- ment for a hamburger.) 3. Normal goods. c. substitute stantially. During this Critical Thinking d. neutral good time, he bought more Applying Economic e. complement cars (specifically, Concepts 4. Answers will vary. Porsches) to add to his 5. In recent years the price Reviewing Facts collection. For Jerry, what of a computer has fallen. Applying Economic Concepts and Concepts kind of good are What effect is this price 5. Computer hardware and software are 2. Explain what it means if Porsches? change likely to have on complements. With complements, the demand increases. the demand for software? price of one is inversely related to the 3. Jerry, a comedian, started Critical Thinking Explain your answer. 4. 6. demand for the other. Thus, as the price out doing stand-up com- Identify a good that is a Graph the following: of computers falls, the demand for soft- edy and went on to per- substitute for one good a. an increase in demand form on a popular hit and a complement for b. a decrease in demand ware is predicted to rise. 6. a. An increase in demand is repre- sented by a rightward shift in a demand Section 2 The Demand Curve Shifts 99 curve, such as from D1 to D2 in Exhibit 4-3. b. A decrease in demand is repre- which demand falls as income Reviewing Facts and Concepts sented by a leftward shift in a demand rises and rises as income falls; 2. Answers will vary. Students curve, such as from D1 to D3 in Exhibit c. substitute: a similar good; might say it means that buyers 4-3. (Ensure that students label the axes d. neutral good: a good for want to buy more of the good at of their diagrams and label all relevant Defining Terms which demand remains each and every price. They also demand curves. They must also show, 1. a. normal good: a good for unchanged as income rises or might mention the factors that with arrows, how the demand curve which demand rises as income falls; e. complement: a good that cause a shift in demand: income, shifts.) rises and falls as income falls; is consumed jointly with another preferences, prices of related b. inferior good: a good for good.

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Discussion Starter Ask students if any of them are consid- ering buying a new computer in the near future. Pose these questions: If a Too Good to Be True? national news agency reported that the price of computers will be higher next year, would you buy one now or wait You just learned that buyers’ Don’t Forget Beanie Babies And What About Real until next year? How might that news expectations about future Now think back to 1998. In that Estate Prices? report affect current demand for com- prices can affect current demand. If year, many people in the United Well, Beanie Babies, tulips, and puters sold in the United States? computer buyers think computer States were buying Beanie Babies (a many Internet stocks all crashed in prices will be higher next year, they small stuffed animal). They believed price. Beanie Babies that once sold might buy their computers now (at that Beanie Babies would become for $100 were selling for $5; tulips Research Activity the lower price) instead of next year that sold for hundreds of thousands Assign each student to conduct an (at the higher price) Buyers who of dollars ended up selling for (the opinion poll on whether the price of think computer prices will be lower equivalent of) a few pennies; and houses will continue to skyrocket or next year, might hold off buying this Internet stock prices in some cases decline. Students should survey several year, thinking they will get a lower went from $400 a share to a few price next year. adults they know, and should docu- cents a share. ment reasons for each person’s opin- The Tulip Example Do you think real estate prices might be similar to these examples? ion. Students may also want to search Similar thinking has been affect- During the period from 2001 to the Internet for current housing mar- ing prices and demand for hundreds 2005 in many places around the ket trends, and use their research to of years. In the 1600s in Holland, for country, all you heard was how form their own opinions about the example, a tulip craze became so home prices were destined—yes, issue. Instruct students to compile their frenzied that some people sold their destined—to just keep on rising. It data and report back to the class. collectors’ items, and that the future was as if some law—let’s call it the price of Beanie Babies would be law of antigravity—kept pulling prices higher than the current price. They up, much like the real law of gravity thought that if they bought Beanie pulls things down. In southern Babies in 1998, they could turn California, especially coastal southern around and sell those Beanie Babies California, it was not uncommon to at a higher price in 1999, or 2000, hear people say, “There is no way or in some later year. Then Came the ᮢ Stock traders such as these partici- Internet Bubble pated in the buying surge of Internet stocks in the late 1990s. One more example: Internet stocks in the late 1990s. Everyone businesses and family jewels just to seemed to be saying that the prices buy a few tulip bulbs. Why would were going to be higher next week or people behave in this way? The next month and so you ought to buy answer has to do with what these the stocks as soon as possible. Even people thought the future price of though many experts said the stocks tulips would be. They believed that if were overpriced, people kept buying, they bought tulips today at a rela- thinking that the prices would con- tively lower price, they could sell the tinue to climb. Many people bor- tulips at a higher price in the future. rowed money to buy the stocks.

100 Chapter 4 Demand

Cooperative Learning

Divide students into groups of three or four. Have each increasing in price might decrease in price for similar group develop two lists. One list will contain items that reasons. Have groups report summaries of their discus- have increased and then decreased in price. The other sions to the class. list will contain items that are currently increasing in price. Each group should discuss possible reasons why prices decreased on the first list. They should then speculate as to whether items that are currently

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Teaching with Visuals Economists can research the housing market to determine how big the demand for real estate is, when supply ᮤ Can economists predict when is likely to equal or exceed demand, real estate prices will rise or fall? and what other factors might affect prices, and make predictions based on their findings. However, even leading What George doesn’t know is economists cannot be certain that their when house prices will start to predictions are correct. decline. Will the price decline begin next week, next month, next year, or Discussion Starter five years from now? It is much harder to predict the timing of an To help students understand that it is event than it is to predict the event. harder to predict the timing of an event (The doctor can tell the pregant than it is to predict the event, suggest woman that she is going to have a that they consider the prices of auto- baby, but be unsure of the day and mobiles. Ask students: Do you think that houses near the coast are going of change in house prices, he is quite time. The weather forecaster is fairly automobile sticker prices will go up or to go down in price. After all, there’s sure that sometime in the future sure that it will rain in the next 24 down in the future? On what is your only so much coast to go around.” At house prices will decline (perhaps hours, but he’s not sure if the rain will the time, many people were buying very quickly). start at 7:08 a.m. or at 9:32 a.m.) opinion based? On a scale of 1 to 10, houses not to live in, but to specu- with 1 standing for “Very Unsure” and late on. In other words, they bought 10 standing for “Very Sure,”how cer- a house in 2003 because they were tain are you of your answer? List stu- “certain” they could sell the house in dents’ ratings and calculate the class 2004 for a higher price. average. Many of these people did just My Personal Economics Action Plan Then ask students: When do you that. Of course, many of the people think prices will change? On what do who bought Beanie Babies, tulips, Here are some points you may want to consider and some you base this opinion? How sure are and Internet stocks did the same guidelines you might want to put into practice: thing: they bought low and sold high. you of this answer? Again list their rat- K1. When someone says that “price has nowhere to go but Not everybody was so fortunate. In ings and calculate the class average. up,” you might want to recall what happened to the all three crazes—Beanie Babies, Compare the average ratings of cer- price of Beanie Babies, tulips, and Internet stocks. Many tulips, and Internet stocks—some tainty for each opinion. Your class as a things that sound too good to be true are just that. people bought at high prices and whole should be more sure of its ended up selling at low prices. Before making a major financial decision, I will talk to some response to the first question; if it is Will it be the same with houses? experts and do some research to make sure that my deci- not, point out that the students’ It very well could be. It’s happened sion is based on facts, not “hype.” responses are an anomaly, and try to before, and no economic law says it find out why they didn’t follow the won’t happen again. K2. Don’t jump to the conclusion that just because you can predict that an event will occur, you can predict when usual pattern. One Last Point the event will occur. Remember that no one, not even Consider George. George the leading experts in a particular field, can know with Instruct stu- watches as the price of houses sky- certainty when an economic event will occur. dents to iden- rockets. He also notices that house tify the next major financial decision prices are rising much more rapidly they might make. Tell them to describe than house rents. Based on the in writing what research they need to discrepancy between the rate of do to gather facts, and what experts change in house rents and the rate could give them information and advice concerning the decision. Chapter 4 Demand 101 Encourage them to carry out the research and make at least a tentative decision. Invite students to report their plans and decisions back to the class, if they feel comfortable doing so.

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Focus Questions ᮣ What is elasticity of demand? Elasticity of ᮣ How do we compute elasticity of demand? ᮣ What does it mean to say that the demand for a good is elastic? Inelastic? Unit elastic? Demand ᮣ What factors can change the elasticity of demand? ᮣ Does an increase in price for a good neces- Focus and Motivate sarily bring about a higher total revenue? Section Objectives Key Terms elasticity of demand After completing this section, students elastic demand will be able to inelastic demand describe elasticity of demand; unit-elastic demand compute elasticity of demand; distinguish between elastic, inelastic, and unit-elastic demand; list the factors that can change the elasticity of demand; and describe the relationship between an increase in price for a good, and What Is Elasticity of higher total revenue. quantity demanded. They compare the per- Demand? centage change in quantity demanded of a good to the percentage change in the price of Suppose Jimmy loves chewing gum, so that good. In mathematical terms, here is much so that he buys as many as four or five what elasticity of demand looks like: packs a week. One day he notices that the price of his favorite gum has gone up a quar- Percentage change in quantity demanded ؍ ter. Jimmy will probably now buy less chew- Elasticity of demand Kickoff Activity ing gum. But how much less? Percentage change in price This question about Jimmy’s gum buying Have students reread the 11:35 P.M.sce- In the equation, the numerator is percent- is the kind of question that you will learn nario in Economics Around the Clock age change in quantity demanded, and the how to answer as you study our next eco- denominator is percentage change in price. (page 89) and then write their answers nomic concept, elasticity of demand. Elastic demand exists when the quantity to the question that accompanies it. Elasticity of demand deals with the relation- demanded (the numerator) changes by a Invite students to share their ship between price and quantity demanded. greater percentage than price (the denomi- answers with the class. Look for It is a way of measuring the impact that a elasticity of demand nator). For example, suppose the quantity price change has on the number of units of a responses indicating that the hotel is The relationship demanded of lightbulbs falls by 15 percent good people buy. In some cases a small price attempting to increase its value to between the percentage as the price of lightbulbs increases by 10 change in quantity change causes a major change in the number Evan, so that he might be willing to pay percent. An economist would say that demanded and the per- of units of a good people buy. In other cases, a higher price for a room. centage change in price. because the numerator (15%) is greater than a small price change causes little change in the denominator (10%), the demand for elastic demand how many units of a good people buy. Activating Prior Knowledge The type of demand that lightbulbs is elastic. Another way that an exists when the percent- Elastic Demand economist might say it is that elasticity of age change in quantity demand is greater than 1, because if you Instruct students to write two or three demanded is greater sentences explaining the differences in than the percentage Economists have created a way to meas- divide 15 percent by 10 percent, you get 1.5, meaning between the terms elastic and change in price. ure these relationships between price and which is greater than 1. inelastic, and guessing at the meanings of the terms elastic demand, inelastic 102 Chapter 4 Demand demand, and unit-elastic demand. Internet Research

Instruct students to use the Internet to find products for demand for each product. Have students create pic- which they think there is high demand, low demand, tures, charts, and graphs showing the results of their elastic demand, and inelastic demand—one product for research. each category. Tell them to write brief descriptions of each product, reasons why each product has this type of demand, and what factors might change the

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Inelastic Demand EXHIBIT 4-5 Elasticity of Demand Teach Inelastic demand exists when the quan- tity demanded changes by a smaller percent- If demand is . . . That means . . . Clarifying Terms age than price—that is, when the numerator changes by less than the denominator. Elastic Quantity demanded changes by a larger percentage After students read the definitions of the a a , , Suppose the quantity demanded of salt falls th n price. For ex mple if price rises by 10 percent terms elasticity of demand, elastic quantity demanded falls by, say, 15 percent. by 5 percent as the price of salt rises by 10 demand, inelastic demand, and unit- percent. In this case the numerator (5%) is Inelastic Quantity demanded changes by a smaller percentage a a , , elastic demand on pages 102–103, tell less than the denominator (10%), so the th n price. For ex mple if price rises by 10 percent quantity demanded falls by, say,5 percent. them to restate the definitions in their demand for salt is inelastic. An economist own words. Students may think the could say that elasticity of demand is less Unit-elastic Quantity demanded changes by the same percentage a a , , terms refer just to the pliability of than 1 (if you divide 5% by 10% you get 0.5, s price. For ex mple if price rises by 10 percent quantity demanded falls by 10 percent. which is less than 1). demand. If that is the case, emphasize that the terms refer to relationships Unit-Elastic Demand between quantity demanded and price. unit-elastic demand Finally, exists when falls by 2 percent. In this situation, we would Reinforcement Activity the quantity demanded changes by the same say that the demand for education at this percentage as price—that is, when the particular university is inelastic. Why? Tell students to list five goods on which numerator changes by the same percentage Because the percentage change in quantity they spend a small percentage of their as the denominator. For example, suppose demanded (2%) is less than the percentage money. Then tell them to list five goods the quantity demanded of picture frames change in price (10%). ࡗ on which they spend a large percentage decreases by 10 percent as the price of pic- of their income. Afterward ask them ture frames rises by 10 percent. The numer- What Determines Elasticity ator (10%) is equal to the denominator what the percentage of income they (10%), so the demand for picture frames is of Demand? spend on each of these goods has to do unit elastic. According to an economist, elas- with the elasticity of their demand for The demand for some goods (coffee, ticity of demand would be equal to 1 (10% that good. For example, students may gasoline at the local gas station, physicians’ divided by 10% equals 1). services) is inelastic, while the demand for say that since they spend a very small When elasticity of demand is greater than other goods (oysters, restaurant meals, and amount of money on pencils, their 1, we say that demand is elastic. When it is cars) is elastic. Why is the demand for some demand for pencils is relatively inelastic. less than 1, we say that demand is inelastic. goods inelastic, while the demand for other And finally, when it is equal to 1, we say that goods is elastic? Four factors affect the elas- demand is unit-elastic. See Exhibit 4-5. ticity of demand: (1) the number of substi- Economics in Action: Elastic or Inelastic? tutes available, (2) whether something is a Student CD luxury or a necessity, (3) the percentage of So, you’re probably wondering what prod- income spent on the good, and (4) time. ucts are elastic and which ones are inelastic? Tutorial: Chapter 4, Script 2, One economics study identified oysters, Number of Substitutes “Elasticity of Demand” restaurant meals, and automobiles as goods Students usually need to see, hear, and Let’s look at two goods: heart medicine with elastic demand. For these goods, price inelastic demand apply a concept more than once before and soft drinks. Heart medicine has relatively The type of demand that changes have a strong impact on how much they understand and remember it. In the few substitutes; many people must have it to exists when the percent- customers will buy. In the same study, coffee, stay well. Even if the price of heart medicine age change in quantity Chapter 4 activities on the Economics in gasoline (for your car), physicians’ services, demanded is less than went up by 50, 100, or 150 percent, the quan- Action: Student CD, they will be able to and legal services were identified as goods the percentage change tity that people demanded probably would in price. see and hear an animated, narrated tuto- with inelastic demand. For these products a not fall by much. Is the demand for heart rial on the elasticity of demand and sup- change in price had less impact on how unit-elastic demand medicine more likely to be elastic or inelas- The type of demand that ply, and complete a matching exercise much customers will buy. tic? The answer is inelastic. Do you see the exists when the percent- applying the major ideas presented in EXAMPLE: A university raises its reasoning here? The fewer substitutes for a age change in quantity demanded is the same the tutorial. tuition by 10 percent. As a result, the num- good, the less likely the quantity demanded as the percentage ber of students applying to the university will change much if the price rises. change in price.

Section 3 Elasticity of Demand 103

Cross-Curricular Activity

In the material in this section on the elasticity of changes that create the percentage changes in quantity demand, math plays a dominant role. You might want demanded and price. Create percentages that are easy to review some of the equations with students. If stu- to see right away (10%, 50%, etc.). Then have stu- dents have trouble with the math involved, especially dents tell you whether each ratio is elastic, inelastic, or with the percentages, walk them through the equations unit-elastic. using a demand graph that you have drawn on the board. Show, through markings on the graph, the

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Percentage of Income Spent ANSWERS TO on the Good ECONOMIC THINKING Demand for Oil In recent years, China’s demand Claire has a monthly income of $2,000. Of As China’s demand for oil for oil has been rising. Two rea- this amount, she spends $10 on magazines rises, the world demand for oil will also sons: First, about 2.5 million cars and $400 on dinners at restaurants. In per- rise. China’s rising demand for oil will are added to China’s roads every centage terms, she spends one-half of 1 per- year. Second, the industrial demand cent of her monthly income on magazines increase the price you pay for gasoline and 20 percent of her monthly income on at the pump. for oil has been rising because China’s economy has been rapidly growing. dinners at restaurants. Suppose the price of magazines and the price of dinners at restau- Reinforcement Activity ECONOMIC As China’s demand for oil rises, what will rants both double. What will Claire be more THINKING happen to the world demand for oil? likely to cut back on, the number of maga- Instruct students to clip or copy, from Although you won’t study the topic of price until a later zines she buys or the number of dinners at magazines and newspapers, pictures of chapter, what do you think China’s rising demand for restaurants? products that they believe are luxuries. oil will do to the price for gasoline you pay at the pump? She will probably reduce the number of Then have them do the same thing for dinners at restaurants, don’t you think? Claire will feel this price change more necessities. Create a bulletin board dis- strongly because it affects a larger percentage play with the items provided by stu- of her income. She may shrug off a doubling In contrast, a particular soft drink (say dents. in the price of magazines, on which she Sprite) has many substitutes (Fresca, Moun- spends only one-half of 1 percent of her tain Dew, etc.). Therefore, if the price of income, but she is less likely to shrug off a Sprite rises, we would expect the quanity doubling in the price of dinners at restau- demanded to fall greatly, because people have rants, on which she spends 20 percent. many other soft drinks they can choose. Is the In short, buyers are more responsive to demand for a particular soft drink more likely price changes for goods on which they spend to be elastic or inelastic? The answer is elastic, a larger percentage of their income. In these because the more substitutes there are for a cases, the demand is likely to be elastic. good, the more likely people will buy a lot Whereas, the demand for goods on which fewer of the item if the price rises. consumers spend a small percentage of their Luxuries Versus Necessities income is more likely to be inelastic.

Luxury goods (luxuries) are goods that Time people feel they do not need to survive. For example, a $70,000 car would be a luxury As time passes, buyers have greater good for most people. Necessary goods opportunities to change quantity demanded (necessities), in contrast, are goods that peo- in response to a price change. If the price of ple feel they need to survive. Heart medicine electricity went up today and you knew may be a necessity for some people. Food is about it, you probably would not change a necessity for everyone. your consumption of electricity much today. Generally speaking, if the price of a neces- By three months from today, though, you sity, such as food, increases, people cannot would probably have changed it more. As cut back much on the quantity demanded. time passes, you have more chances to (They need a certain amount of food to change your consumption by finding substi- live.) However, if the price of a luxury good tutes (natural gas), changing your lifestyle increases, people are more able to cut back (buying more blankets and turning down on the quantity demanded. Between the two the thermostat at night), and similar actions. types of goods, luxuries and necessities, the The less time you have to respond to a price demand for luxuries tends to be elastic; the change in a good, the more likely it is that demand for necessities is more likely to be your demand for that good is going to be inelastic. inelastic.

104 Chapter 4 Demand

Background Information: Elasticity and Total Revenue

The relationship between elasticity and total revenue is “set eris pair abis”). As long as every other part of the a basic formulator of price in a free enterprise econ- equation stays the same (ceteris paribus), by knowing omy. The law of demand—which specifies that price the nature of this relationship, a seller can learn the and quantity demanded move in opposite directions— best price at which to sell the goods or services. So implicitly assumes that when price changes, nothing when the law of demand states that as the price of an else changes. In Latin, the term used to denote that item falls, people buy more of that item, it is implicitly nothing else changes is ceteris paribus (pronounced assuming that nothing else in the world changes.

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An Important Relationship Between Elasticity and Total

Revenue he Bureau of Labor Statistics Answers will vary Demand is elastic for one good and T(BLS) is an agency within the depending on the inelastic for another good. Does it matter? U.S. Department of Labor. consumer price As you just read, it can matter to you as an The agency collects data on prices index information that students find. individual, and it definitely matters to the in the economy. To see whether consumer prices are rising, sellers of goods. In particular, it matters to a falling, or remaining constant, go to the BLS Web site at seller’s total revenue (money sellers receive www.emcp.net/prices. Once there, click on “Inflation & for selling their goods). To see how elasticity Consumer Spending.”Next, scroll down the page until you Discussion Starter of demand relates to a business’s total rev- see “Consumer Price Index (CPI).”The CPI is a measure of Have students reread the case studies enue, let’s consider four cases in detail. The the prices of the goods and services purchased by consumers. concerning the relationship between elas- cases look at both elastic and inelastic goods Have prices risen, fallen, or remained constant in the last month reported? If prices have risen or fallen, by what per- ticity and total revenue, on pages and what happens to each when the price 105–107. Call on student volunteers to rises, and when the price falls. centage have they risen or fallen? explain each case study in turn. You • Case 1: Elastic Demand and a Price might invite volunteers to act out the case Increase studies and graph them on the board. Javier currently sells 100 basketballs a week at a price of $20 each. His total 10 percent reduction in price. We know revenue (price × quanity) per week is that if price falls, quantity demanded will $2,000. Suppose Javier raises the price of rise. Also, if demand is elastic, the per- his basketballs to $22 each, a 10 percent centage change in quantity demanded is increase in price. As a result, the quantity greater than the percentage change in demanded falls from 100 to 75, a 25 price. Suppose quantity demanded rises After reading and discussing “An percent reduction. The demand is from 100 to 130, a 30 percent increase. Important Relationship Between Elas- elastic because the change in quantity Total revenue at the new, lower price demanded (25%) is greater than the ($18) and higher quantity demanded ticity and Total Revenue,”you may change in price (10%). What happened (130) is $2,340. Thus, if demand is elastic want to remind students of the 10:41 to Javier’s total revenue at the new price and price is decreased, total revenue will A.M. scenario in Economics Around and quantity demanded? It is $1,650: increase. the Clock (page 89) and to discuss their the new price ($22) multiplied by the answers to its question. Students should note that according ؍ number of basketballs sold (75). Elastic demand ؉ Price decrease Total revenue increase Notice that if demand is elastic, a to the law of demand, the higher the price increase will lead to a decline in price charged for a good, the fewer total revenue. Even though he raised the • Case 3: Inelastic Demand and a Price units of that good purchased. Higher price, Javier’s total revenue went down, Increase from $2,000 to $1,650. An important taxes on cigarettes will raise the price Now let’s assume that the demand for lesson here is that an increase in price paid for cigarettes, so teens will buy basketballs is inelastic, rather than elas- does not always bring about an increase fewer cigarettes. Whether this reduces tic, as it was in cases 1 and 2. Suppose in total revenue. the amount of money teens spend on Javier raises the price of his basketballs to $22 each, a 10 percent increase in cigarettes depends on whether their demand for cigarettes is elastic or ؍ Elastic demand ؉ Price increase Total revenue decrease price. If demand is inelastic, the per- centage change in quantity demanded inelastic. If inelastic, then a higher must fall by less than the percentage price means greater total revenue (or • Case 2: Elastic Demand and a Price rise in price. Suppose the quantity more spent on cigarettes); if elastic, Decrease demanded falls from 100 to 95, a 5 per- then a higher price means lower total In case 2, as in case 1, demand is elastic. cent reduction. revenue (or less spent on cigarettes). This time, however, Javier lowers the Javier’s total revenue at the new price price of his basketballs from $20 to $18, a and quantity demanded is $2,090, which Teaching with Visuals Section 3 Elasticity of Demand 105 After students study Exhibit 4-6 on page 107, instruct them to create their own visuals to explain the relationship between elasticity of demand and total revenue. Suggest that they think of Instruct students to each find an advertisement for a things that are elastic or stretchy, and sales event in the newspaper and to write a short sum- incorporate them into the illustration. mary of the advertisement. Then divide the class into Urge them to be creative—they might groups of three or four and direct each group to decide come up with cartoon characters or how the concept of ceteris paribus is reflected in the three-dimensional models or a Flash sales events examined by the group members. presentation, for example.

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After students read this feature, ask them to describe personal experiences 30,000 people. Do you earn more to $50. At this higher price you will in which they have attended a rock Who’s income if all 30,000 seats are sold not sell as many tickets as you sold concert. Ask whether they agree that Rockin’ with or if only 20,000 seats are sold? when the price was $30 per ticket. rock stars need to know about elasticity “Elasticity This question seems a little silly. Let’s say you sell only 20,000 tick- of demand, and to explain their It seems obvious that you would be ets. You have not “sold out” the of Demand”? better off if you sold more tickets auditorium, but it doesn’t matter. At responses. ? than fewer tickets. Certainly 30,000 a price of $50 per ticket and 20,000 would be better than 20,000, seats sold, total revenue is $1 mil- Teaching with Visuals ock stars need to know more wouldn’t it? lion—or $100,000 more than it was Rthan how to write and play when you sold out the auditorium.* Ask if students know of any direct con- “You can’t always get music. They also need to know Is a sold-out auditorium, then, nection between economics and Mick what you want about elasticity of demand. In fact, better than an auditorium that is not But if you try sometimes Jagger, lead singer for the Rolling a large part of their earnings will sold out? Usually you would think You just might find Stones. Savvy students might know depend on whether they know so, but an understanding of elastic- that he attended the London School of You’ll get what you need” about elasticity of demand. —The Rolling Stones ity of demand informs us that it may Economics. Suppose you are a rock star. be better to sell fewer tickets at a You write songs, record them, and The obvious answer here is not higher price than to sell more tickets ANSWERS TO 1. Answers will vary. THINK ABOUT IT spend 150 days each year on the necessarily correct. The answer at a lower price. Who would have Understanding elas- road performing. Let’s say that really depends on an understanding thought it? ticity of demand would be important if tonight you will be performing in of elasticity of demand. Let’s say you wanted to increase total revenue in Chicago. The auditorium there seats that to sell all 30,000 seats, the THINK 1. You may not ABOUT IT your business. price per ticket has to be become a rock star, 2. Answers will vary. Wants are unlim- $30. At this ticket price, but you may run your own business ited and resources are limited. People total revenue, which is the someday. Explain why it will be must choose which wants to satisfy. number of tickets sold important for you to understand times the price per ticket, elasticity of demand. is $900,000. 2. What basic economic concept If the demand for that you learned in Chapter 1 is your Chicago performance expressed by the Rolling Stones’ Application Activity is inelastic, a higher ticket lyrics on this page? price will actually raise After reading and discussing Section 3, total revenue. (Remem- you may want to assign the Section ber: Inelastic demand + *This description assumes that only one ticket Activity and the Demand Practice Activ- Price increase = Increase price, $30 or $50, can be charged. If more than one ticket price can be charged, then some ity in the Applying the Principles Work- in total revenue.) Suppose seats may be sold for $30, some for $40, book, pages 44–53. you raise the ticket price some for $50, and so on.

Assess Quick Quiz The following true-or-false quiz will is the new price ($22) multiplied by the $2,000 to $2,090 when he increased the number of basketballs sold (95). Notice price of basketballs from $20 to $22. help you assess student understanding of that if demand is inelastic, a price ؍ the material covered in this section. increase will lead to an increase in total Inelastic demand ؉ Price increase 1. Demand is always inelastic. (False) revenue. Javier’s total revenue went from Total revenue increase 2. Unit-elastic demand exists when the quantity demanded is less than the per- 106 Chapter 4 Demand centage change in price. (False) 3. Time affects the elasticity of demand. (True) Differentiating Instruction 4. The demand for necessities is likely to Enrichment and Extension fills the auditorium. She will probably have to sell tick- be inelastic. (True) ets for a lower price, and the total revenue may then 5. It doesn’t matter if demand is elastic, Present this puzzle: A music group is going to play at an be lower. Suppose the auditorium holds 10,000 peo- inelastic, or unit-elastic. (False) auditorium Friday night. The owner of the auditorium must sell each ticket for the same price. Is the owner ple and the owner can sell 10,000 tickets at $10 each, necessarily better off if the entire auditorium is filled? for a total revenue of $100,000. Also suppose that if What does this situation have to do with elasticity? she increases ticket prices to $20 each, she can sell (Answer: The owner is not necessarily better off if she 7,500 tickets, for a total revenue of $150,000.) 106 Chapter 4 Demand Economics ATE_Ch04.qxd 5/25/06 3:21 PM Page 107

• Case 4: Inelastic Demand and a Price Decrease EXHIBIT 4-6 Relationship of Elasticity of Demand to Total Revenue Demand is again inelastic, but Javier now Assessment Book lowers the price of his basketballs from You will find a quiz for this section in $20 to $18, a 10 percent reduction in the Assessment Book, page 37. Price Total revenue price. We know that if demand is inelas- If Then tic, the percentage change in quantity demanded is less than the percentage Reteaching Activity Elastic change in price. Suppose quantity demand Direct pairs of students to create their demanded rises from 100 to 105, a 5 per- own versions of Exhibit 4-5. The pairs cent increase. Total revenue at the new, If Then may use the same descriptions on their lower price ($18) and higher quantity Price Total revenue demanded (105) is $1,890. Thus, if charts, but they should create examples demand is inelastic and price decreases, of specific goods or services, illustrating total revenue will decrease. elastic, inelastic, and unit-elastic demand. Price ؍ Inelastic demand ؉ Price decrease Total revenue decrease If Then Total revenue

See Exhibit 4-6 for a summary of the four Inelastic Guided Reading types of relationships between elasticity and demand For further reteaching of the key con- revenue. Total revenue cepts in this section, assign the Outlining If Then Price Activity and the Just the Facts Handout from the Guided Reading and Study QUESTION: Most people seem to think Guide, pages 60–62. that if a seller raises the price, the seller’s total revenue will automatically rise. But If demand is elastic, price and total revenue move in opposite direc- it isn’t always true, is it? tions: as price goes up, total revenue goes down, and as price goes ANSWER: No, it isn’t always true. If down, total revenue goes up. If demand is inelastic, price and total rev- demand is inelastic (case 3), then a enue move in the same direction: as price goes up, total revenue goes 4. The demand for good B is more likely higher price will lead to a higher total up, and as price goes down, total revenue goes down. to be elastic. The more substitutes a revenue, but if demand is elastic (case good has, the higher the likelihood that 1), a higher price will lead to a lower the quantity demanded of the good will total revenue. fall off greatly as price rises. And the higher the likelihood that the quantity demanded will fall off greatly, the higher the likelihood that the percentage Defining Terms from $400 to $350. Is ferent from elasticity of change in quantity demanded will be 1. Define: the demand for the good demand? greater than the percentage change in a. elasticity of demand elastic, inelastic, or unit- price (which is the definition of elastic b elastic? Applying Economic . unit-elastic demand demand). c. inelastic demand 4. Good A has 10 substi- Concepts 6. A hotel chain advertises d. elastic demand tutes, and good B has 20 Critical Thinking substitutes. The demand its hotels as “The Best Reviewing Facts and is more likely to be elastic Hotels You Can Find 5. (a) The law of demand and the elastic- Concepts for which good? Explain Anywhere.”Does this ad ity of demand deal with the same two 2. Does an increase in price your answer. have anything to do with variables—price and quantity necessarily bring about a elasticity of demand? If demanded. (b) The law of demand spec- higher total revenue? Critical Thinking so, what? ifies the direction that quantity 5. 3. The price of a good rises How is the law of demand demanded changes as price changes; for (a) similar to and (b) dif- from $4 to$4.50, and as a example, as price goes up, quantity result, total revenue falls demanded goes down. The elasticity of demand deals with the amount that Section 3 Elasticity of Demand 107 quantity demanded changes as price changes; for example, if demand is elas- price; b. unit-elastic demand: demand that exists when quantity tic and the price rises by 10%, quantity the type of demand that exists demanded changes by a larger demanded might fall by 20%. when quantity demanded percentage than price. changes by the same percentage Applying Economic Concepts Defining Terms as price; c. inelastic demand: the Reviewing Facts and Concepts 6. When a firm advertises its hotels as 1. a. elasticity of demand: the type of demand that exists when 2. No. The effect on total revenue “the best,”it is trying to get across the relationship between the percent- quantity demanded changes by a depends on whether the demand message that there are few substitutes for age change in quantity demanded smaller percentage than price; is elastic, inelastic, or unit-elastic. its hotels. After all, there can be only one and the percentage change in d. elastic demand: the type of 3. Elastic. “best.”

Section 3 Elasticity of Demand 107 Economics ATE_Ch04.qxd 1/4/06 10:44 AM Page 108

Economics Vocabulary Chapter Summary To reinforce your knowledge of the key terms in Be sure you know and remember the following this chapter, fill in the following blanks on a sepa- key points from the chapter sections. rate piece of paper with the appropriate word or phrase. Economics Vocabulary Section 1 1. A(n) ______is any place where people come

1. market; 2. inferior; 3. quantity ᮣ together to buy and sell goods or services. demanded; 4. law of demand; 5. law of Demand is the willingness and ability of buy- 2. ers to purchase different quantities of a good at If, as income rises, demand for a good falls, then diminishing marginal utility; 6. inelastic; that good is a(n) ______good. different prices during a specific time period. 3 7. law of demand; 8. normal; 9. substi- ᮣ A market is any place where people come . According to the law of demand, as the price of tutes; 10. unit-elastic. a good rises, the ______of the good falls. together to buy and sell goods and services. 4. There are two sides to a market—demand and According to the ______, price and quantity demanded are inversely related. Understanding the Main Ideas supply. 5 ᮣ The law of demand says that price and quan- . According to the ______, as a person consumes 1. The demand for margarine rises. tity demanded move in opposite directions. additional units of a good, eventually the utility 2. a. The demand curve for apples shifts ᮣ A demand curve graphically represents the law gained from each additional unit of the good to the right. b. The demand curve for of demand. decreases. 6. Demand is ______if the percentage change in apples shifts to the right. c. The demand Section 2 curve for apples shifts to the right. quantity demanded is less than the percentage ᮣ An increase in demand for a good causes the change in price. 3. Students should disagree. If demand is 7. A downward-sloping demand curve is the elastic, an increase in price will lower demand curve to shift to the right. ᮣ graphic representation of the ______. total revenue. A decrease in demand causes a leftward shift in 8. the demand curve. For a(n) ______good, the demand increases as 4. a. elastic; b. elastic; c. unit-elastic. ᮣ income rises and falls as income falls. A change in demand may be caused by changes 9. 5. a. Total revenue falls. b. Total revenue in income, people’s preferences, price of If, as the price of good X rises, the demand for Y falls. c. Total revenue rises. d. Total rev- increases, then X and Y are ______. related goods, number of buyers, and future 10. enue rises. price expectations. When demand is ______, the percentage ᮣ A change in price is what causes quantity change in quantity demanded is the same as the Doing the Math demanded to change. percentage change in price. 1. 0.583 (calculation: 0.07 ÷ 0.12 Section 3 Understanding the Main Ideas = 0.583). ᮣ 2. $1,045 (calculation: $9.50 × 110 Elasticity of demand deals with the relationship Write answers to the following questions to review = between price and quantity demanded. the main ideas in this chapter. $1,045). ᮣ Demand is elastic when quantity demanded 1. changes by a greater percentage than price. Margarine and butter are substitutes. What hap- Working with Graphs and Charts ᮣ Demand is inelastic when quantity demanded pens to the demand for margarine as the price of butter rises? changes by a smaller percentage than price. 2. 1. an increase in demand, or a rightward ᮣ Explain what happens to the demand curve shift in the demand curve. Elasticity of demand is affected by available substitutes, whether the good is a luxury or for apples as a consequence of each of the 2. a decrease in demand, or a leftward following. necessity, percentage of income spent on the a. shift in the demand curve. good, and time. More people begin to prefer apples to 3. a movement along a demand curve, or oranges. b. a decrease in quantity demanded. The price of peaches rises (peaches are a 4. (a) elastic; (b) unit-elastic; (c) inelastic. substitute for apples). c. People’s income rises (apples are a normal good). Solving Economic Problems 1. It is better to buy stock in a company 108 Chapter 4 Demand that produces a normal good. If income is expected to rise, then the demand for a normal good will rise. It is better to buy stock in a company that you expect will have more sales than in one that you expect will have fewer or the same sales (which would be the case with an infe- rior good or a neutral good, respec- tively).

108 Chapter 4 Demand Economics ATE_Ch04.qxd 1/4/06 10:44 AM Page 109

3. “Sellers always prefer higher to lower prices.”Do 1. What does Exhibit 4-7(a) represent? you agree or disagree? Explain your answer. 2. What does Exhibit 4-7(b) represent? 4. In each of the following, identify whether the 3. What does Exhibit 4-7(c) represent? demand is elastic, inelastic, or unit-elastic. a. The price of apples rises 10 percent as the EXH IBIT quantity demanded of apples falls 20 4-8 percent. b. The price of cars falls 5 percent as the quan- (a) PTRDemand is . tity demanded of cars rises 10 percent. c. The price of computers falls 10 percent as the quantity demanded of computers rises (b) PTRDemand is . 10 percent. 5. State whether total revenue rises or falls in each of the following situations. (c) PTRDemand is . a. Demand is elastic and price increases. b. Demand is inelastic and price decreases. P = Price TR = Total revenue c. Demand is elastic and price decreases. d. Demand is inelastic and price increases.

Doing the Math 4. In Exhibit 4-8, a downward-pointing arrow (↓) means a decrease, an upward-pointing arrow Do the calculations necessary to solve the following (↑) means an increase, and a bar (—) over a problems. variable means the variable remains constant 1. If the percentage change in price is 12 percent (unchanged). Fill in the blanks for parts (a) and the percentage change in quantity through (c). demanded is 7 percent, what is the elasticity of demand equal to? Solving Economic Problems 2. The price falls from $10 to $9.50, and the quan- Use your thinking skills and the information you tity demanded rises from 100 units to 110 units. learned in this chapter to find a solution to the fol- What does total revenue equal at the lower price? lowing problem. Working with Graphs 1. Application. Income in the economy is expected to grow over the next few years. You and Charts are thinking about buying stock in a company. Use Exhibit 4-7 to answer questions 1 through 3. Is it better to buy stock in a company that pro- ?duces a normal, inferior, or neutral good ؍ ؍ (P Price and Qd Quantity demanded) Explain your answer. EXH IBIT 4-7

A P B D2 D1 D D D 1 2 Go to www.emcp.net/economics and choose Economics: 0 Qd New Ways of Thinking, Chapter 4, if you need more help in (a) (b) (c) preparing for the chapter test.

Chapter 4 Demand 109

Chapter 4 Demand 109