Chapter 4 Demand Lesson 1 Part 2 PDF

Chapter 4 Demand Lesson 1 What is Demand? Part 2  The Law of Demand MAIN Idea There is an inverse relationship between the price of an item and the quantity demanded. Economics & You When you go shopping, do you try to catch sale days? Read on to find out how an eco...

Chapter 4 Demand Lesson 1 What is Demand? Part 2  The Law of Demand MAIN Idea There is an inverse relationship between the price of an item and the quantity demanded. Economics & You When you go shopping, do you try to catch sale days? Read on to find out how an economic “law” describes your behavior.  The prices and quantities in Figure 4.1 point out a feature of demand: for practically every good or service that we might buy, higher prices are associated with smaller amounts demanded. Conversely, lower prices are associated with larger amounts demanded.  The Law of Demand This is known as the Law of Demand, which states that the quantity demanded varies inversely with its price. When the price of something goes up, the quantity demanded goes down. Likewise, when the price goes down, quantity demanded goes up.  Why We Call It a “Law” Expressing something as a “law” may seem like a strong statement for a social science like economics to make, but there are two reasons why economists prefer to do so.  Why We Call It a “Law” First, the inverse relationship between price and quantity demanded is something that we find in study after study, with people almost always stating that they would buy more of an item if its price goes down, and less if the price goes up.  Why We Call It a “Law” Second, common sense and simple observation are consistent with the Law of Demand. This is how people behave in everyday life— they normally buy more of a product at lower prices than they do at higher ones. All we have to do is to note the increased purchases at the mall whenever there is a sale. This is why economics is a social science: because it is the study of the way we behave when things around us change.  The Market Demand Curve So far we have discussed a particular individual’s demand for a product. Sometimes, however, we are more concerned with the market demand curve, the demand curve that shows the quantities demanded by everyone who is interested in purchasing the product. Figure 4.2 shows the market demand curve D for Mike and his friend Julia, the only two people whom (for simplicity) we assume to be willing and able to purchase CDs.  The Market Demand Curve To get the market demand curve, all we do is add together the number of CDs that Mike and Julia would purchase at every possible price. Then, we simply plot the prices and quantities on a separate graph. To illustrate, point a in Figure 4.2 represents the three CDs that Mike would purchase at $15, plus the three that Julia would buy at the same price. Likewise, point b represents the quantity of CDs that both would purchase at $10.  Reading Check Explaining How does the market demand curve reflect the Law of Demand?  Demand and Marginal Utility Utility MAIN Idea As we buy more of an item, we get less satisfaction from each additional purchase. Economics & You When you buy clothes, why do you prefer a variety of colors and styles to identical items? Read to see how this relates to marginal utility.  Utility Economists use the term utility to describe the amount of usefulness or satisfaction that someone gets from the use of a product. Marginal utility—the extra usefulness or additional satisfaction a person gets from acquiring or using one more unit of a product— It is an important extension of this concept because it explains so much about demand.  Diminishing marginal utility The reason we buy something in the first place is because we feel that the product is useful and will give satisfaction. However, as we use more and more of a product, we encounter diminishing marginal utility, the principle which states that the extra satisfaction we get from using additional quantities of the product begins to decline.  Diminishing marginal utility Because of our diminishing satisfaction, we usually are not willing to pay as much for the second, third, fourth, and so on, as we did the first unit. This is why our demand curve is downward-sloping, and this is why Mike and Julia won’t pay as much for the second CD as they did for the first.  Diminishing satisfaction happens to all of us at some time. For example, when you buy a drink because you are thirsty, you get the most satisfaction from the first purchase. Since you are now less thirsty, you get less satisfaction from the second purchase, and even less from the next, so you are not willing to pay as much for the second and third purchases.  Reading Check Describing How does the principle of diminishing marginal utility explain the price we pay for another unit of a good or service? Because consumers derive less satisfaction from consuming additional units of a good, they will only be willing to buy more of a particular good if the good's price decreases. In this way, the law of diminishing marginal utility helps explain the law of demand.