Page 3 - Economics and Personal Finance
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Section 1  Understanding Demand





                Objectives                                          Guiding Question

                ■ Explain demand.                                   How does the law of demand affect the
                ■ Describe how the substitution                     quantity demanded?
                  effect and the income effect                      Copy this table and fill it in as you read.
                  influence decisions.                                                      Demand
                ■ Identify demand schedules.
                                                                             As the price of a good   As the price of a good
                ■ Interpret a demand curve using                                 goes up . . .       goes down . . .
                  demand schedules.                                         Quantity demanded goes
                                                            Law of demand
                                                                            down
                                                                                                People buy less of a
                                                            Substitution effect
                                                                                                substitute good
                                                                            consumers feel poorer,
                                                            income effect   so consumption of that
                                                                            good goes down



                                                    ◗ Economics and You If you have ever bought something,
                demand
                the desire to own something and     you can understand demand. Suppose you are shopping at the
                the ability to pay for it           local mall. After visiting many stores, you find a watch you really
                law of demand                       like. But the watch costs a little more than you want to pay.
                consumers will buy more of a        Otherwise, it is perfect. You decide that you just have to have it. If
                good when its price decreases       you want the watch and you can pay for it, you have demand for
                and less when its price increases
                                                    that good.

                                                    Principles in Action Price changes always affect the quantity
                        Reading Strategy
                        Text Structure              demanded. The Economics & You feature shows how a change in
                        Preview this section.       price serves as an incentive to buy something else instead.
                Notice the headings, features,      What is demand?
                and boldfaced words.
                                                    Demand has two parts. First, consumers must be willing to buy.
                                                    Then, they must have the ability to pay. Wanting something does
                                                    not create demand. Suppose you go to an auto show and see a
                                                    $50,000 sports car you like. You probably do not have $50,000
                                                    to pay for it. According to economists, you have not added to
                                                    demand. In the same way, you might have $50,000. But if you are
                                                    not willing to spend it on the sports car, demand is not affected.


                                                    What is the law of demand?
                                                    The law of demand is simple. It says that when the price of a
                                                    good goes up, the quantity demanded goes down. If the price goes
                                                    down, demand generally goes up. Producers are aware of this law.
                                                    They know that if their prices rise too high, consumers will stop
                                                    buying their goods and services.

                176  DemanD






           VA_EPF_Ch08_174-193.indd   176                                                                                6/13/10   6:15 PM
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