Transcript or demand

Who are the two main actors in our economy?
Consumers – Buy stuff
Producers – Make stuff
Now we are going to discuss Supply and Demand.
This concept is the essence of our economic system
– CAPITALI$M.
Consumers – Create demand
Producers – Create supply
Understanding Demand
• What is the law of demand?
• How do the substitution effect and income effect influence
decisions?
• What is a demand schedule?
• What is a demand curve?
D
S
DRAW THIS
IN YOUR
NOTES
$
Increasing
amounts
Q
Increasing amounts
If you get a big raise,
and you’re a good
American, what
would you do?
Your store is selling a
sweatshirt and it appears in
a very popular movie. What
do you think will happen to
demand?
If you own a company and many companies are
making a similar item so a consumer doesn’t have
to buy your product. What could you do to
increase interest (or demand) for your product?
Nature of Demand
Demand – In economics it is the amount of a
good or service that a consumer is willing and
able to buy at various possible prices during a
given time period.
Quantity demanded - In economics it is the
amount of a good or service that a consumer is
willing and able to buy at each particular price
during a given time period.
What Is the Law of Demand?
DONT COPY THIS DOWN!!!
The law of demand states that an increase in a
good’s price causes a decrease in the quantity
demanded and that a decrease in price causes
an increase in the quantity demanded, if price
is the only determining factor.
What Is the Law of Demand?
Simplify it:
The law of demand states that consumers
buy more of a good when its price decreases and
less when its price increases.
Simplify it even more:
P
D
P
D
Law of Demand
3 economic concepts that can help explain the inverse effect
that changes in price have on the quantity demanded.
P
D
P
D
(Don’t write these down now we will cover each)
Income Effect
Substitution Effect
Diminishing Marginal Utility
What Is the Law of Demand?
The law of demand states that consumers buy more
of a good when its price decreases and less
when its price increases.
• The law of demand is the result of three
separate behavior patterns that overlap, the
substitution effect , the income effect, and
diminishing marginal utility.
• These three effects describe different ways that
a consumer can change his or her spending
patterns for other goods.
The Substitution Effect
The substitution effect occurs when
consumers react to an increase in a
good’s price by consuming less of that
good and more of other goods.
Substitution Effect
If the price of something you like goes up you
change to a lower priced substitute.
Fish
Chicken
$10.00 a pound – What
are some alternatives?
Substitution Effect
If the price of something you like goes up you
change to a lower priced substitute.
Chicken
Noodle
Soup
Late 1970s popular – 1982 highest – late 1980s
less popular – 1990 store brands
Income Effect
Purchasing power
The amount of an item that a
dollar will buy
How can your purchasing power increase?
You get more money
The price of what you want comes down
Income Effect
Purchasing power
The amount of an item that a
dollar will buy
How can your purchasing power decrease?
You have less money
The price of what you want goes up
Diminishing Marginal Utility
(Diminishing means lessening or getting smaller)
Utility – the usefulness of a product, or the
amount of satisfaction that an individual receives
from consuming a product.
Simplify:
The more you consume or use a product you will
reach a point where you enjoy that product less
Diminishing Marginal Utility
A product’s overall utility typically increases as
more of the product is consumed.
But you will eventually reach a point when it
starts to diminish or lessen
Simplify:
The
Demand
Schedule
A
demand
schedule
is a table that lists the quantity of
a good a person will buy at each different price.
Demand Schedules
Individual Demand Schedule
Price of a
slice of
pizza
$.50
$1.00
$1.50
$2.00
$2.50
$3.00
Quantity demanded
per day
5
4
3
2
1
0
Market Demand Schedule
Price of a
slice of
pizza
$.50
$1.00
$1.50
$2.00
$2.50
$3.00
Quantity
demanded per
day
300
250
200
150
100
50
A market demand schedule is a table that lists the
quantity of a good all consumers in a market will buy
at each different price.
Demand Schedules
Individual Demand Schedule
Price of a
slice of
pizza
$.50
$1.00
$1.50
$2.00
$2.50
$3.00
Quantity demanded
per day
5
4
3
2
1
0
Market Demand Schedule
Price of a
slice of
pizza
$.50
$1.00
$1.50
$2.00
$2.50
$3.00
Quantity
demanded per
day
300
250
200
150
100
50
A Market Demand Schedule For
Car Stereos
Price Per Car Stereo
Quantity Demanded
$500
500
$400
1,000
+100%
$300
1,500
+50%
$200
2,500
+66%
$100
5,000
+100%
The
Demand Curve
• A demand curve is
• When reading a
demand curve,
assume all outside
factors, such as
income, are held
constant.
Market Demand Curve
Price per slice (in dollars)
a graphical
representation of a
demand schedule.
3.00
2.50
2.00
1.50
1.00
Demand
.50
0
0
50
100 150 200 250 300 350
Slices of pizza per day
DEMAND
PRICE
PRICE
DEMAND
Section 1 Assessment
1. The law of demand states that
(a) consumers will buy more when a price increases.
(b) price will not influence demand.
(c) consumers will buy less when a price decreases.
(d) consumers will buy more when a price decreases.
2. If the price of a good rises and income stays the same,
what is the effect on demand?
(a) the prices of other goods drop
(b) fewer goods are bought
(c) more goods are bought
(d) demand stays the same
Section 1 Assessment
1. The law of demand states that
(a) consumers will buy more when a price increases.
(b) price will not influence demand.
(c) consumers will buy less when a price decreases.
(d) consumers will buy more when a price decreases.
2. If the price of a good rises and income stays the same,
what is the effect on demand?
(a) the prices of other goods drop
(b) fewer goods are bought
(c) more goods are bought
(d) demand stays the same
Shifts of the Demand Curve
• What is the difference between a change in
quantity demanded and a shift in the demand
curve?
• What factors can cause shifts in the demand
curve?
• How does the change in the price of one good
affect the demand for a related good?
Shifts in Demand
• Ceteris paribus is a Latin phrase economists
use meaning “all other things held constant.”
• A demand curve is accurate only as long as the
ceteris paribus assumption is true.
• When the ceteris paribus assumption is
dropped, movement no longer occurs along the
demand curve. Rather, the entire demand curve
shifts.
Nature of Demand
Quantity demanded - In economics it is the
amount of a good or service that a consumer is
willing and able to buy at each particular price
during a given time period.
A
B
A move along
the curve is a
change in
Quantity
Demanded
Nature of Demand
Demand – In economics it is the amount of a
good or service that a consumer is willing and
able to buy at various possible prices during a
given time period.
When the entire
curve shifts this a
change in
demand.
DC2
DC3
DC1
Demand shifts on the Demand Curve
Increase in demand shifts right
0
Q
Demand shifts on the Demand Curve
Decrease in demand shifts left
0
Q
What Causes a Shift in Demand?
Several factors, besides price, can lead to a change in demand.
These are called the: “Non-price Determinants of Demand”
•Consumer tastes and preferences
•Prices of related goods
•Consumer expectations
•Income
•Market Size
The non-price determinants of demand:
Consumer Tastes and Preferences (Advertising)
Does it really matter is a truck is blue or red?
The non-price determinants of demand:
Prices of related goods
Substitute goods – margarine and butter. If butter
increases in price the demand for margarine will
increase as people switch to the lower priced
substitute
Complementary goods – goods that are commonly
used with each other.
Can you think of an example?
The non-price determinants of demand:
Consumer Expectations
If many people think they might lose their jobs the
overall demand in the economy will go down.
If many people think they will be getting the
chance for lots of overtime the overall demand in
the economy will go up.
If many people think the price of an item (say
houses) is going to up they will increase the overall
demand by purchasing more before the price
increase. What if something goes on sale
tomorrow?
The non-price determinants of demand:
Income
If you get a raise you will have more money to
spend.
If you lose your job your demand for all products
that are not ‘needs’ will have to go down.
Income Continued
The non-price determinants of demand:
Income (con’t.)
• Normal Goods-a good that consumers demand more of when
their incomes increase.
– Clothes
– DVD’s
• Inferior Goods-a good that consumers demand less of when
their incomes increase.
– Top Ramen
– Powdered milk
– Used books
The non-price determinants of demand:
Market size/Population changes
If there are a lot of people who need/want your
product then the demand will be high.
Again, the non-price determinants of demand:
• Consumer tastes and preferences
•Prices of related goods
•Substitute goods
•Complementary goods
•Consumer Expectations
•Income
•Normal goods
•Inferior goods
•Market Size
Section 2 Assessment
1. Which of the following does not cause a shift of an entire demand curve?
(a) a change in price
(b) a change in income
(c) a change in consumer expectations
(d) a change in the size of the population
2. Which of the following statements is accurate?
(a) When two goods are complementary, increased demand for one will
cause decreased demand for the other.
(b) When two goods are complementary, increased demand for one will
cause increased demand for the other.
(c) If two goods are substitutes, increased demand for one will cause
increased demand for the other.
(d) A drop in the price of one good will cause increased demand for its
substitute.
Section 2 Assessment
1. Which of the following does not cause a shift of an entire demand curve?
(a) a change in price
(b) a change in income
(c) a change in consumer expectations
(d) a change in the size of the population
2. Which of the following statements is accurate?
(a) When two goods are complementary, increased demand for one will
cause decreased demand for the other.
(b) When two goods are complementary, increased demand for one will
cause increased demand for the other.
(c) If two goods are substitutes, increased demand for one will cause
increased demand for the other.
(d) A drop in the price of one good will cause increased demand for its
substitute.
Section 2 Assessment
1. Which of the following does not cause a shift of an entire demand curve?
(a) a change in price
(b) a change in income
(c) a change in consumer expectations
(d) a change in the size of the population
2. Which of the following statements is accurate?
(a) When two goods are complementary, increased demand for one will
cause decreased demand for the other.
(b) When two goods are complementary, increased demand for one will
cause increased demand for the other.
(c) If two goods are substitutes, increased demand for one will cause
increased demand for the other.
(d) A drop in the price of one good will cause increased demand for its
substitute.
Whiteboard exercises
• Whiteboard Exercises:
• Bananas are found to cause cancer. What happens to the demand for
bananas?
• Shortage of steel, price of magnums increases, what happens to demand
for magnums?
• Gas prices will double next week, what happens to demand for gas this
week?
• Peanut Butter goes on sale. What happens to the demand for peanut
butter?
• What happens to demand for jelly?
• Small Pox hits, 25% population dies. What happens to demand for
caskets?
•
What happens to demand for all other goods?
Whiteboard exercises
• Whiteboard Exercises:
• Price of paint goes up. What happens to demand for paint?
• What happens to demand for paintbrushes?
• Joe wins the lotto, what happens to his demand for all normal
goods? What effect is taking place?
• What happens to his demand for inferior goods?
• Eating hot cheetos with cream cheese causes weight loss and
extends life expectancy. What happens to the demand for
cheetos?
• What happens to the demand for cream cheese? Why?
Whiteboard
exercises
Fill in the Blank/Short
Answer:
• Due to ________________you stop buying nail polish after the
120th bottle, even though the price is only $.25.
• Bart prices sky-rocket, so due to the __________________ you
start taking the ferry to work.
• You get a raise and buy a new car instead of a used car. This
is due to the ________________. A used car is then
considered a ___________ good.
• Mrs. Eugster gives you $1000. You buy more/less Ben and
Jerry’s ice-cream.
• Why does the law of demand only apply in a free market
economy?
• Are there goods that do not obey the law of demand?