Transcript Demand

Demand
P
D
$5
$4
$3
$2
$1
0 10 20
35 55 80
Quantity Demanded
D
1.
Income Effect
•
•
2.
When things are expensive, money buys less
When things are cheap, money buys more
P1
P2
QD1 QD1
Substitution Effect
•
3.
When apples are expensive and their
substitutes (pears) are relatively cheap,
I buy fewer apples and more pears
Diminishing Marginal Utility
•
•
Each additional unit of an item purchased gives less marginal utility
(happy points) than the previous unit. Therefore, the only way I will buy
more is if the price is lower.
Ex. When I’m hungry, I typically will buy 2 breakfast tacos. The
reason I don’t buy a third taco is because the marginal utility of the
third taco is less than the price of the taco. But, if the price of the taco
is less than the marginal utility of the taco, then I will buy the third taco
Demand Can Increase or Decrease
“Change in Demand (curve)” [“TIMER]
Individual Demand
P Qd
$5
10
4
20
3
35
2
55
1
80
6
5
Price (per bushel)
Demand Schedule
P
D1 D2
D3
Increase in Demand
4
3
2
1
0
Decrease in Demand
2
4
6
8
10
12
14
16
18 Q
Quantity Demanded (bushels per week)
Demand is a whole bunch of QDs strung together.
Disutility [or negative utility]?
I ate one hamburger, and it tasted
great. The next two tasted okay. I
wish I hadn’t have eaten the 5th. I
can’t finish the 6th.
.
About this time
there is toilet trauma.
Or,
“inconvenienced
afterward”.
DIMINISHING MARGINAL UTILITY
Utility (satisfaction) decreases as more of the same product
is consumed.
5 Days Without Liquid
Too Much Relief?
I’ll pay you $1 to
drink another glass.
NS 1-10
1. (Demand/Supply) is identified as quantities consumers are willing
and able to buy at various prices during a given time period.
2. The law of demand says that price & QD are (directly/inversely) related.
3. The most important variable influencing decisions to produce and
purchase goods is (technique/price). (Price/income) is not held
constant when moving along a stable demand curve.
4. Income effect-the increase or decrease in purchasing power
brought on by a change in (taste/market size/price).
5. Substitution effect – tendency to substitute a (higher/lower)
-priced product for a more expensive product.
6. Diminishing marginal utility – utility, or (determination/anger/satisfation)
decreases as more of the same product [Snickers] is consumed.
7. The law of demand refers to a (movement/shift) along a demand curve.
8. Substituting chicken as the price of steak goes up is an example
of the (income/substitution) effect.
9. When the price of caviar falls, the purchasing power of our money income
rises & thus permits us to purchase more caviar. This is the (income/substitution) effect.
10. The demand (curve/schedule) is a numerical tabulation showing QD at each price.
The demand (curve/schedule) is a graphical representation of the law of demand.
Elastic or Inelastic
(Total Receipts Test)
$2
$1
Elastic
Inelastic
20
30
Total Receipts Test
20 x $2 = $40.00
30 x $1 = $30.00
40
50
Total Receipts Test
20 x $2 = $40
50 x $1 = $50
11. Elasticity of D – the way price affects QD.
12. Elastic - QD that is very responsive to price.
13. Inelastic - a chg in price has little impact on QD.
Elastic (flexible) Demand
1. Substitutes (butter)
2. Luxury (mink coat)
3. Expensive (car)
4. Has durability (refrigerator)
5. Lasts a long time (gas-guzzling car)
Inelastic (inflexible) Demand
1. No substitutes (milk)
2. Necessity (insulin)
3. Inexpensive (safety pin)
4. No durability (pencil)
5. Lasts only a short time (bread)
Elastic Demand For Cassette Tapes
“TR” Test
$2.50x100,000=$250,000
$1.50x600,000=$900,000
+$650,000
D
-$1
.
D
“TR” Test
$2 = $30 bil.
$1 = $20 bil.
-$10 bil.
-$1
+25% QD
Elastic/Inelastic Demand
Think of “responsiveness” as “flatness”.
.
Elasticity
of
Soft Drinks
Inelasticity of Milk
Estimating the Elasticity of Demand
3 Key Questions:
1. Subs? 2. Necessity? 3. Expensive?
Change in
“Demand”
[curve]
[“TIMER”]
Consumers change
their minds at each
and every price.
Based on good or bad
publicity about OJ.
.
16 oz. Orange juice = 220 calories
16 oz. Tomato juice = 78 calories
Quantity Demanded vs. Demand
Quantity Demanded [QD] is triggered by a price change.
QD is the quantity of a good/service that people will
purchase at a specific price at a given time.
Demand [D] is triggered by “TIMER” [non-price].
A schedule of the total quantities of a good or service
that purchasers will buy at different prices at a
given time.
Demand is a bunch of QD’s strung together.
“Demand Shifters” [TIMER]
1.
2.
3.
4.
Taste [direct]
Income [normal-direct] [inferior-inverse]
Market Size [number of consumers-direct]
Expectations [of consumers about future *price-direct,
about future availability-inverse, or about future income–direct.
5. Related Good *Prices [substitutes-direct] [complements-inverse]
D1 D2
D3 D1 D2
P
Butter
D1
D2
P
P2
Complement
[inverse]
P
P1
D
QD1 QD2
Bread
Substitute
[Direct]
Bagels
Change in “D” [curve]
1. Non price change [“TIMER”]
2. Whole “D” curve shifts
QD3 QD1 QD2
[There is a change in “QD” but it is
not caused by a change in “price.”
[QD-”single price”; D-”all prices”]
D1 D2
P
D3
QD3 QD1 QD2
Bell Bottoms
Mini
Hip Huggers
Skirts Platforms
1. An “Increase in Taste” shifts the D curve right
a. The Nehru jacket came & went in 6 months.
b. Jordache Jean demand created by TV
c. Leisure suits and bell bottoms.
d. Technological change may cause
consumer taste to change [slide rules].
Jordache
Normal Good – goods whose demand
varies directly with income.
Inferior Good – goods whose demand
varies inversely with income.
Butter, filet, steel-belts, new clothing & new cars
v.
Margarine, spam, used tires, old clothing & old cars
Demand
For
Income
Spam
Demand
For
Steak
The Impact of a Change in Income
As the recession worsened in 2010, spam companies put in two shifts
of workers cranking out Spam 7 days a week.
A 12-ounce can that doesn’t require refrigeration and can last for years cost only
$2.40. At least families are putting something on the table resembling meat.
• Higher income decreases the • Higher income increases the
demand for normal goods
demand for inferior goods
More demand
for both normal
and inferior
P
goods.
D1 D2
QD1 QD2
can increase/decrease from
economic decisions, advertising, and
government political decisions (China).
Ex: The large “baby boom” of 1946-64
increased the demand for baby supplies.
An increase in life expectancy increased
demand for for medical care, retirement
communities, and nursing homes.
Increase in # of consumers
If the iPad is expected to increase
in price from $499 to $799.
D1 D2
iPad
P
QD1 QD2
Let’s say that we are coming out of recession & consumers
feel secure about their jobs. [Positive future income]
D1 D2
P
QD1 QD2
Let’s say that we are going into a recession and consumers
don’t feel secure about their jobs. [Negative future income]
D1
D2
P
QD2QD1
car
Consumer expectations about future product
price, future availability, & future income.
Ex: When the Korean War broke out in the
summer of 1950, new car sales boomed (also
washers and refrigerators) out of the
expectation of a production stoppage like
during WWII. None occurred but it was the
expectation that affected new car demand.
D1 D2
D
D1
P1
P
D2
P
P2
Complement
[Inverse]
Gangsta Grills
QD1 QD2
Chrysler 300s
MV X PQ
Substitute
[Direct]
Toyotas
No, I want to
learn econ.
No demand
There are three types of goods.
for beer
1. Independent goods – price change
of one has no impact on the other. Beer BL Student
Ex: fishhooks and pantyhose or salt and shoelaces
2. Substitute goods(“competing goods”)
- price change of one affects the
demand of the other directly.
Ex:
7Up & Coke or Miller & Bud
D1
D2
QD2 QD1
3. Complementary (“go together”)
- price change of one affects the
demand for the other inversely.
Peanut butter & jelly
D1 D2
Camera
QD1 QD2
Film
Cereal & milk Coffee & donuts
[Increase in price of one; increase in “D” of the other]
D1 D2
D
P
P2
QD
QD
P1
QD2
Price
Of
7UP
QD1
Demand
for
Dr Pepper
[Decrease in price of one; increase in the “D” for the other]
P1
P2
QD1 QD2
D1 D2
Boat Prices
P
QD
QD
Gasoline Demand
No change
in price
I’m making more
money without
dropping my prices.
They are so cheap that
even dogs are buying boats
P
?
Ok, so I’m
only 17.
This is how
cigarettes
age you.
+D1. The price of cigarettes are expected
+D2.
+D3.
.
+D 4.
-D 5.
to increase sharply in the future.
Substantial increase in market size
affect the demand for cancer sticks.
A cure for lung cancer impacts the
demand (taste) for cancer sticks.
Cigar prices increase which affect the
demand for cigarettes(a substitute).
The surgeon general has just warned that
smoking causes cancer, severe facial
wrinkles, ashtray breath, ashtray smelling
clothes & hair, chronic cough, yellow teeth,
impotency, and ugly warts all over the lips.
Substitute/Complement Relationships
D
“Substitutes”
P1
Price
Price
P2
P
D1
D2
Decreases Decreases
QD2 QD1
QD1 QD2
Hot Dogs [DIRECT] Hamburgers
.
D
P1
“Complements”
Demand
Price
Decreases Increases P
D1
D2
P2
QD1 QD2
Pancakes
[inverse]
QD1
QD2
Syrup
Increase in “QD”
Decrease in “QD”
[caused by a “decrease in price”]
[caused by an “increase in price”]
D
D
1. Price change
2. Movement
3. Point to point
P1
P2
[“Snap
QD1 QD2
D1
P
D2
shot of 1 pt in time]
P2
P1
QD2 QD1
Change in “D” [“TIMER”]
1. Non-price
2. Whole curve
3. Shift
D1
D2
P
[“Time passes”]
“Increase in D”
What could cause an “increase in Demand?”
1. Increase in taste
2 .Increase in income [normal good]
3. Decrease in income [inferior good]
4. Increase in market size [# of consumers]
“Decrease in D”
5. Expectations of a shortage
6. Expectations of a price increase
7. Expectations of positive future income
8. Incr in price of a substitute for product “X”
9. Decr in price of a complement of product “X”
QD & D Practice Quiz [Snickers]
1. What would cause an “increase in QD” for Snickers?
a. increase in number of consumers
c. decrease in income
b. decrease in the price of Snickers
d. increase in the price of Snickers
2. What would cause an “increase in D” for Snickers?
a. increase in taste for Snickers
c. decrease in income
b. decrease in the price of Snickers
d. increase in the price of Snickers
3. What would cause a “decrease in QD” for Snickers?
a. increase in taste for Snickers
b. Increase in # of consumers
c. decrease in the price of Snickers
d. increase in the price of Snickers
4. What would cause a “decrease in D” for Snickers?
a. decrease in income
b. increase in taste
c. increase in the price of Snickers
d. decrease in the price of Snickers
5. An “increase in the price of Butterfingers would
cause a(n) (increase/decrease) in (QD/D) for Snickers?
NS 1-10
1. (Demand/Supply) is identified as quantities consumers are willing
and able to buy at various prices during a given time period.
2. The law of demand says that price & QD are (directly/inversely) related.
3. The most important variable influencing decisions to produce and
purchase goods is (technique/price). (Price/income) is not held
constant when moving along a stable demand curve.
4. Income effect-the increase or decrease in purchasing power
brought on by a change in (taste/market size/price).
5. Substitution effect – tendency to substitute a (higher/lower)
-priced product for a more expensive product.
6. Diminishing marginal utility – utility, or (determination/anger/satisfation)
decreases as more of the same product [Snickers] is consumed.
7. The law of demand refers to a (movement/shift) along a demand curve.
8. Substituting chicken as the price of steak goes up is an example
of the (income/substitution) effect.
9. When the price of caviar falls, the purchasing power of our money income
rises & thus permits us to purchase more caviar. This is the (income/substitution) effect.
10. The demand (curve/schedule) is a numerical tabulation showing QD at each price.
The demand (curve/schedule) is a graphical representation of the law of demand.
NS 11 - 20
11. Elasticity of demand–the way price affects (attitude/quantity/market size).
12. (Inelastic/Elastic) demand – demand that is very responsive to price.
[A small price increase causes a large decrease in quantity demanded.]
13. (Inelastic/Elastic) demand-when a change in price has little impact on QD.
14. The 3-item test for elastic demand are substitutes, luxury items,
15.
16.
17.
18.
19.
and (inexpensive/expensive) items.
The 3-item test for inelastic demand are no substitutes,
necessities, and (inexpensive/expensive) items.
Expensive cars have (inelastic/elastic) demand.
Pepsi Cola has (inelastic/elastic) demand.
Insulin has (inelastic/elastic) demand.
The elastic demand curve is more (horizontal/vertical). [much change]
20. The inelastic demand curve is more (horizontal/vertical). [not much change]
NS 21-26
21. With the invention of the calculator, the demand curve for the
slide rule (increased/decreased).
22. When Forest Gump went to China & the U.S. followed by
opening up relations with China, the demand curve for
Coke (increased/decreased).
23. An increase in income would (increase/decrease) the demand
for used clothing. [inferior good]
24. A decrease in income would (increase/decrease)
the demand for lobster. [normal good]
25. A decrease in the price of product X [lumber] will (incr/decr)
the demand for the complementary product Y. [nails]
26. After Brooke Shields[15] did her national TV ads[“Nothing comes
between me and my Calvin’s”], the “D” curve moved (right/left).
$45
NS 27-38
27. An increase in the price of Pepsi causes the
demand curve for Coke to move to the (right/left).
28. If there is a sale on shirts, the demand curve for ties will move
to the (right/left).
29. If a man’s workplace is about to close down, his demand
curve for major purchases would move to the (right/left).
30. If a cure for lung cancer were found, the demand curve for
cigarettes would move to the (right/left).
31. If the price of pancakes decreases, the demand
for syrup, a complement, will (increase/decrease).
32. If the price of butter decreases, the demand for margarine will (incr/decr).
33. A “change in QD” is caused by (price change/TIMER) [a “movement”]
34. A “change in D” is caused by (price change/TIMER) [a “shift”]
e
[caused by “TIMER”]
P
D1
D2
QD1 QD2
Quantity
“D” is a whole bunch of QD’s strung together.