Transcript understanding demand - Bibb County Schools

UNDERSTANDING DEMAND
• This section will be one of the easiest to
understand.
– You live out this section nearly every day.
• SUMMARY OF SECTION –
– This section explains how when you have more
you want (Demand) more, and…
– How you want (Demand) more when prices
drop, and
– How your income affect your choices (i.e. I have
$5 I buy a value meal. I have $30 I go to
Cheddars).
UNDERSTANDING DEMAND
• According to the LAW OF DEMAND people
buy less of a good when the price rises.
• Demand schedules & demand curves
illustrates how people & markets react to
different prices.
• SUMMARY OF SECTION –this section
explains how people increase or decrease
their wants and it uses graphs, charts, &
tables to illustrate how people increase or
decrease their wants.
UNDERSTANDING DEMAND
• Demand – the desire to own something
and have the ability to pay for it.
• Law of Demand – when a good’s price is
lower consumers will buy more of it.
LAW OF DEMAND
PRICE
GOES
DOWN
Price
Goes Up
DEMAND
GOES UP
Quantity
Demand
Goes Down
INCOME EFFECT
The change in consumption resulting from a change
in real income.
PRICE OF “A” INCREASES
Consumption of
“A” goes down
Consumption of
other goods go
down or remain the
same
Understanding the income effect.
When the price of “A”
increase real Income
(purchasing power)
decreases
Resulting in the consumer’s
ability to buy fewer of the
other goods
INCOME EFFECT
PRICE OF “A” DECREASES
Consumption of
“A” goes UP
Consumption of
other goods go
UP
Understanding the income effect.
When the price of “A”
Decrease real Income
(purchasing power)
increases
Resulting in the consumer’s
ability to more of the other
goods
SUBSTITUTION EFFECT
When consumers react to an increase in a good’s price by
consuming less of that good and more of other goods.
PRICE OF “A” INCREASES
Consumption of
“A” goes down
Consumption of
other goods go UP
SUBSTITUTION EFFECT
When consumers react to an increase in a good’s price by
consuming less of that good and more of other goods.
PRICE OF “A” DECREASES
Consumption of
“A” goes up
Consumption of
other goods go
DOWN
THE PRICE OF A CASE OF COCA
COLA GOES UP TO $5.99 / CASE
PEOPLE WILL SUBSTITUTE
FOR A CHEAPER COLA
• For example
let’s view a
demand
schedule for a
“Snicker’s
candy bar.
Demand Schedule
Price of
Snicker’s
.50
Quantity
demanded
10
.75
7
1.00
5
1.25
4
1.50
2
2.00
0
Demand Curve for
Snicker’s Bar
2.00
1.75
1.50
1.25
1.00
0.75
0
1
2
4
5
7
10
READING A DEMAND CURVE
Demand Curves slope down from left to right
The higher the price the lower the demand
2.00
1.75
1.50
1.25
1.00
0.75
0
1
2
4
5
7
10
READING A DEMAND CURVE
SHIFTS OF THE DEMAND
CURVE
• In this section we will understand the
difference between a change in quantity
demanded and a SHIFT IN QUANTITY
demanded.
• A Shift involves factors other than price.
• For example
let’s view a
demand
schedule for a
“Snicker’s
candy bar.
Demand Schedule
Price of
Snicker’s
.50
Quantity
demanded
10
.75
7
1.00
5
1.25
4
1.50
2
2.00
0
Demand Curve for
Snicker’s Bar
2.00
1.75
1.50
1.25
1.00
0.75
0.50
0
1
2
4
5
7
10
• “BREAKING
NEWS REPORT!”
A new medical
discovery has
found that eating
one or two
Snicker’s candy
bar per week can
prevent wrinkles
in women or
reverse the
wrinkling process!
Demand Schedule
Price of
Snicker’s
1.00
Quantity
demanded
50
1.25
45
1.50
30
1.75
25
2.00
20
2.50
10
Demand Curve for
Snicker’s Bar
2.50
2.00
1.75
1.50
1.25
1.00
0
10
20
25
30
45
50
Understanding Through Relating
Terms & Sections
• Demand Shifts - A Shift involves factors
other than price.
– Ceteris paribus – “all other things held
constant.” – in the previous section the
demand schedule only took into account
prices.
• More factors than just price cause a shift in
quantities demanded (key).
• A demand curve is accurate only as long as the
“ceteris paribus” assumption is true.
Understanding Through Relating
Terms & Sections
• Factors that Cause Shifts –
– Income – a consumer’s income affect his or
her demand for most goods.
• Normal goods – goods that consumers demand
more of when their income is up.
– A reduction of income almost always lead to a
reduction in demand (income effect).
– A reduction in income would cause a decrease in
demand and a demand shift to the left
– A decrease in income would cause the demand of
normal goods to go down and inferior goods to go up.
• Factors that Cause Shifts –
– Income – a consumer’s income affect his or
her demand for most goods.
• Normal goods – goods that consumers demand
more of when their income is up.
– A decrease in income would cause the demand of
normal goods to go down and inferior goods to go up.
• Inferior Goods – inferior goods are goods that
you would buy in smaller quantities or not at all.
– Even though you may buy a small quantity the
demand for Inferior goods go up because you are now
purchasing more of a product that you would not
normally purchase (substitution effect).
• Factors that Cause Shifts –
– Consumer Expectation – Our expectations
about the future affect our demand for
certain goods.
• Would tax free weekend in August cause a
demand shift to the left or right in July?
– The shift would be to the left because people will wait
until the tax free weekend to satisfy their demands.
• Skinny leg jeans will double in price starting in
April. Will the demand for skinny leg jeans shift
to the left or right in March?
– The shift will be to the right because the immediate
demand goes up in order to beat the price increase.
– Self interest becomes the incentive to buy.
• Factors that Cause Shifts –
– Population – The size of the population
affect the demand for products.
• Example – a new factory opens up in Macon
employing 1000 local workers but relocating
2000 employees to Macon.
– Which way will the demand for goods in Macon shift?
– Name some of the things that will cause an increase in
demand.
– Consumer tastes & Advertising –
• Once advertising makes a product popular how
is the demand for that product affected?
• Factors that Cause Shifts –
– Price of Related Goods – the demand curve
for one good can affect positively or
negatively the demand curve for another.
• Complements are two goods bought and used
together.
– Computer, monitor, & printer – if the demand for
computers rise the demand shift for monitors &
printers go up.
– How will a rise in demand for laptops cause a demand
shift for monitors? Which way will the shift go?
• Substitutes are goods used in place of one
another.
LAW OF SUPPLY
PRICE
GOES
DOWN
Price
Goes Up
Quantity OF
SUPPLY
Goes
DOWN
Quantity Of
Supply Goes
Up
UNDERSTANDING SUPPLY
• Supply is the amount of goods available.
• Law of Supply – The higher the price the
larger the quantity produced.
• When do parents buy kids the most?
– Example –
• Bratz & WWF sell for $10.00 ea. from January to August
but the demand is low therefore producers make a small
quantity.
• For Christmas lots of children want Bratz & WWF.
Christmas is a hot buying season therefore both now
sell for $17.00 ea. Producers make more because the
profit motive is higher.
• Quantity Supplied describes how much
of a good is offered for sale at a specific
price.
– When the price of goods rise firms produce
more in order to earn more profit.
– The key to profit is that they utilize almost the
same labor & output cost.
– The rise in the price of goods causes new
firms to enter into the market.
– Firms changing their level of output and new
firms entering into the market combine to
create the Law of Supply.
– Bottom Line – The more money to be made
the higher the supply becomes.
• If a firm is making a profit an increase in
price will automatically bring an increase in
profit.
• A Supply Schedule shows the
relationship between a price increase of a
good and the quantity supplied.
– Variables are the factors that can change.
See Figure 5.2
– A supply schedule only deals with price. It
shows how the price affects the producer’s
output.
• A Supply Curve – is a graph of the data in
a supply schedule.
SUPPLY SCHEDULE
Price of
Snickers
.50
Snickers
supplied per
week
50
.75
100
1.00
150
2.00
200
2.50
300
SUPPLY CURVE
100
9
P
RI
C
E
8
7
6
5
4
3
2
0
50
75
100
150
200 250 300
350
• Elasticity of Supply measures the way
suppliers respond to a change in prices.
– If elasticity is greater than one supply is
considered ________
– If Elasticity is less than one supply is
considered ________
– If Elasticity is equal to one supply is said to be
___________.
• Elasticity of Supply and Time
– If a producer can change his production to
take advantage of a price increase the
supply is elastic. A Baker (cakes double)
– If a producer cannot change in a short
period of time the supply is inelastic. Hotel
rooms
COSTS OF PRODUCTION
• Why do you suppose that some
employers increase the work load on
its employees instead of hiring help?
• Labor & Output – how does the number
of workers affect production?
– Marginal Product of Labor – the change in
output from hiring one more worker –
• Why would an employer pay an employee
overtime instead of hiring another employee?
COSTS OF PRODUCTION
• Labor & Output – how does the number
of workers affect production?
– Marginal Product of Labor – the change in
output from hiring one more worker –
– Recall THINKING AT THE MARGIN!!!
• Deciding whether to do or add one unit of
resource.
• The marginal product of labor measures the
change of output at the margin.
• Increasing Marginal Returns –a level of
production in which the marginal
product of labor (what is being made)
increases as the number of workers
increase.
– More workers equal greater production
– More workers can specialize thereby
creating EFFICIENCY.
• Diminishing Marginal Returns - a level
of production in which the marginal
product of labor decreases as the
number of workers increase.
– More workers equals less production.
Production Costs
• Fixed costs – a cost that does not
change no matter how much goods are
produced.
• Variable Costs – costs that rise or fall
depending on the quantity produced.
• Total costs – the fixed costs and
variables costs added together find the
total cost.
• Marginal cost is the additional cost to
produce one more unit.