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AGENDA Thurs 2/2 & Fri 2/3 •Review Chapter 2 Quiz •QOD #9: What’s in a headline? •Review HW •Demand Shifts •Reading the Headlines •HW: Looking for S & D Project Pg 76 #1-6; pg 84 #2-6 • Study for Demand Quiz • • Identify the service/product most closely associated with each headline. •Describe what you think will happen to demand of that item based on the headline. Facebook files for $5 billion IPO Sony sees $2.9 billion loss, new CEO warns of pain Texas oysters may soon be back on restaurant menus Consumer watchdog recalls HP fax machines Muhammad Ali trainer Dundee dies at 90 McDonald’s confirms that it’s no longer using ‘pink slime’ chemical in hamburgers Sugar Should Be Regulated As Toxin, Researchers Say A shift to the right indicates that demand has increased. buyers are willing and able to purchase more of a good at all price points A shift to the left indicates that demand has decreased. buyers are willing and able to purchase less of a good at all price points Demand then Demand Curve shifts to the right Demand then Demand Curve shifts to the left Income Tastes & Preferences (Consumer Attitudes) Number of Buyers Price of Related Goods Price Expectation Income – as their income rises, people can buy more of any particular good Having the ABILITY does NOT always mean having the WILLINGNESS to buy more. normal good – demand • • (CDs, luxury cars) inferior good – demand • • as income (hot dogs, used cars) as income and vice versa Tastes & Preferences (Consumer attitudes)– a change in preferences shifts the demand curve Number of buyers – more buyers = higher demand as more people move into an area rent prices go up Price of Related Goods – two types of related goods substitutes – the demand for one good moves in the same direction as the price of the other (as P of coffee increases, the D of tea as a substitute will go up - explain) complements – goods that are consumed together (as P of gas goes up, D of SUVs go down) Price Expectations - if consumers expect the price to increase, they try to buy more now before the price rises. A change in demand refers to a shift in the demand curve. A change in income, preferences, price of related goods, number of buyers, or price expectation can change demand. A change in quantity demanded refers to a movement along a demand curve. Only price of the good can directly cause a change in the quantity demanded of a good. if buyers' income changed? if buyers' get tired of chocolate chip cookies? if the class added more people? if everyone had $5 extra in their pockets? if Tiger Woods added his endorsement to chocolate chip cookies? if buyers thought cookies enhanced popularity? if fudge brownies became very expensive? Elasticity of demand is the relationship between the percentage change in quantity demanded and the percentage change in price expressed as a ratio Elasticity of = Demand Percentage of change in QD Percentage change in Price Elastic demand is when the quantity demanded changes by a greater % than the % change in price. Inelastic demand is when the quantity demanded changes by a smaller % than the % change in price. Unit elastic is when the quantity demanded changes by the same % as the % change in price. elastic demand – when QD change is greater than the percentage change in price ( QD 15% > P 10% ) ( QD 15% > P 10% ) inelastic demand – when QD change is less than the percentage change in price ( QD 5% < P 10% ) ( QD 5% < P 10% ) unit-elastic demand – when QD changes by the same percentage as price ( QD 10% = P 10% ) ( QD 10% = P 10% ) Number of substitutes the demand for goods with many substitutes likely to elastic ex: the demand for goods with very few or no substitutes is likely to be inelastic ex: Luxuries v. Necessities luxuries are goods that people feel they do not need to survive demand is elastic necessities are good that people feel they need to survive demand is more likely to be inelastic Percentage of income spent on the Good elastic – buyers are more responsive to price changes in goods when they spend a larger percentage of their income inelastic – demand for goods on which consumers spend a small percentage of income Time as time passes buyers have greater opportunities to change quantity demanded in response to price change Number of Total Revenue = Price of a Good X Goods Sold Case 1: Elastic Demand and Price Rise if demand is elastic, a price rise will lead to a decline in total revenue ex: Case 2: Elastic Demand and Price Demand elastic demand + price decline = Total Revenue will increase Case 3: Inelastic Demand and Price Rise Inelastic demand + price decline = total revenue ex: any change in price will be equal to, but move in the opposite direction of, the change in quantity demanded there will be no change in total revenue Case 4: Inelastic Demand and Price Decline Inelastic demand + price decline = total revenue ex: any change in price will be equal to, but move in opposite direction of, the change in quantity demanded there will be no change in total revenue ex: Looking for S & D Project pg. 76 #1-6; pg 84 #2-6 Study for Demand Quiz Arnold, R (2001). Economics in our times, 2nd edition. Chicago, IL: National Textbook Company .