Transcript Lecture_Ch04 - Princeton High School

Explorations in Economics
Alan B. Krueger & David A. Anderson
Chapter 4: The Demand for Goods and Services
- Module 10: Determining Demand
- Module 11: Shifts of the Demand Curve
- Module 12: Elasticity of Demand
MODULE 10:
Determining Demand
KEY IDEA:
When the price of a good or service increases, consumers buy
less of it for two reasons: (1) they substitute the good with other
goods whose prices haven’t increased, and (2) their income will
buy less of the good at the higher price.
OBJECTIVES:
•To describe the law of demand and the role of the substitution
effect and the income effect.
•To explain what economists mean by “all else equal.”
•To show the relationship between a demand schedule and a
demand curve.
THE LAW OF DEMAND
Demand: for goods, resources, or
services
• Demand:
–
–
–
–
Willingness and ability to buy a good at a range of prices
Downward sloping
As price goes up quantity demanded goes down
As the price goes down quantity goes up.
Law of Demand: There is always an inverse relationship
between the price of a good and the quantity demanded.
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Chapter 4-Mods 10, 11 & 12
Law of Demand: Demand Curve
• Few consumers are willing and able to buy a good at
a high price.
• At lower prices there will be more consumers who
are willing and able to benefit from the good and
quantity demand increases.
• Downward sloping Demand Curve: showing the
inverse relationship between the good and quantity
demanded.
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Chapter 4-Mods 10, 11 & 12
THE LAW OF DEMAND
Substitution Effect
There are two distinct reasons why a consumer buys less of a
good after its price increases: the substitution effect and the
income effect.
The substitution effect arises when an increase in the price
of a good causes a consumer to switch away from that good
and toward other goods that do not experience a price
increase.
Likewise, a decrease in the price of a good causes consumers
to switch toward that good.
.
THE LAW OF DEMAND
Income Effect
There are two distinct reasons why a consumer buys less of a
good after its price increases: the substitution effect and the
income effect.
The income effect is the change in
consumption that occurs when a
price increase causes consumers to
feel poorer or when a price decrease
causes them to feel richer.
example of the price of groceries decreasing makes
consumers feel richer and they can buy more clothing or
fancy coffee
THE LAW OF DEMAND
THE LAW OF DEMAND AND THE
“ALL ELSE EQUAL” ASSUMPTION
Economists use the Latin term ceteris paribus,
meaning “all else equal,” to indicate that they
are looking only at a specified relationship, such
as the one between price and quantity
demanded.
In a science class, you hold other variables
constant.
Price changes lead to movement along the
curve, Ceteris Paribus
THE DEMAND SCHEDULE &
THE DEMAND CURVE
A demand schedule is a table that relates the quantity
demanded of a particular good to its price.
INDIVIDUAL DEMAND SCHEDULE
& THE DEMAND CURVE
A demand curve is a graphical representation of the demand
schedule for a good, showing the quantity demanded at each
price.
THE DEMAND SCHEDULE
& THE DEMAND CURVE
The market demand curve for a good is a graphical
representation of how the quantity demanded by ALL
consumers in the market varies with the price.
THE DEMAND SCHEDULE
& THE DEMAND CURVE
The market demand curve for a good is a graphical
representation of how the quantity demanded by ALL
consumers in the market varies with the price.
THE DEMAND SCHEDULE
& THE DEMAND CURVE
The market demand curve for a good is a graphical
representation of how the quantity demanded by all
consumers in the market varies with the price.
• https://www.youtube.com/watch?v=kUPm2tMCbGE
4/13/2016
Chapter 4-Mods 10, 11 & 12
Module 10 Review
What is…
A. Substitution effect?
B. Income effect?
C. Law of demand?
D. Market demand curve?
E. Demand schedule?
F. Demand curve?
G. Quantity demanded?
H. Ceteris paribus?
MODULE 11:
Shifts of the Demand Curve
KEY IDEA:
The demand curve for a good can shift due to changes in tastes
income, the prices of related goods, expectations about the
future, and the number of buyers in a market.
OBJECTIVES:
• To identify what shifts the demand curve to the left and
what shifts it to the right.
• To distinguish between the terms quantity demanded and
demand.
• To explain how goods are categorized as normal goods,
inferior goods, substitutes, and complements.
MOVEMENTS ALONG A
DEMAND CURVE
A movement along a demand curve caused by a price
change is called a change in the quantity demanded,
not to be confused with a change in demand.
SHIFTS OF THE
DEMAND CURVE
A shift of the
demand curve
represents a change
in the amount people
are willing and able
to buy at every price.
SHIFTS OF THE
DEMAND CURVE
SHIFTS OF THE
DEMAND CURVE
# 1 Taste & Preferences
All of the following shift the demand curve:
•
Tastes and preferences
•
–
Popularity, famous people. Advertising agencies
influence taste.
More popular demand shifts right
If more people demand a good, the price will increase.
A more popular good will increase the quantity
demanded at EVERY price which is a shift of the curve.
#2
Income
The amount of money people earn affects the amount they
are willing and able to spend. A rise in income means there
is more money to spend on consumption.
– Income (if income increases)
- normal good (the demand shifts right)
- inferior good (the demand shifts left)
• If a good is normal or superior good we will DEMAND more at every price
when our incomes rise.
• If a good is an inferior good we will DEMAND less at every price when our
incomes decrease.
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# 3: Prices of Related Goods
The Prices of Related Goods (if the price increases)
- substitute goods (demand will increase)
- complementary goods (demand will decrease)
Complements: when people buy one of these goods, they
are likely to also buy the other.
Substitutes: a decrease in the price of a substitute
encourages some customers to switch to that good, which
decreases the demand for the other.
Price of Related Goods
• Substitute goods like Coke and Pepsi—If the price of
Pepsi increases the DEMAND for COKE will increase.
• Complementary goods like peanut butter and jelly—If
the price of jelly increases the DEMAND for peanut
butter will decrease.
Substitute
Complement
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# 4: Expectations
• Expectations (a predicted shortage will increase
demand)
• Your expectations about the future price of a good
can influence your demand for that good today.
– If you think the price of a good will fall in the future, you
are likely to postpone your purchase of that good until the
price is lower.
– Because the expectation about future prices affect the
quantity demanded at every price, the demand curve shift
Expectations
• If people expect there to be a shortage of Twinkies
they may stock up now—increasing the demand for
Twinkies causing the price to increase.
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Chapter 4-Mods 10, 11 & 12
# 5 : Number of Buyers
– The Number of Buyers (more buyers
increases demand)
• Increases- say because the population grows—then
the market demand curve shifts to the right.
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WHAT CAUSES THE DEMAND
CURVE TO SHIFT?
All of the following shift the demand curve:
•
•
•
•
•
Tastes and preferences (more popular demand shifts right)
Income (if income increases)
- normal good (the demand shifts right)
- inferior good (the demand shifts left)
The Prices of Related Goods (if the price increases)
- substitute goods (demand will increase)
- complementary goods (demand will decrease)
Expectations (a predicted shortage will increase demand)
The Number of Buyers (more buyers increases demand)
Your Turn
Each group will get one of the 5 factors that causes the
demand curve to shift.
You will analyze one factor as a group and then present
your findings to the class.
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Chapter 4-Mods 10, 11 & 12
Module 11 Review
What is…
A. Change in the quantity demanded?
B. Change in demand?
C. Normal goods?
D. Expectations?
E. Substitutes?
F. Complements?
G. Conspicuous consumption?
H. Taste?
I. Inferior goods?
J. Income?
MODULE 12:
Elasticity of Demand
KEY IDEA:
An important aspect of demand is how sensitive quantity
demanded is to price changes.
OBJECTIVES:
• To explain how economists measure the sensitivity of
quantity demanded to price changes.
• To identify what makes the demand for a good more or
less sensitive to changes in its price.
• To show the connection between price sensitivity and the
total revenue of firms in a market.
WHAT IS ELASTICITY?
Elasticity of demand is a measure of how strongly consumers
respond to a change in the price of a good, calculated as the
percentage change in the quantity demanded divided by the
percentage change in price.
•
•
•
Demand is elastic if consumers respond to a change in PRICE
with a relatively large change in the quantity demanded
Demand is inelastic if consumers respond to a change in PRICE
with a relatively small change in the quantity demanded.
Demand is unit-elastic if consumers respond to a change in
price by changing the quantity demanded by the same
percentage.
WHAT MAKES DEMAND
MORE OR LESS ELASTIC?
• Necessities versus luxuries: If you need it, your
demand is relatively inelastic.
• The availability of close substitutes: No substitutes
means your demand is inelastic.
• The share of income spent on the good: If It is a large
expense, your demand is elastic.
• Time: If you can wait, your demand is elastic.
Perfectly Elastic Demand
Perfectly Inelastic Demand
PREDICTING ELASTICITY
COMPARING ELASTICITIES
By calculating the value of elasticity, economists can
categorize the demand for goods according to how
sensitive consumers are to price changes.
We can specify whether demand is elastic, inelastic, or
unit elastic, depending on the value of elasticity.
The larger the elasticity, the greater the percentage
change in quantity demanded relative to the
percentage change in price and the stronger the
response to a price change.
COMPARING ELASTICITIES
SPENDING, REVENUE,
AND ELASTICITY
ELASTICITY, TOTAL SPENDING,
& TOTAL REVENUE
Total revenue is all the money consumers spend on
a good, and firms receive for a good, during a
particular period of time: it is the price of the good
multiplied by the quantity of the good sold.
Changes in Total Revenue with Elastic Demand
Price increases = total revenue decreases
Price decreases = total revenue increases
ELASTICITY, TOTAL SPENDING,
& TOTAL REVENUE
Total revenue is all the money consumers spend on
a good, and firms receive for a good, during a
particular period of time: it is the price of the good
multiplied by the quantity of the good sold.
Changes in Total Revenue with Inelastic Demand
Price increases = total revenue increases
Price decreases = total revenue decreases
ELASTICITY, TOTAL SPENDING,
& TOTAL REVENUE
Total revenue is all the money consumers spend on
a good, and firms receive for a good, during a
particular period of time: it is the price of the good
multiplied by the quantity of the good sold.
Constant Total Revenue with Unit-Elastic Demand
Price increases or decreases = total revenue
unchanged.
ELASTICITY, TOTAL SPENDING,
& TOTAL REVENUE
Changes in Total Revenue with Elastic Demand
Changes in Total Revenue with Inelastic Demand
Constant Total Revenue with Unit- Elastic Demand
Module 12 Review
What is…
A. Elasticity of demand?
B. Elastic demand?
C. Inelastic demand?
D. Necessity?
E. Unit- elastic demand?
F. Total revenue?
G. Luxury?
H. Close substitute?