Transcript price

Warm-up

List the last five goods or services you
have purchased in the past week and how
much you spent on each. What led you to
buy each one?
Ch 4.1
Understanding
Demand
Demand

In a market system, the
interaction of buyers and sellers
determines the _______of
most
prices
goods as well as what _________
quantity
of a good will be produced.
Buyers demand goods, sellers
supply those goods and the the
interaction between the two
groups lead to an __________
agreement on
the price and the quantity traded.

Demand is the _______to
own
desire
something and the _______to
pay
ability
for it
Law of Demand
When a goods price is ______,
lower consumers
will buy _____
more of it. When the price is
______,
higher consumers will buy ____
less of it.
 The law of demand is the result of not one
pattern of behavior, but of ___
two separate
patterns that overlap.

Behavior Patterns (2)
Substitution effect
•
When consumers ______
react to an
increase in a good’s price by
_______________
consuming less of that good
and more of ________
another


Pizza = $5 (up from $2) thus go
buy a burger ($3) or a taco ($2)
Vice versa…Pizza drops to $1
(from $2) so buy more Pizza
Behavior Patterns cont.
Income Effect

The change in consumption
resulting from a change in
____________
real income

With rising prices your budget
won’t buy as ______
much as it use too
& it works in __________
opposite – if
prices fall your budget buys more.

economists measure consumption in
amount of a good bought, not
the __________
money spent to
in the amount of _________
buy it.
A Demand Schedule

A table that lists the quantity
________ of a good a
price
person will buy at each different _____.
Market Demand Schedule
 A table
that lists the quantity of a good all
consumers in a market will buy at each
different price
Tale of two T-shirts


Both are white, both made of 100% cotton, single
pocket, size Large.
rises manufacturers
When the demand for a product _______,
can charge ______
more for it. And the law of demand says
that when prices ______,
rise people buy _____
less of a product.
So how can T-shirts costing $50 be in such demand
when an identical T-shirt that costs $10 sits neglected on
the next display table. This is related to demand. One
important detail missing from the story is that the more
expensive T-shirt has a small nautical flag on the
pocket….a logo of a designer in ________.
demand Even though
the labor and materials that went into manufacturing the
two T-shirts are the same, the ______
value of one is nearly
400 percent greater. If the market __________
demands it,
produce it, and consumers will _____
pay
someone will _________
for it!
Demand Curve

A graphic representation of a demand
schedule
 Price
is at the vertical axis, and quantities on
the horizontal
Reading a Demand Curve
It assumes all other things such as price of
other goods, income and quality stay
________
constant
change their
 It predicts how people will ______
buying habits
 ***it is only looking at _______!Z
PRICE

Graphing
 Graph
the following
Number of Doughnuts 1, 2, 3, 4, 5, 6
 Price at .30, .50, .75, 1.00, 1.25, 1.50
 NOTE: as price decreases, the quantity of
demand increases…thus law of demand

…disobeying the law…

Some economists believe that there are
goods that do not obey the law of demand,
because the demand for them would
actually drop if their price fell. One
example is a top of the line luxury car.
Why do you think prospective buyers
might feel differently about these goods?
Can you name one other product?
Activity




create an individual demand
schedule
Think of a good, and create a
series of price levels.
Ask 5 classmates how much
of the good he would buy at
each price point and create a
demand schedule and curve
based on the data collected.
Homework – daydream
doughnuts
Ch 4.2 Shifts of the
Demand Curve
Ceteris Paribus
Latin phrase
“________________________.”
all other things held constant
 This is the assumption that _______
nothing
besides the price
____ would change when
selling a good or service.
 When drop ceteris paribus then we do not
move along the demand curve…the entire
demand curve _____.
shifts

Changes in Demand
A demand curve is accurate only as long
as there are no changes other than price
that could affect the consumer’s
decisions.
 Several other factors can cause demand
for a good to change.


1. INCOME – A consumers
_______affects
his/her demand for goods.
income
Most are considered normal goods –
goods demanded when their income
increases. There are also other goods
called _____________because
an
infereior goods
increase in income causes a _______
demand for
these goods to ___.
fall For ex: Mac N
Cheese, Top Ramen
2. Consumer Expectations – our
future can affect
expectations about the ______
our demand. If prices will rise, you will buy
now, if prices will fall, you will ____.
wait Tell
me about a time you waited to purchase a
product:
__________________________________
__________________________________
3. Population – changes in the size, change
the demand. A growing population needs
to be fed, housed, etc.
4. Consumer Tastes and Advertising – who
can explain why bell-bottoms or acid
washed jeans were everywhere and then
gone?
When do luxury goods become a
necessity?

Give 3 examples…
Where's the Beef?

In 1996 British cattle had a disease
that was linked to human death.
Oprah Winfrey aired a program
about it and declared that she would
never eat another hamburger again.
Later, a group of Texas cattlemen
filed suit against her because at the
same time the demand for beef
dropped down to a 10 year low.
Was she guilty?
A year in the life of …(product)

In pairs choose a product and speculate
how demand for that product might
change due to income fluctuations,
population trends, consumer expectations,
tastes and advertising.
Ch 4.3 Elasticity of
Demand
Elastic
Inelastic
Are there goods that you would always
find money to buy, even if the price were
to rise drastically? _________________
 Are there others that you would cut back
on or stop buying? _________________
 Elasticity of demand is how economists
describe the way that consumers respond
to price changes.

Elasticity of Demand
 Dictates
how drastically buyers will
cut back or increase their demand for
a good when the price rises or falls
Elasticity= % of change in quantity demanded/percentage
change in price
(original number – new number/Original number X 100 =
Percentage change)
Inelastic
Demand that is not very _______
sensitive to a
change in price…you will keep buying it no
matter the change in price.
 If the demand for a good at a certain price
is less than 1
Inelastic
Elastic

Elastic
Demand that is very
sensitive to a change in
price and you will buy
less of that good after a
small price increase.
 elasticity is greater than
1

Unitary elastic
If elasticity is exactly equal to 1
 If a product increases price by 50% and
sells 50% less…

Elastic or Inelastic?
A pharmaceutical company
 A computer company
 A power supplier
 A sportswear manufacturer
 A water company
 An organic egg producer

Factors Affecting Elasticity

Availability of Substitutes
 If
there are a few you will still
buy when price rises because
you have no
____________.
alternative Your
favorite musical group, life
saving medicine, gas.
Importance

If you spend a large share of your income
on a good, price increase will force you to
make difficult choices.
Necessities vs. Luxuries

This varies person to person. A ________
necessity
is a good people always buy even when
the price increases. Such as milk
(inelastic)
Change over Time

Consumers don’t always react quickly to a
price increase because it takes time to find
substitutes. Demand
______________________.
But it may
is inelastic in the short term
become elastic over time.
Elasticity and Revenue

A company’s total revenue is defined as the
amount of _______
money the company receives
by selling its goods
 Price
& quantity determine TR
 Companies can lose revenue by raising the
price of its goods because of:



Available substitutes
Limited budget
Perception of the good as a luxury item
Elasticity and Pricing

Companies must know whether the
demand for its product is elastic or
inelastic at a given _____.
price
McDonalds…

For many years McDonalds restaurants
had little __________
competition because their prices
were so low. When McDonald’s prices
reached the level at which competitors
could make a profit, other fast-food
restaurants such as Wendy’s entered the
market.
Organs
Does a person who has severe heart
disease has an elastic or inelastic demand
for a heart transplant?
 If it is inelastic then price is no
object…should available organs be sold to
the highest bidder?
 How should medical science address this
personal and sensitive issue of demand?


Predict the elasticity of demand
for each of the following goods &
tell me if the good has a
substitute, if it is a necessity or
luxury and if her demand for the
good will change over time.
1.
2.
3.
4.
5.
Frozen Orange Juice
Italian sports car
Insulin
Cellular phone
house
Take a Trip
With a group of 3-4 decide whether you
are taking a trip or planning a wedding.
 Make a list of 25 items you will need and
whether they are elastic or inelastic.

Math Practice

Look at Figure 4.7 to calculate the exact
elasticity of demand