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Microeconomics – Unit 2 part 2 Let’s assume Lindsey would see the quantity demanded at the following prices: Price P $9 8 7 6 Quantity Demanded Qd 2 3 5 9 5 of 29 We can graph that demand schedule.... P To be on the 9 demand curve a person must 8 7 be WILLING 6 and ABLE to purchase the product or service. 8 of 31 Quantity Demanded Qd Price P $9 8 2 3 5 9 7 6 Qd just a point on the curve. D is the entire curve. 2 3 5 9 Q P Definitions: 9 8 7 6 D 2 3 5 9 Q Qd--it is the amount that will be purchased at a specific P. D--it is a schedule of quantities of goods and services that will be purchased at various prices at a specified time, all other things held constant. Qd just a point on the 9 8 7 6 curve. D is the entire curve. 2 3 5 9 Q Price changes Quantity Demanded Price DOES NOT CHANGE DEMAND! 8 of 29 Law of Demand Quantity demanded rises as price falls, & quantity demanded falls as price rises, other things constant. IB extension 2 exceptions: (1) Giffen goods quantity demanded increases when price increases – in the case of inferior goods; product would have to be one that formed a large part of the total expenditure. con’t … IB extension (1) Giffen goods (con’t) 19th century economist Giffen claimed that in England the rise in English bread prices reduced real income so much (because that’s what people were spending most of their money on) that consumers bought more bread – bread being an inferior good. 11 of 29 IB extension (2) Veblen goods Early 1900’s economist Thornstein Veblen argued that for some ostentatious goods (yachts, Rolls Royce, Tiffany heart necklaces) as price rises on the good, quantity demanded rises. He argued that humans consumed to strut around & show that they could “afford it.” P at $9 people $9 would 8 demand 7 4 rather 6 _____ 2 than _____ What happens if P changes from $7 to $8? at $7 people would D1 demand 8 rather _____ 5 than _____ D 2 3 5 9 this is a Q shift in demand Quantity Demanded The ___________ ___________ changes, not demand ____________. But you can shift demand....meaning that What can shift demand? Let’s say that with all the new homes, there are 100 additional students (consumers) at CHS. What will happen to demand for Lindsey’s lanyards at the same prices? hold off on note-taking P S P1 P D1 AFTER shifting demand, then tell us, what happens to P & Q? P & Q 14 of 29 D Q Q1 Q This is why supply & demand are important. The curves themselves don’t matter – it’s intersect where they ____________. P Their intersection is equilibrium called ______________ and it tells us the market-clearing price & __________ quantity __________ at which all products will be bought & sold. So from this graph when D shifted P ____ & Q ____ S P1 P D1 D Q Q1 Q What can shift demand? Harkins opens 2 new theaters in Chandler and employs even more CHS students at a higher wage of $7.25/hour. What happens to demand? P S P1 P D1 What happens to P & Q? P & Q D Q Q1 Q What can shift demand? Lindsey has been selling for $4.00 and decides to raise the price to $6.00. What happens to demand? P S P1 Demand does NOT shift. P does not shift demand. P is movement along the demand curve. P D Q1 Q Q What can shift demand? Lindsey wouldn’t let the 3 most popular cheerleaders copy her math homework. Now they refuse to wear the lanyards and make fun of people wearing them. What happens to demand? P S P P1 What happens to P & Q? D1 P & Q Q1 Q D Q What can shift demand? Lindsey has been selling lots of lanyards that the market-clearing price of $4.00. Then the CHS administration decided to permit students to wear their ID’s on clips as well as lanyards. Business-minded Ben started selling metal clips at $1.00 each during lunch. What happens to the demand for Lindsey’s lanyards? P S P P1 What happens to P & Q? P & Q 19 of 29 D1 Q1 Q D Q Lots of students like to also buy plastic pockets for $1.50 from the book store to hold their ID’s to wear along with Lindsey’s lanyards. Suddenly Lindsey saw the price of her lanyards drop from $4 to $2. What happens to the demand for plastic pockets? What can shift demand? Plastic Pockets P S P1 P D1 What happens to P & Q of plastic pockets? D Q P & Q Q1 Q What The CHS administration feels guilty for making students wear their ID’s and the high cost P involved. So the Administration decides to subsidize P1 the cost of lanyards P and gives students $1.00 to help them pay for each lanyard. What happens to demand? What happens to P & Q? P & Q can shift demand? S D1 D Q Q1 Q What can shift demand? A lot of gossipy students got wind of Lindsey’s plans to drop her price in half starting next week since it’s near the end of the school year. What happens to the demand for Lindsey’s lanyards this week? P S P P1 What happens to P & Q? P & Q D1 Q1 Q D Q Variables that Shift Demand: resume note-taking S Subsidies / Taxes N Number of consumers I Normal Goods Income (Y) Inferior Goods Preferences / Tastes P E R future P by consumers Expected future Y by consumers Related products price of Complements price of Substitutes I Normal Goods Income Inferior Goods Income--Normal Goods As consumers’ income (Y) goes up demand for normal goods increases. As consumers’ Y goes down, demand for normal goods decreases. Income--Inferior Goods As consumers’ income goes up demand for inferior goods decreases. As consumers’ Y goes down, demand for inferior goods increases. 24 of 29 Make sure you can correctly draw the graphs illustrating a shift in demand. lanyards P P S lanyards S P1 P P D1 P1 D Q Q1 Q D1 Q1 Q D Q Note the elements of an acceptable IB / AP graph: y axis labeled P title of graph High-Definition TV’s S dotted line to show where point is on y & x axis P P1 D1 Q1 Q D Q x axis labeled Note the elements of an acceptable IB / AP graph: P High-Definition TV’s S equilibrium P & Q labeled P shifts in curves noted with arrows & new color ink P1 D1 Q1 Q D Q Note the elements of an acceptable IB / AP graph: P High-Definition TV’s S P P1 new numbers for P & Q labeled P1 & Q1 28 of 29 D1 Q1 Q D Q changes in P & Q noted with arrows & new color ink In English pubs, ale is ordered by pints and quarts. So in old England, when customers got unruly, the bartender would yell at them to mind their own pints and quarts and settle down. It's where we get the phrase . . . “Mind your P's and Q's."