Transcript Chapter 4 Demand_Brown

Unit 4
Demand
Where do “prices” come from?
How are prices
determined in
economic systems?
Basic Terms in Economics: Demand
“Demand” defined:
“Demand is the combination of
the willingness (have motivation) and
ability (have money) among
consumers to purchase at a
particular price.”
The Law of Demand
Law of Demand: There is an inverse
(opposite) relationship between the price of a
good and the quantity consumers are willing
to purchase.
What helps explain this relationship???
 The availability of substitutes - goods
that do similar functions - explains this
negative relationship
$
What does the graph show?
Inverse relationship!
Q
What else does the graph show?
Law of Diminishing Utility
As consumption increases, additional
benefit decreases.
– When benefits > costs: consumption continues
– When benefits < costs: consumption ends
Simply put, too much of something is
a bad thing. This law also happens
explain why the curve slopes
downward.
EXAMPLE: The first bottle of water satisfied your thirst.
The second bottle made you feel totally full.
The third bottle made you sick.
The Law of Diminishing
Utility
Utility
(happiness)
Quantity
Consumed
Where do we get the data for our Demand Curve?
From a “Market Demand Schedule”
A market demand schedule is a table that
shows the quantity of a good people will
demand at different prices.
CELL PHONE EXAMPLE
Consider the market for cell phones (Verizon).
A market demand schedule lays out the
amount of cell phones that are demanded in the
market for a spectrum of prices.
We can graph these points (price and the
demand for them) to make a demand curve for
cell phones.
Market Demand Schedule
Price
(monthly bill)
Millions of
Cell Phone
(monthly bill) Subscribers
Cell Phone
Price
$129
$109
$ 89
$ 69
$ 59
$ 49
$ 39
2.1
3.5
5.1
7.6
11.0
16.0
24.1
140
120
100
80
60
Assume this is for a unlimited
minute & data package.
5
10
15
20
25
30
Quantity
(of Cell Phone
Subscribers)
Market Demand Schedule
Price
(monthly bill)
140
•Notice how the law of
demand is reflected by
the shape of the demand
curve.
• As the price of a good
rises …
. . . consumers buy
less.
120
100
80
Demand Curve
60
5
10
15
20
25 30
Quantity
(of Cell Phone
Subscribers)
Demand Curve & Utility
Price
(monthly bill)
 The slope of the
demand curve at any
quantity shows the
maximum price that
consumers are
WILLING and ABLE
to pay for that additional
unit.
Q: What happens
140
Law of Diminishing Utility
120
100
80
60
as prices ↑ & Q ↓?
A: utility diminishes
5
10
15
20
25
30
Quantity
(of Cell Phone
Subscribers)
Demand Review
• What is quantity demanded?
• What does the law of diminishing utility
state?
• What is the law of demand?
ELASTIC
AND
INELASTIC DEMAND
The Demand & Price relationship
is not the same for every product.
LAW OF DEMAND:
INVERSE RELATIONSHIP BETWEEN PRICE AND
QUANTITY.
…but sometimes the relationship between PRICE and a
change in DEMAND is not as strong for some goods.
: PRICE
: PRICE
WEAKER LAW RELATIONSHIP
STRONGER LAW RELATIONSHIP
LESS SUBSITITUTES
MORE SUBSITITUTES
Elasticity of Demand
Elasticity is a measure of
responsiveness between change in
demand and a change in the price.
 It tells how much demand changes
when you change the price.
 2 Types of Elasticity:
 Inelastic
 Elastic
Elastic Demand
Elastic Demand: quantity demanded is
sensitive to small price changes.
 Easy to substitute a good that has elastic
demand. HAS MANY SUBSTITUTES
 When price increases, demand decreases
(business revenue decreases)
 Example: price of a good with many
substitutes, such as bottle water or soda.
Inelastic Demand
Inelastic Demand: quantity demanded
is NOT sensitive to price changes.
 Hard to find substitutes for the good. HAS FEW
OR NO SUBSTITUTES
 When price increases, business revenue
increases
 Example: needed medication for an illness,
such as Chemo-Therapy & gas.
Elastic and Inelastic Demand Curves
 If the market price for
gasoline was to rise from
$1.00 to $5.00, the
quantity demanded in the
market decreases
insignificantly
(from 8 to 7 units).
 If the market price for
tacos rises from $1.00 to
$5.00, the quantity
demanded in the market
decreases significantly
(from 8 to 1 unit).
 Taco demand is highly
sensitive to price changes
and can be described as
elastic; gasoline demand
is relatively insensitive
to price changes and can
be described as inelastic.
5.00
1.00
Gasoline
INELASTIC
1 2 3 4 5 6 7 8 9 10
5.00
1.00
Tacos
ELASTIC
1 2 3 4 5 6 7 8 9 10
Elasticity Over Time
Short-Run - Consumers don’t have
enough time to adjust to the price change
in a short period of time (ex: stuck with the current
product with no substitutes).
 Demand tends to be inelastic in the short-run
Long-Run - Consumers have enough time
to adjust in a longer period of time
(ex: we will find a substitute to gas if the price remains high).
 Demand tends to be much more elastic in the
long-run
Review
• What does elasticity measure?
• What is elastic demand?
• What is inelastic demand?
• What is demand in short run?
• What is demand in long run?
“Changes in Demand”
Versus
“Changes in Quantity
Demanded”
What will cause the demand
curve to shift?
Changes in the Demand Curve
versus Quantity Demanded
Change in Demand Curve - shift OF the
entire demand curve.
A shift to the right =
increase in demand
$ Price
8.00
5.00
A shift to the left =
decrease in demand
1.00
1
5
10
Quantity
Change in Quantity Demanded movement ON the same demand curve due
$ Price
to a PRICE change.
5.00
1.00
1
5
10
Quantity
THE DETERMINANTS OF DEMAND
THE ONLY FACTORS THAT CAN
CAUSE A DEMAND CURVE TO
SHIFT TO THE LEFT (decrease) OR
RIGHT (increase).
$ Price
8.00
5.00
1.00
1
5
10
Quantity
Position of the Demand Curve?
What specific things determine the
position of the demand curve?
“P.O.I.N.T.”
1.
2.
3.
4.
5.
Price of Related Products
Outlook (Consumer Expectations)
Income
Number of consumers
Tastes
THE DETERMINANTS OF DEMAND
1. PRICE OF RELATED GOODS
Substitute Goods:
– As price of one rises
other rises
the demand for the
– As price of one falls
falls
demand for the other
Example: Dr. Thunder and
Dr. Pepper.
(assuming they taste the same)
$
=
D
THE DETERMINANTS OF DEMAND
1. PRICE OF RELATED GOODS
Complementary Goods: (they go well together)
– As the price of one rises
other falls
the demand for the
– As the price of one falls the demand for the
other rises.
Example: Gas, SUVs, and tires.
Which way will the Demand curve for Tires shift?
$
+
DEMAND
A: Shift to the left
=
DEMAND
THE DETERMINANTS OF DEMAND
1. PRICE OF RELATED GOODS
Substitutes vs Complements
2. OUTLOOK OF THE FUTURE
This could work in numerous ways. For example:
You hear there is going to be a recession so you stop spending
today –OR– you hear that a sale on some clothing is ending
soon so you run to make a purchase today.
3. INCOME
INCOME effects Superior and
Inferior Goods in different ways.
Income Effects on
Superior and Inferior Goods
Superior Goods:
– As income rises, demand will increase (shift right)
– As income falls, demand will decrease (shift left)
–Example: Expensive versus cheap cars
Vs.
Income Effects on
Superior and Inferior Goods
Inferior Goods:
– As income rises
demand falls
– As income falls
demand rises
Example: Compact cars, MP3 Players, etc.
THE DETERMINANTS OF DEMAND
1. PRICE OF RELATED GOODS
Substitutes vs Complements
2. OUTLOOK OF THE FUTURE
This could work in numerous ways. For example:
You hear there is going to be a recession so you stop spending
today –OR– you hear that a sale on some clothing is ending
soon so you run to make a purchase today.
3. INCOME
Superior vs Inferior Goods
4. NUMBER OF BUYERS
5. TASTES (Affected by attitudes, quality, advertising, etc.)
DETERMINANTS OF DEMAND
JOHN STOSSEL VIDEO
Customer are getting even with help
from the Internet.
Focus on..
1. How are customers getting back?
2. How has the Internet affected Elasticity of
Demand?
3. How has the Internet affected any (or all) of
the Determinates of Demand?
Link to Video
CHAPTER 4 DEMAND
THE END
STUDY FOR
THE TEST