Transcript Demand - Mr. Davidson`s IB Economics Page

Demand
IB Economics
Demand for chocolate bars
experiment
Getting an idea of what demand is
The demand for chocolate bars experiment
• In my shop I have 4 items for sale
50p
50p
50p
50p
Getting an idea of what demand is
Stage 1
Each item is 50p each
You have £2.50 to spend and must spend it all
You can buy any number of one product and do not have to buy all
of the products
When you have made your decision draw a table like the one below
and fill it out
Product
Can of coke (50p)
Snickers bar (50p)
Pint of milk (50p)
Mars bar (50p)
Quantities
Stage 2
 It’s a new day and you have consumed everything that you bought
yesterday
 A global shortage of peanuts has put the price up of a snickers bar
to £1
50p
50p
£1
50p
Demand for chocolate bars experiment continued
Stage 2
It’s a new day and you have consumed everything that you bought
yesterday
A global shortage of peanuts has put the price up of a snickers bar to
£1
You still have £2.50 income to spend and must spend it all
You can buy any number of one product and do not have to buy all of
the products
When you have made your decision draw a table like the one below
again and fill it out with your new preferences
Product
Can of coke (50p)
Snickers bar (£1)
Pint of milk (50p)
Mars bar (50p)
Quantities
Demand for chocolate bars experiment continued
Stage 3 – calculating market demand
Organise yourself into a group
Work out the market quantities for your group for stages 1 and 2. Do this
by adding together the quantities for each product at each price level
demanded by each person in your group. See an example below
Product
Quantities - Stage 1
(Snickers cost 50p)
Quantities - Stage 2
(Snickers cost £1)
Can of coke
||||| ||||| ||||
14
||||| ||||
9
Snickers bar
||||| ||||| |||
13
||||
4
Pint of milk
||||| ||||| ||
12
|||
3
Mars bar
||||| ||||| ||||| ||||
19
||||| ||||| ||||
14
What this represents is the demand for each product – the
amount each person would like to purchase at the price stated. By
adding together each individual’s demand we get the market
demand
Make your team a table like the one above and complete it
Demand for chocolate bars experiment continued
Stage 3 – calculating market demand
Now lets represent this information in the form of a graph
Use the graph paper provided
Price goes on the vertical axis
Quantity demanded goes on the horizontal axis
Plot the quantity demanded of snickers bars for your group against the
price (see the example below)
You will see two points on the graph – one for the quantity demanded at
50p and another for the quantity demanded at £1
Draw these two points and draw a straight line through them like below
Demand for chocolate bars experiment continued
Stage 3 – calculating market demand
Now compare your graph with the other group’s graph
Are they the same shape?
Do they both slope downwards from left to right?
So what can you conclude about the relationship between
price and the amount demanded?
Use your graph to estimate the following for your group
What is the demand likely to be if the price were 75p?
What is the demand likely to be if the price were 25p?
What is the demand likely to be if the price were 60p?
Demand for chocolate bars experiment continued
Let's now take the game one step further.
Stage 4
It is now day three and the peanut crisis has eased. Snickers now cost 50p
once more.
The government has decided to provide all students with a grant
As a result your income has increased and you now have £4 to spend.
Again, in your group work out market demand by adding together each
person's demand for each product
The rules are the same as before
Fill out your individual table to find your individual demand
Fill out your group table to find your market demand (the sum of all your
individual demands)
Then create a table like the one below
Product
Can of coke
Snickers bar
Pint of milk
Mars bar
Quantities - Stage 1
(Income is £2.50)
Quantities - Stage 4
(Income is £4)
Demand for chocolate bars experiment continued
Stage 4 continued
Comparing stage 1 and stage 4 what can we see?
Was the demand for all of the goods greater than before?
This is because demand is not static – it changes as a result of changes
in factors that affect demand (other than price)
So we know now that one of these factors is income; we saw that when
we had an increase in income our demand levels increased.
What other factors might increase demand?
What factors might decrease demand?
On your original graph plot the new snickers demand.
Assume that you would get the same increase in demand at £1 and plot
your second point.
Now draw your new demand line
What do we see?
Now lets have a look at the theory of demand
The Theory of Demand
The Demand Curve
Often we desire certain things like luxury cars or jewellery but we don’t have the
ability to buy them so they are not a part of what economist consider demand
Demand is the amount that consumers are willing and able to buy at each given
price level
This is what we call effective demand because it is backed by purchasing power
The demand curve illustrates the relationship between the price and the amount
consumers intend to buy at each given price (note the word intend – demand
diagrams show planned or intended spend not realised or actual demand)
We can see that there is an inverse or negative relationship – as the price goes up
the demand goes down
Note also the notation that we use
Price
Remember……
Demand goes
Down!!!
P2
P1
P3
Demand
Q2
Demand Curve
Q1
Q3
Quantity
Demanded
Watch this
video
Drawing diagrams
It is really important that you learn to draw the diagrams well because there are a lot of
marks to gain if you do it correctly
Use a ruler and a sharp pencil
Label the axes properly (quantity always goes on the x axis and price on the y when
we draw demand diagrams)
If you were illustrating a certain market e.g. cars you would write Quantity of cars or
price of cars
We draw demand curves as a straight line
We can draw several curves on one diagram but we have to label them each
differently
The first demand curve we drew would be labelled D1
The first demand curve we drew would be labelled D2
We label the prices and the quantities on the axis in the same way
We always draw the curve first and then draw the dotted lines to show the new prices
and quantities
Later you will shade parts of diagrams and it is good to have different colours (pencil
only) to hand although in the exam you will only have black
Diagrams must be large enough so that labels can be seen clearly
You MUST always explain/analyse what is happening in a diagram. This is why it is
good to use different colours because you can use the colour to describe the area or
line you are discussing.
I WILL GIVE YOU A HARD TIME IF YOU DRAW SMALL AND MESSY
DIAGRAMS!!!!!!!
The individual demand curve for a good and market
demand
Each consumer will buy as much of a product they deem as worth it
at each given price level
A demand curve can be plotted for each individual
To identify the market demand we calculate the sum of the demand
from all individuals
Below individual 1 buys 3 cans of coke, individual 2 buys 2 cans of
coke and so the overall demand or the market demand is 2+3 = 5
This is exactly what you did with the demand for snickers. You
worked out your individual demand and then the group (market)
demand
Individual demand 1
Individual demand 1
Price
Market Demand
Price
Price
50p
50p
50p
D
3
D
Quantity
2
Demand curves for coke
D
Quantity
5
Quantity
The shape of demand curves
As we have already said the demand curve typically slopes
down from left to right
There is a negative relationship between price and quantity
This is because of the assumptions we make about
consumers
They want to maximise the benefits they can receive with
their limited income
They will only buy something if they feel it is worth it
The benefits from buying it have to outweigh the opportunity
cost of using the money for something else
This is what we call rational behaviour – it would be
irrational to buy something that we didn’t think was worth it!!
The law of economics says that as we buy more and more
of something the benefit we get from each extra unit will fall
think about if you bought a cake and ate it, bought another
and ate it, bought another and ate it…each time the cake
would be less appealing and eventually you might not want to
buy any at all!
This is true with all products although the point at which the
value falls will depend on the person and the product
So, the point is..
As we buy
more it
becomes less
valuable which
means we will
only buy more
if the price falls
(it has to be
worth it!) –
hence the
downward
sloping curve.
Movements along the demand curves
When there is a change in price there is a movement
along the demand curve
When there is a fall in price there is an extension in
demand (demand grows because the price is less and it
is worth buying more)
There is a movement down the curve (there is an
increase in the quantity demanded)
Important wording!
When there is an increase in price there is a
contraction in demand (because the price is more it
becomes less valuable and we buy less)
There is a movement up the curve (there is a
decrease in the quantity demanded)
Remember – movements along the curve are always
caused by a change in price – nothing else!!!!
A contraction of demand
How to describe this?
Price
P2
A contraction of demand
due to a higher price
P1
At the original price P1
there is a demand for the
quantity Q1. As the price
increases to P2 consumers
see less value in the
product and demand less.
There is a contraction of
demand and the quantity
demanded reduces to Q2.
Note: I talk about 1) where
we were to start with, then
2) where we have got to
and why that has
happened.
D
0
Q2
Q1
Quantity
Demanded
Time for you to draw!
In the market for strawberries there has been an increase in
price
Draw the diagram and analyse (describe what is happening)
Price
Answer:
1.Describe the starting
point
2.Describe the change
P2
A contraction of demand 3.Describe what is
happening in the diagram
due to a higher price
At the original price P1
there is a demand for the
quantity Q1 of strawberries.
P1
As the price increases to
P2 consumers see less
value in the strawberries
and demand less.
D
0
Q2
Q1
There is a contraction of
demand and the quantity
demanded reduces to Q2.
Quantity
Demanded
Time for you to draw!
In the market for copper there has been an increase in price
Draw the diagram and analyse (describe what is happening)
Answer:
Price
1.Describe the starting
point
2.Describe the change
P2
A contraction of demand 3.Describe what is
happening in the diagram
due to a higher price
At the original price P1
there is a demand for the
quantity Q1 of copper.
P1
As the price increases to
P2 consumers see less
value in the copper and
demand less.
D
0
Q2
Q1
There is a contraction of
demand and the quantity
demanded reduces to Q2.
Quantity
Demanded
An extension of demand
How to describe this?
Price
An extension of demand
due to a lower price
P1
At the original price P1
there is a demand for the
quantity Q1. As the price
decreases to P2
consumers see more value
in the product and demand
more. There is an
extension of demand and
the quantity demanded
increases to Q2. Note: I
talk about 1) where we
were to start with, then 2)
where we have got to and
why that has happened.
P2
Demand
0
Q1
Q2
Quantity
Demanded
Time for you to draw!
In the market for gold there has been a decrease in price
Draw the diagram and analyse (describe what is happening)
Answer:
1.Describe the starting
point
Price
2.Describe the change
An extension of demand
due to a lower price
P1
3.Describe what is
happening in the diagram
At the original price P1
there is a demand for the
quantity Q1 of gold.
As the price decreases to
P2 consumers see more
value in the gold and
demand more.
P2
Demand
0
Q1
Q2
There is an extension of
demand and the quantity
demanded increases to Q2.
Quantity
Demanded
Shifts of the demand
curves
When we did our Snickers experiment
we saw that an increase income made us
buy more at the same price.
When we drew the 2nd curve we saw
that it had moved outwards
What makes someone want to buy
more of something at the same price?
Think about a holiday in a villa in Spain
- why would there be more demand for
this even though the price had not
changed?
Income – if average incomes rise
demand may rise
Cost of flights – if the cost went
down more people may consider complementary goods
Other European holidays become
more expensive – the villa in Spain
would be more attractive. The other
European holidays would be known
as a substitute
substitutes – a
competing
alternative
Complementary
goods – goods that
are consumed
together e.g. DVDs
and DVD players
Shifts of the demand curves
Things that cause a shift of the demand
curve (and none of those are price!!) are
called determinants of demand
Prices of complements (things you buy
with that product) e.g. ink cartridges with
printers
Advertising and branding that creates
desire and loyalty for a product
Trends/Fashion
Price – not a determinant!
Income level – this is the most important
prices of substitutes (similar products)
e.g. Xbox and playstation are substitutes
Remember CATPIS!!
Watch this
video
Shifts in Demand
The shift of the demand curve to the right
means that there is more demand at
every given price level. This is called
a change in demand (not a change in
quantity demanded like before)
Price
Increase in
Demand
P1
D1
0
Q1
Q2
How to describe this?
This diagram shows how there has been an
increase in demand at the same price (P1). The
demand curve has shifted from D1 to D2
because there has been ______ (fill this blank
with - an increase in income, or increase in
substitute price, or decrease in complementary
price or whatever the reason). This factor has
made the consumers think that the product is
more valuable at price P1 and therefore they
want to buy more. The original quantity
demanded was Q1 and the new quantity
demanded is higher at Q2. There is an increase
in demand for every given price level
D2
Quantity
Demanded
The curve moves to the
Right so the demand is
moRe
Shifts in Demand
Time for you to draw and write an
explanation
In the market for strawberries there
has been a medical journal published
that says strawberries prevent cancer.
Draw a diagram and analyse
Price
Increase in
Demand
Analysis
1.Describe the starting point. At P1…..
2.Describe what has happened (what happens
when this journal is published)
3.Describe what has happened to the demand
curve
1.At P1 the quantity of strawberries demanded is
Q1.
2.Due to the fact that strawberries are seen as a
cancer preventing agent there will be an increase
in demand for strawberries
3.The demand curve shifts outwards from D1 to
D2 and the quantity demanded increases to Q2
P1
D1
0
Q1
Q2
D2
Quantity
Demanded
The curve moves to the
Right so the demand is
moRe
Shifts in Demand
Time for you to draw and write an
explanation
Draw a diagram and analyse
In China there is a massive increase in
demand for washing machines.
Copper is used to create the electrical
wires. What happens in the market for
copper?
Price
Increase in
Demand
Analysis
1.Describe the starting point. At P1…..
2.Describe what has happened (change in
demand for washing machines)
3.Describe what has happened to the demand
curve
1.At P1 the quantity of copper demanded is Q1.
2.Due to the fact that there is an increased
demand for washing machines there is an
increase in demand for copper.
3.The demand curve shifts outwards from D1 to
D2 and the quantity demanded increases to Q2
P1
D1
0
Q1
Q2
D2
Quantity
Demanded
The curve moves to the
Right so the demand is
moRe
Shifts in Demand
How to describe this?
This diagram shows how there has been
a decrease in demand at the same price
(P1). The demand curve has shifted from
D1 to D2 because there has been
______ (fill this blank with – a fall in
incomes, or decrease in substitute price,
or increase in complementary price or
whatever the reason). This factor has
made the consumers think that the
product is less valuable at price P1 and
therefore they want to buy less. The
original quantity demanded was Q1 and
the new quantity demanded is lower at
Q2. There is a decrease in demand at
every given price.
The shift of the demand curve to the
left means that there is less demand
at every given price level
Price
Decrease in
Demand
P1
D2
0
Q2
Q1
The curve moves to the
Left so the demand is
Less
D1
Quantity
Demanded
Shifts in Demand
Time for you to draw and write an
explanation
Draw a diagram and analyse
The government has just banned
smoking inside public buildings.
Describe the effect on the market for
cigarettes
Decrease in
Demand
Analysis
1.Describe the starting point. At P1…..
2.Describe what has happened (ban)
3.Describe what has happened to the demand
curve
1.At P1 the quantity of cigarettes demanded is
Q1.
2.Due to the change in law there is less demand
for cigarettes
3.The demand curve shifts inwards from D1 to
D2 and the quantity demanded reduces to Q2
P1
D2
0
Q2
Q1
The curve moves to the
Left so the demand is
Less
D1
Quantity
Demanded
Shifts in Demand
Time for you to draw and write an
explanation
Draw a diagram and analyse
The government has launched an
advertising campaign to show the
negative effects of too much sugar in
your diet. What will happen to the sugar
market?
Decrease in
Demand
Analysis
1.Describe the starting point. At P1…..
2.Describe what has happened (advert)
3.Describe what has happened to the demand
curve
1.At P1 the quantity of sugar demanded is Q1.
2.Due to the advertising campaign there is less
demand for sugar
3.The demand curve shifts inwards from D1 to
D2 and the quantity demanded reduces to Q2
P1
D2
0
Q2
Q1
The curve moves to the
Left so the demand is
Less
D1
Quantity
Demanded
Normal and Inferior Goods
 When we say that as income rises the
demand for a good will increase we are
making an assumption that the good we
are discussing is a normal good
 For normal products, more is demanded as
income rises, and less as income falls
 There are exceptions called inferior goods
 They are often cheaper poorer quality
substitutes for some other good
 With a higher income a consumer can
switch from the cheaper substitute to
preferred alternative
 As a result, less of the inferior product is
demanded at higher levels of income
 An example is cheap bread in developed
countries or rice in developing countries
Normal good – more is
demanded when income rises
Inferior good – less
is demanded when
income rises
Does it look Shifty?
Market for Tennis Balls in Glasgow
Price of
Tennis
Balls
Mind your P’s and Q’s!!
Here are some scenarios. On your
mini white boards draw the change
• The price of tennis balls falls
• The price of tennis rackets goes up
• It is anticipated that tennis balls will
go down in price in the next few
months
• Slazenger, Adidas and Dunlop start
advertising campaigns for their
sports equipment
• The population of Glasgow
increases
• There are no British success stories
at Wimbledon for years and years
• Average incomes in Glasgow rise
• The price of tennis balls goes up
• Cricket becomes cheaper to play
and more fashionable as a summer
activity
Composite Demand
 There are a couple of types of demand
that you need to know about other than
effective demand. The first is Composite
Demand and the second is Derived
Demand
 Wheat is used for pasta
 It is also used for biofuel
 With global warming and the need to find
more efficient fuels biofuel is increasing
in demand
 As the demand for biofuel increase so
does the increase in demand for wheat
(derived demand)
 Wheat is needed for both pasta and
biofuel (composite demand)
 As demand increases for wheat the price
goes up
 The price goes up for pasta and biofuel
Composite demand – a good that is
demanded for more than one use – if there is
an increase in one this could lead to a
shortage in the other and a higher price
Derived demand is when the
demand for one good or service
comes from the demand for another
good or service
2007 - Italian pasta
manufacturers have warned that
the price of pasta, one of Italy's
staple foods, will go up by about
20% this autumn.
Global warming and the growing
use of durum wheat as a bio-fuel
are blamed.
Derived demand
Derived demand is when the demand for one good or service comes from the
demand for another good or service
The housing market is a good example of the idea of derived demand. When
construction of new homes rises, so too does the demand for materials used in new
properties as well as demand for labour
Other examples
An increase in demand for healthcare will lead to an increase in demand for
doctors
An decrease in demand for cars will lead to a decrease in demand for steel
Growth in global economic output will lead to an increase in the demand for oil
Important to remember…
When we talk about market forces
(supply and demand) we are assuming
that the market is perfectly competitive
there are lots of small firms that
have no price making power
 firms are price takers – they have
to take their price from the market
The market price comes about
because of supply and demand (market
forces)
There is an invisible hand that sets
the market price (Adam Smith)
When you are describing a change in
a market the change in demand comes
first and the price changes as a result
(not the other way around)
More about this later……
Consumer Surplus
Consumer surplus is a measure of
welfare gained as a result of consuming
goods and services
Watch this
pajholden
video
http://www.y
outube.com/
watch?v=qT
xniCLYgok
Starter
from Easy
Mark Qs
 Complete the following 2 questions
 Remember to include
 Definition/s
 Diagram/s
 Analysis (description of what is
happening and the changes in the
diagram)
 get your wording right (look at the
previous slides)
 Label the diagram and refer to it e.g.
“in figure 1 demand has……”
 Example
1. Distinguish between a shift of the demand
curve for a product and a movement along
the product’s demand curve
2. With reference to two different determinants
of demand explain why the demand for
bicycles might increase
The HL Bit!
Linear Demand Functions
We can show the relationship between the
demand for a product and individual
determinants of demand by using an equation
This is the demand function
A simple demand function relating the
quantity demanded of a product to the price of
the product is usually shown in this form
QD = a – bP
QD is the quantity demanded
P is the price
a is the quantity that would be demanded if
the price was zero
b is the slope of the curve
Read through page 25/26 from the 4th
paragraph - an example of such…..
Complete the student workpoint 2.2 on page
27
Quantity
demanded
if price is
zero
The price
Quantity
demanded
The slope
of the curve