Transcript Demand

Demand
How does demand affect what
producers are willing to supply to
the market?
What Is the Law of Demand?
Law of demand=
• Consumers buy more
of a good when its price decreases
• Less when its price increases.
• Result of two separate behavior patterns that
overlap, the substitution effect and the income
effect.
• These two effects describe different ways that a
consumer can change his or her spending
patterns for other goods.
Law in Action
• Shlagor’s Demand for Krystal Cheeseburgers
Price of a single KC
$.25
$.50
$.75
$1.00
$1.50
$2.00
Quantity Demanded
12
10
6
4
3
0 (Substitute other
junk food!)
Krystals will not go below $.25, it represents a price below cost of production
3 Economic Concepts
Important to Demand
1.Income effect
- an increase or decrease in
consumer purchasing power caused
by a change in price.
– Purchasing Power- the amount of
income that people have to spend on
goods and services.
2. Substitution Effect- consumer’s
tendency to substitute a lower price
good for a similar 1 that is priced
higher.
3. Diminishing marginal utility- the
usefulness of each unit consumed
decreases with each additional unit.
The Demand Schedule
• A demand
schedule is a
table that lists the
quantity of a
good a person
will buy at each
different price.
• A market demand
schedule is a table
that lists the quantity
of a good all
consumers in a
market will buy at
each different price.
The Demand Curve
Price per slice (in dollars)
• A demand curve is a
graphical
representation of a
demand schedule.
• Notice it slopes
downward – D
for downward
Market Demand Curve
3.00
2.50
2.00
1.50
1.00
Demand
.50
0
0
50
100 150 200 250 300 350
Slices of pizza per day
Shlagor’s Krystal Demand Curve
Shifts in Demand
• The Law of Demand only works
assuming “all other things are held
constant.”
• When this assumption is dropped,
movement no longer occurs along
the demand curve. Rather, the
entire demand curve shifts.
Shifts of the Demand Curve
• Determinants of
demand: Factors
other than price that
influence the amount
of demand for a
good or service.
– Shifts the curve to
the right
(increase) or the
left (decrease)
What Causes a Shift in Demand?
Several factors can lead to a change in demand:
1. Income
-Changes in consumers incomes affect demand.
-Normal good: good that consumers demand more of when their
incomes increase.
-Inferior good: good that consumers demand less of when their
income increases.
2. Consumer Expectations
Whether or not we expect a good to increase or decrease in price
in the future greatly affects our demand for that good today.
3. Population
Changes in the size of the population also affects the demand for
most products.
4. Consumer Tastes and Advertising
Advertising plays an important role in many trends and therefore
influences demand.
Prices of Related Goods
The demand curve for one good can be affected by a
change in the demand for another good.
• Complements are
two goods that are
bought and used
together.
• Example: skis and
ski boots
• Substitutes are
goods used in place
of one another.
• Example: skis &
snowboards
Product 1
Product 2
1.
Coke
Pepsi
2. Hamburger
Ketchup
3. Hamburger
Bean Burrito
4. Computer
Flash Drive
5. Pencil
Notebook Paper
6. DVDs
Video Tapes
7. Headphones
IPod
Substitute or
Complement
Substitute
Complement
Substitute
Complement
Complement
Substitute
Complement
Fill in the answers to the following
questions with (increase/decrease) or
(complement/ substitutes.
Exp. The price of Big Macs increases
causing a decrease in the Big Mac
market. Therefore, the demand for Mc
Fries decreases because the two items
are complements.
1. The cost of Honda Accords decreases,
causing ________ in the Honda market.
Therefore, the demand for the Toyota Camry
(assume they have about the same value)
__________ because the two items
are______________.
2. The cost of automobile maintenance
increases, causing__________ in the
maintenance field. Therefore, the demand for
public transportation _______because it
is____________.
1. The cost of Honda Accords decreases,
causing increase in the Honda market.
Therefore, the demand for the Toyota
Camry (assume they have about the
same value) decreases because the two
items are _substitutes__.
2. The cost of automobile maintenance
increases, causing _decrease_ in the
maintenance field. Therefore, the
demand for public transportation
increases_ because it is _a substitute_.
3. The price of movie theater tickets
increases, causing ________ in the movie
ticket market. Therefore, the demand for
movie rentals_________ because the two
items are _____________.
4. The price of CD players decreases,
causing ____________ in the CD player
market. Therefore, the demand for CDs
__________ because they are
______________.
3. The price of movie theater tickets
increases, causing decrease in the movie
ticket market. Therefore, the demand for
movie rentals increases because the two
items are substitutes.
4. The price of CD players decreases,
causing __an increase_ in the CD player
market. Therefore, the demand for CDs
_increases__ because they are
__complements.
Which way would a demand curve shift in the following scenarios?
Write “left” or “right” and which determinant of demand caused the
shift.
1. Papa John’s Pizza is offering $1 pizzas for students
on Monday nights.
2. The government releases a report that Taco Bell’s
meat is actually dog food.
3. Susan’s job at Six Flags ends in late October.
4. John has taken a second job.
5. Abercrombie opened a new store dedicated to preteens.
6. The local Pepsi plant has an explosion and has to
close, what happens to the demand for Coke?
7. The price of jelly increases 200%, what happens to
the demand for peanut butter?
Which way would a demand curve shift in the following scenarios?
Write “left” or “right” and which determinant of demand caused the
shift.
1. Papa John’s Pizza is offering $1 pizzas for students
on Monday nights. Right
2. The government releases a report that Taco Bell’s
meat is actually dog food.
Left
3. Susan’s job at Six Flags ends in late October. Left
4. John has taken a second job. Right
5. Abercrombie opened a new store dedicated to preteens. Right
6. The local Pepsi plant has an explosion and has to
close, what happens to the demand for Coke? Right
7. The price of jelly increases 200%, what happens to
the demand for peanut butter? Left
DEMAND HEADLINES
• Read the following eight newspaper headlines. In
each case decide if the event will cause a change
(shift) in the demand for beef in May. If so, determine
if it is an increase (right shift) or a decrease (left shift)
and tell which of the determinants of demand has
caused the shift:
• Prices of related goods
• Income
• Consumer Expectations
• Population
• Consumer Tastes and Advertising
• NOTE: 1 Headline will not lead to a shift in demand instead it
will indicate a change in quantity demanded (due to a change in
price.)
HEADLINE 1: Price of beef to rise in June
• Example:
Demand (for beef in May) increases_ because of
consumer expectations
2. HEADLINE 2: Millions of foreign immigrants
swell the US population
Demand _________ because _____________
3. HEADLINE 3: Pork prices drop
Demand _____ because ______________
HEADLINE 1: Price of beef to rise in June
• Example:
Demand (for beef in May) increases_ because of
consumer expectations
2. HEADLINE 2: Millions of foreign immigrants
swell the US population
Demand increases because of population
increase.
3. HEADLINE 3: Pork prices drop
Demand decreases because substitute price
decreases.
4. HEADLINE 4: Surgeon General warns that
eating beef can be hazardous to your health
Demand ________because____________
5. HEADLINE 5: Beef prices fall; consumers
buy more
Demand ______ because _________________
6. HEADLINE 6: Real income for Americans
drops third month in a row
Demand _____because ___________________
4. HEADLINE 4: Surgeon General warns that
eating beef can be hazardous to your health
Demand decreases because consumer
expectations change.
5. HEADLINE 5: Beef prices fall; consumers
buy more
Demand increases because price of goods.
6. HEADLINE 6: Real income for Americans
drops third month in a row
Demand decrease because income changes.
Demand Elasticity
• Elasticity describes the way in which consumers react to a
change in a products price.
• If a small price increase causes a dramatic change in
demand the product is said to have Elastic Demand.
(ex. Price of movie tickets goes up $1 & demand falls by half=
movie tickets have elastic demand)
• If there is little change in demand, despite a rise in price the
product is said to have Inelastic Demand.
(ex. The price of Bob’s medicine doubles, but Bob still buys it
every week = Inelastic Demand)
Factors Affecting Demand Elasticity
Availability of Substitutes
•
If there are few or no substitutes available for a good or service =
inelastic demand.
(Medicine, Gas, diapers, milk, cigarettes, etc.)
•
Other products have many substitutes & would have more Elastic
Demand if the price increased.
(Food items, Bottled water, Some medications*, etc.)
Additional Factors affecting
DEMAND ELASTICITY
•
Expense of Product – more expensive items tend to be more elastic, these
items take more of your budget & can be sacrificed.
(Ex. Clothes, Air Travel, Video Games, etc.)
•
Less expensive products tend to be more inelastic, these items are cheap –
so most people buy them regardless of a price change.
(Ex. Socks, underwear, Shampoo, etc.)
•
Necessities vs. Luxuries- if the product is something you need vs.
something you want.
(Ex. Baby Diapers– necessary / inelastic demand
Rolex Watches – luxury / elastic demand)
Time & Elasticity
•
•
Consumers often need time to adjust to price changes.
Demand can become more elastic over time.
•
Ex. Gas – Demand for gas after a price hike is inelastic, but after a few
months or years consumers adjust & seek alternatives: public
transportation, fuel efficient cars, etc.
Demand Elasticity – the Curves
Elastic Demand
Small Price Change greatly affects QD
Inelastic Demand
Little Change with Price Change
Elastic or Inelastic Demand: you decide
•
-
Product
Starbucks Coffee Elastic
New Car Elastic
Inelastic
Toothpaste
New Laptop Elastic
Water/Toilet resistant I-phone
Elastic
Milk Inelastic
Chick-fil-a chicken biscuits
Elastic
Inelastic
Blood pressure medicine