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Demand DemandSupply Demand and Supply Why do roses cost more on Valentine’s Day? Why do TV ads cost more during the Super Bowl ($2.7 million for 30 sec.)

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Presentation on theme: "Demand DemandSupply Demand and Supply Why do roses cost more on Valentine’s Day? Why do TV ads cost more during the Super Bowl ($2.7 million for 30 sec.)"— Presentation transcript:

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3 DemandSupply Demand and Supply Why do roses cost more on Valentine’s Day? Why do TV ads cost more during the Super Bowl ($2.7 million for 30 sec.) than during Nick at Nite reruns? Why do hotel rooms in Sun Valley, Idaho cost more in the winter than in the summer? Why do surgeons earn more than butchers? Why do pro basketball players earn more than pro hockey players? Why do economics majors earn more than most other majors? Why are some of you going to major in economics in college? The answer to these and other economics questions boil down to the workings of supply and demand – the subject of this chapter. “Econ, Econ”

4 To M arket D emand “JO” $3 $3 $ $3 100 From “individual” demand to “market” demand [Total] “Bo” “Mo” D D D D = And, what if the price of this product decreases from $3 to $2? Individual Demand $2 40 $2 45 $2 30 $2 115 A point to point movement on the same “D” curve is a “ Change in QD ” And – what if this good prevents cancer, so we have an increase in “D” for it. D2D2D2D

5 $54321 specifiedtime period … a specified time period … other things being equal P QDQDQDQD Price decreases; QD increases Consumers “willingness to buy” $5$4$3$2$1 D Quantity Demanded QD – how much will be purchased at a specific price [& date].

6 QD 2 QD 1 PriceQD Inverse relationshi p $ [ with 2 yr contract] D Reasons For Downsloping “D” Curve Income Effect 1. Income Effect –current buyers buy more. Substitution Effect 2. Substitution Effect– new buyers now purchase. Diminishing MarginalUtility 3. Diminishing Marginal Utility - because buyers of successive units receive less marginal utility, they will buy more only when the price is lowered. Change in QD Price change 1. Price change Movement 2. Movement [up/down the demand curve] Point to point 3. Point to point [along the curve] “D” “whole curve”.“all prices” “D” refers to the “whole curve”. [“all prices”] “QD”“point on the curve” “QD” refers to a “point on the curve” “particular price.” based on a “particular price.” $ iPhone [8GB]

7 1.Income Effect When things are expensive, money buys less When things are cheap, money buys more 2.Substitution Effect When apples are expensive and their substitutes (pears) are relatively cheap, I buy fewer apples and more pears 3.Diminishing Marginal Utility Each additional unit of an item purchased gives less marginal utility (happy points) than the previous unit. Therefore, the only way I will buy more is if the price is lower. Ex. When I’m hungry, I typically will buy 2 breakfast tacos. The reason I don’t buy a third taco is because the marginal utility of the third taco is less than the price of the taco. But, if the price of the taco is less than the marginal utility of the taco, then I will buy the third tacoD P1P1P1P1 P2P2P2P2 QD 1

8 Quantity Demanded (bushels per week) Price (per bushel) PQdQd $ Individual Demand P Q D1D Demand Can Increase or Decrease Increase in Demand Decrease in Demand D2D2D2D2 D3D3D3D3 “Change in Demand (curve)” [“TIMER] Demand Schedule Demand is a whole bunch of QDs strung together.

9 P icture of Law of Demand

10 Elastic or Inelastic (Total Receipts Test) Total Receipts Test 20 x $2 = $40.00 Total Receipts Test 20 x $2 = $ $2 $1 Inelastic Elastic 30 x $1 = $ x $1 = $50

11 Elasticity of D Elastic - QD very responsive to price Inelastic chg in price has little impact on QD 11. Elasticity of D – the way price affects QD. 12. Elastic - QD that is very responsive to price. 13. Inelastic - a chg in price has little impact on QD. Elastic (flexible) Demand 1.Substitutes 1.Substitutes (butter) 2.Luxury 2.Luxury (mink coat) 3.Expensive 3.Expensive (car) 4.Has durability 4.Has durability (refrigerator) 5.Lasts a long time 5.Lasts a long time (gas-guzzling car) Inelastic (inflexible) Demand 1.No substitutes 1.No substitutes (milk) 2.Necessity 2.Necessity (insulin) 3.Inexpensive 3.Inexpensive (safety pin) 4.No durability 4.No durability (pencil) 5.Lasts only a short time 5.Lasts only a short time (bread)

12 . Elastic Demand For Cassette Tapes -$1 D “TR” Test $2.50x100,000=$250,000 $1.50x600,000=$900,000 +$650,000 “responsiveness”“flatness” Think of “responsiveness” as “flatness”.

13 +25 % QD -$1 D “TR” Test $2 = $30 bil. $1 = $20 bil. -$10 bil.

14 . Consumers change their minds at each and every price. Based on good or bad publicity about OJ. 16 oz. Orange juice = 220 calories 16 oz. Tomato juice = 78 calories Change in “ D emand ” [curve] [“TIMER”]

15 Quantity Demanded vs. Demand Quantity Demanded [QD] is triggered by a price chg. people will purchase at a specific price The quantities of a good or service that people will purchase at a specific price at a given time. Demand [D] is triggered by “TIMER” [non-price]. purchasers will buy at different prices A schedule of the total quantities of a good or service that purchasers will buy at different prices at a given time. Demandbunch of QD’s strung together Demand is a bunch of QD’s strung together.

16 “Demand Shifters” [TIMER] 1. Taste [direct] 2. Income [normal-direct] [inferior-inverse] 3. Market Size [number of consumers-direct] 4. Expectations [of consumers about future *price-direct, about future availability-inverse, or about future income–direct. about future availability-inverse, or about future income–direct. 5. Related Good *Prices [substitutes-direct] [complements-inverse] Change in “D” [curve] Non price change[“TIMER”] 1. Non price change [“TIMER”] Whole “D” curve shifts 2. Whole “D” curve shifts [There is a change in “QD” but it is not caused by a change in “price.” QD-”single price”D-”all prices” [QD-”single price”; D-”all prices”] Complement [ inverse ] Substitute [ Direct ] Butter Bread Bagels P D3D3D3D3 D1D1D1D1 D2D2D2D2 QD 3 QD 1 QD 2 D1D1D1D1 D2D2D2D2 P P1P1P1P1 QD 1 P2P2P2P2 D1D1D1D1 D2D2D2D2 D P QD 2

17 1. An “Increase in Taste” shifts the D curve right a. The Nehru jacket came & went in 6 months. b. Jordache jean demand created by TV c. Leisure suits and bell bottoms. d. Technological change may cause consumer taste to change[slide rules]. D1 D1 D1 D1 D3D3D3D3 P QD 1 QD 1 Bell Bottoms MiniSkirts Hip Huggers Platforms D2D2D2D2 QD 2 QD 3

18 Increase in demand for dark chocolate after studies revealed that there were health benefits from eating it. Scientists have discovered that smokers who ate dark c hocolate had less hardening of the arteries and a lowered risk of blood clots. D1D1D1D1 D2D2D2D2 P

19 $45 QD1 QD2 D1D1D1D1 D2D2D2D2 Advertising Can Shift “ D ” [& also impact QD]

20 D1 D1 D1 D1 D2 D2 D2 D2 P QD 1 QD 2 More income results in more demand for steak; less demand for spam. Steak Spam Less income results in more demand for spam; less demand for steak.

21 Normal Good Normal Good – goods whose demand directly varies directly with income. Inferior Good Inferior Good – g oods whose demand inversely varies inversely with income. B utter, filet, steel-belts, new clothing & new cars v. Margarine, spam, used tires, old clothing & old cars 2. Change in Income Income Demand For Spam Demand For Steak

22 D1 D1 D1 D1 D2 D2 D2 D2 P QD 1 QD 2 More demand for both spam and steak.

23 can increase/decrease from economic decisions, advertising, and China government political decisions (China). “baby boom” Ex: The large “baby boom” of increased the demand for baby supplies. An increase in life expectancy increased medical careretirement demand for for medical care, retirement communitiesnursing homes communities, and nursing homes. Increase in # of consumers

24 D1 D1 D1 D1 D2 D2 D2 D2 P QD 1 QD 2 iPod-Touchexpected If the iPod-Touch is expected to increase in price from $299 to $399. iPod-Touch

25 Consumer expectationsfuture product Consumer expectations about future product price future availabilityfuture income price, future availability, & future income. Korean War Ex: When the Korean War broke out in the new car sales boomed summer of 1950, new car sales boomed (also washersrefrigerators washers and refrigerators) out of the expectation of a production stoppage like during WWII. None occurred but it was the expectationnew car demand expectation that affected new car demand. car

26 Complement [ Inverse ] Substitute [ Direct ] Gangsta Grills Chrysler 300s Toyotas D1D1D1D1 D2D2D2D2 P P1P1P1P1 QD 1 P2P2 D1D1D1D1 D2D2D2D2 D P QD 2 MV X PQ

27 QD 1 QD 2 There are three types of goods. 1.Independent goods 1.Independent goods – price change no impact of one has no impact on the other. fishhooks & pantyhose or salt & shoelaces Ex: fishhooks & pantyhose or salt & shoelaces Substitute goods“competing goods” 2. Substitute goods(“competing goods”) - price change of one affects the directly demand of the other directly. 7 Up & CokeMiller & Bud Ex: 7 Up & Coke or Miller & Bud Complementary goods“go together” 3. Complementary goods(“go together”) - price change of one affects the inversely demand for the other inversely. D1D1D1D1 D2D2D2D2 QD 2 QD 1 D2D2 D1D1 CameraFilm Cereal & milk Coffee & donuts Peanut butter & jelly

28 PriceOf7UP Demandfor Dr Pepper Increaseincrease [Increase in price of one; increase in “D” of the other] P P2P2P1P1P2P2P1P1 QD 2 QD 1 QD D D1D1 D2D2

29 Decreaseincrease [Decrease in price of one; increase in the “D” for the other] Car Prices Gasoline Demand P QD QD D1D1D1D1 They are so cheap that even dogs are buying cars P1P2P1P2 QD 1 QD 2 I’m making more money without dropping my prices. D2D2D2D2 No change in price

30 Price of iPod Video Demand for M icrosoft’s Z une Substitutes – Direct Increaseincrease [Increase in price of one; increase in “D” of the other] P P2P2P1P1P2P2P1P1 QD 2 QD 1 QD QD D D1D1D1D1 D2D2D2D2 1977, Bill was arrested for running a stop sign and driving without a license.

31 PriceOfChicken DemandforTurkey Substitutes - Direct D1D1D1D1 D2D2D2D2

32 Complement [inverse] Substitute [Direct] Monitor DesktopComputers Laptops D1D1D1D1 D2D2D2D2 P P1P1P1P1 QD 1 P2P2P2P2 D1D1D1D1 D2D2D2D2 D P monitor & laptop QDs changed Although both monitor & laptop QDs changed, it is still “Change in D” a “Change in D” for those two, because the QD changes were not triggered by a change in price. price of desktop computers did change The price of desktop computers did change so there is a “Change in QD” desktop computers “Change in QD” for desktop computers. QD 2

33 Demand for for Apple AppleComputers D1D1D1D1 D2D2D2D2 Price Of WindowsComputers Substitutes - Direct

34 . [DIRECT] [inverse][inverse][inverse][inverse] Hot Dogs Hamburgers Pancakes Syrup “Substitutes” PriceDecreases PriceDecreases P D2D2D2D2 D D1D1D1D1 QD 2 QD 1 QD 2 QD 1 QD 1 QD 2 P1P1P1P1 P2P2P2P2 “Complements” PriceDecreases DemandIncreases P D1D1D1D1 D2D2D2D2D P1P1P1P1 P2P2P2P2 QD 1 QD2 Substitute/Complement Relationships

35 Tdirect Tastes [direct] I Incomes directinverse -Normal [direct] & Inferior[inverse] Mdirect Market Size(# of consumers) [direct] E Expectations of consumers about direct [future price-direct; future directinverse income [ direct ]; and availability [inverse] R Related Good Price Changes directinverse [substitutes-direct; complements-inverse] Helmets P “ TIMER ”

36 “Decrease in D” Increase in “QD” [caused by a “decrease in price”] Decrease in “QD” [caused by an “increase in price”] 1. Price change 2. Movement 3. P oint to p oin t [“ Snap shot of 1 pt in time ] Change in “D” [“TIMER”] 1. Non-price 2. Whole curve 3. Shift [“Time passes”] What could cause an “increase in Demand?” Expectationsshortage What could cause an “increase in Demand?” 5. Expectations of a shortage tasteExpectationsprice increase 1. Increase in taste 6. Expectations of a price increase incomenormal goodExpectationspositive future income 2.Increase in income [normal good] 7. Expectations of positive future income incomeinferior goodIncrsubstitute 3. Decrease in income [inferior good] 8. Incr in price of a substitute for product “X” market size# of consumersDecrcomplement 4. Increase in market size [# of consumers] 9. Decr in price of a complement of product “X” P1P1P1P1 P2P2P2P2 QD 1 P1P1P1P1 P2P2P2P2 D D D1D1D1D1 D2D2D2D2 D1D1D1D1 D2D2D2D2 P P “Increase in D” QD 2

37 Change in D [curve] Change in D [curve] [non-price change/shift/whole curve] 5 Demand Shifters [“TIMER”] Tastedirect 1. Taste [direct] Incomenormal - direct[inferior - inverse 2. Income [normal - direct] [inferior - inverse] Market Sizenumber of consumers-direct 3. Market Size [number of consumers - direct] Expectationsprice, income, & availability 4. Expectations [price, income, & availability] Related Good Price changes 5. Related Good Price changes substitutes - directcomplements - inverse [substitutes - direct] [complements - inverse] P1P1P2P2P1P1P2P2 QD 1 QD 2 “Shifting the crab demand curve” Change in QD [price change/movement/pt to pt] [“Moving” along the crab demand curve [“Moving” along the crab demand curve ” because of a crab price change] because of a crab price change] +/- QD/D Crab drop in crab prices ___ ___ 1. Crab sales are affected by a drop in crab prices. increase in income crab ___ ___ 2. An increase in income causes the demand curve for crab to shift. D3D3D3D3 D1D1D1D1 D2D2D2D2 QD 3 QD 1 QD 2 D + + QD D

38 population increase ___ ___ 1. A population increase affects sales of Pepsi Colas. incomes ___ ___ 2. Consumer incomes in the city of Plano decrease, jewelry with the result that jewelry sales are affected. 25% off cameras ___ ___ 3. A camera store has a sale that features 25% off the price of all cameras. 15% luxury tax sailboats ___ ___ 4. Texas imposes a 15% luxury tax on the sale of sailboats. ___ ___ 5. A frost in Florida destroys 60% of the orange crop and increases expectationsabout a future price increase oranges expectations about a future price increase of oranges. expect the prices digital cameras to decrease ___ ___ 6. C onsumers expect the prices of digital cameras to decrease next month. DVDs 20% increase in the price of DVD players ___ ___ 7. The sale of DVDs is affected by a 20% increase in the price of DVD players. buns 20% decrease in the price of ___ ___ 8. The sale of buns is affected by a 20% decrease in the price of hamburger meat hamburger meat. Kangaroo meat ___ ___ 9. The sale of Kangaroo meat in Europe [Roo Steak] is affected 25% increase in the price of beef by a 25% increase in the price of beef. Donuts lowers the price of donuts ___ ___ 10. Dunkin Donuts lowers the price of donuts & experiences a change in sales. + D - D + QD - QD + D - D - D + D + D + QD DVD Players Graph The Black Boldfaced Items +/- D/QD D D1D1D1D1 P2P2P1P1P2P2P1P1 Complements INVERSE [ Complements - INVERSE ] Hamburger meat P1P1P2P2P1P1P2P2 D1D1D1D1 D QD 1 Q D2 P2P2P1P1P2P2P1P1 DD1D1 QD 2 QD 1 Substitutes - DIRECT [ Substitutes - DIRECT ] QD 2 QD 1 Beef Kangaroo meat DVDs Buns

39 “Change in Demand” Change in Demand Non-Price Change Whole Curve Shift What is not held constant in these two graphs? in these two graphs? Change in QD Price Change Point to Point Movement [INVERSE][INVERSE][INVERSE][INVERSE] P1P1P2P2P1P1P2P2 P2P2P1P1P2P2P1P1 QD 1 QD 2 D QD 2 QD 1 D1D1 D2D2D2D2 D1D1D1D1 D2D2D2D2 Q 1 Q 2 Q 2 Q 1 P P Do not confuse these two with “Chg in QD” D Price

40 [D – “TIMER; QD – price change [inverse] [D – “TIMER; QD – price change [inverse] “Increase in D” MP3 Player phones __1. Which will cause an “Increase in D” for MP3 Player phones ? a. increase in incomec. increase in the price of MP3 Player phones b. decrease in income d. decrease in the price of MP3 Player phones “Increase in QD” MP3 Player phones ___2. Which will cause an “Increase in QD” for MP3 Player phones ? a. decrease in incomec. decrease in the price of MP3 Player phones b. increase in incomed. increase in the price of MP3 Player phones “Decrease in D” ___3. Which will cause a “Decrease in D” for Projectors? a. increase in the price of projectors c. decrease in # of consumers b. decrease in the price of projectors d. increase in projector taste “Decrease in QD” ___4. Which will cause a “Decrease in QD” for Projectors? a. increase in the price of projectorsc. decrease in # of consumers b. decrease in the price of projectorsd. increase in projector taste A C C A MP3 Player Phone [stereo sound, downloadable sound games and ring tones]

41 “increase in QD”Snickers 1. What would cause an “increase in QD” for Snickers? a. increase in price of Snickers b. decrease in price of Snickers c. decrease in income d. increase in number of consumers “increase in D”Snickers 2. What would cause an “increase in D” for Snickers? a. increase in taste b. decrease in price of Snickers c. decrease in incomed. increase in the price of Snickers “decrease in QD”Snickers 3. What would cause a “decrease in QD” for Snickers? a. increase in taste b. decrease in price of Snickers c. increase in price of Snickers “decrease in D”Snickers 4. What would cause a “decrease in D” for Snickers? a. decrease in income b. increase in taste c. decrease in price of Snickers Butterfingers 5. An “increase in the price of Butterfingers would Snickers cause a(n) (increase/decrease) in (QD/D) for Snickers? QD & D Practice Quiz [ S nickers ]

42 1. (Demand/Supply) is identified as quantities consumers are willing and able to buy at various prices during a given time period. law of demandprice & QD 2. The law of demand says that price & QD are (directly/inversely) related. most important variable 3. The most important variable influencing decisions to produce and not held purchase goods is (technique/price). (Price/income) is not held constant when moving along a stable demand curve constant when moving along a stable demand curve. Income effect-the increase or decrease in purchasing power 4. Income effect-the increase or decrease in purchasing power brought on by a change in (taste/market size/price). Substitution effectsubstitute 5. Substitution effect – tendency to substitute a (higher/lower) -priced product for a more expensive product. Diminishing marginal utility – utility 6. Diminishing marginal utility – utility, or (determination/anger/satisfation) decreases as more of the same product [Snickers] is consumed. law of demand 7. The law of demand refers to a (movement/shift) along a demand curve. Substituting chickensteak goes up 8. Substituting chicken as the price of steak goes up is an example of the (income/substitution) effect. price of caviar falls 9. When the price of caviar falls, the purchasing power of our money income rises & thus permits us to purchase more caviar. This is the (income/substitution) effect. numerical tabulation 10. The demand (curve/schedule) is a numerical tabulation showing QD at each price. graphical representation The demand (curve/schedule) is a graphical representation of the law of demand. NS 1-10

43 Elasticity of demand 11. Elasticity of demand – the way price affects (attitude/quantity/market size). very responsive 12. (Inelastic/Elastic) demand – demand that is very responsive to price. [A small price increase causes a large decrease in quantity demanded.] change in price has little impact on QD. 13. (Inelastic/Elastic) demand-when a change in price has little impact on QD. 3-item test for elastic demand 14. The 3-item test for elastic demand are substitutes, luxury items, and (inexpensive/expensive) items. 3-item test for inelastic demand 15. The 3-item test for inelastic demand are no substitutes, necessities, and (inexpensive/expensive) items. Expensive cars 16. Expensive cars have (inelastic/elastic) demand. Pepsi Cola 17. Pepsi Cola has (inelastic/elastic) demand. Insulin 18. Insulin has (inelastic/elastic) demand. elastic demand curve 19. The elastic demand curve is more (horizontal/vertical). [much change] inelastic demand 20. The inelastic demand curve is more (horizontal/vertical). [not much change] NS

44 invention of the calculator 21. With the invention of the calculator, the demand curve for the slide rule (increased/decreased). Forest Gump went to China 22. When Forest Gump went to China & the U.S. followed by opening up relations with China opening up relations with China, the demand curve for Coke (increased/decreased). increase in income 23. An increase in income would (increase/decrease) the demand used clothing for used clothing. [inferior good] decrease in income 24. A decrease in income would (increase/decrease) the demand for lobster. [normal good] decrease in the price of product X 25. A decrease in the price of product X [lumber] will (incr/decr) complementaryproduct the demand for the complementary product Y. [nails] Brooke Shields 26. A fter Brooke Shields[15] did her national TV ads [“Nothing comes between me and my Calvin’s”], the “D” curve moved (right/left). NS $45

45 increase in the price of Pepsi 27. An increase in the price of Pepsi causes the Coke demand curve for Coke to move to the (right/left). sale on shirtsties 28. If there is a sale on shirts, the demand curve for ties will move to the (right/left). man’s workplace is about to close down 29. If a man’s workplace is about to close down, his demand major purchases curve for major purchases would move to the (right/left). cure for lung cancer 30. If a cure for lung cancer were found, the demand curve for cigarettes cigarettes would move to the (right/left). price of pancakes decreases 31. If the price of pancakes decreases, the demand syrupcomplement for syrup, a complement, will (increase/decrease). price of butter decreases margarine 32. If the price of butter decreases, the demand for margarine will (incr/decr). “change in QD” 33. A “change in QD” is caused by (price change/TIMER) [a “movement”] 34. A “change in D” is caused by (price change/TIMER) [a “shift”] NS e

46 The End “Econ, Econ”. Let tell you about econ.

47 doubling the ticket 1. Madonna gave a concert at the AAC after doubling the ticket price price and experiencing a change in anticipated attendance. decrease in tastelobster 2. A decrease in taste causes the demand for lobster to shift. 20% increase in the price of Pepsi Coke. 3. A 20% increase in the price of Pepsi affect the sale of Coke. expectcell phones 4. Consumers expect the price of cell phones to increase 25% next month. Ford F150sCuba 5. The sale of Ford F150s is affected when the U.S. begins trading with Cuba. autos decrease in pricegasoline 6. New autos decrease in price by 20% & the sale of gasoline is affected. increases the price of its thongs 7. Victoria’s Secret increases the price of its thongs by 40% and experiences a change in the volume of sales. triples the price of her album 8. Britney Spears triples the price of her album, “Oops, I flunked Econ Again,” “Oops, I flunked Econ Again,” and sales are affected. peaches expectations 9. A drought in Texas destroys 40 % of the state’s peaches & increases consumer expectations about a future price increase of peaches. motorcycleshelmets 10. A 15% decrease in the price of motorcycles affect the sale of helmets. T direct T aste [direct] I directinverse I ncome [normal-direct] [inferior-inverse] M direct M arket Size [# of consumers-direct] E directdirectinvers E xpectations [price-direct] [income-direct] [availability-inverse] R directinverse R elated Good Price Changes [subs-direct] [complements-inverse] 1.–QD 2. –D 3. +D 4.+D 5.+D 6.+D 7.–QD 8.–QD 9.+D 10.+D

48 the ticket 1. Christina gave a concert at the AAC after lowering the ticket price price and experiencing a change in anticipated attendance. increase in tastelobster 2. An increase in taste causes the demand curve for lobster to shift. coke 20% decrease in the price of Pepsi. 3. The sale of coke is affected by a 20% decrease in the price of Pepsi. expectXBOX 4. Consumers expect the price of XBOX to decrease 25% next month. Dr Pepperwar with China 5. The sale of Dr Pepper is affected when the U.S. goes to war with China. SUVs decrease in pricegasoline 6. New SUVs decrease in price by 30% & the sale of gasoline is affected. decreases the price of its teddies 7. Victoria’s Secret decreases the price of its teddies by 50% and experiences a change in the volume of sales. lower the price of their album“Oops, 8. T he Spice Girls lower the price of their album, “Oops, We Actually Passed Econ,” We Actually Passed Econ,” and sales are affected. oranges expectations 9. A freeze in California destroys 70% of the state’s oranges and increases consumer expectations about a future price increase of oranges. breadbagels 10. A 50% increase in the price of bread affect the sale of bagels. T direct T aste [direct] I directinverse I ncome [normal-direct] [inferior-inverse] M direct M arket Size [# of consumers-direct] E directdirectinverse E xpectations [price-direct] [income-direct] [availability-inverse] R directinverse R elated Good Price Changes[subs-direct] [complements-inverse] 1.+QD 2.+D 3. -D 4.-D 5. -D 6.+D 7.+QD 8.+QD 9.+D 10.+D

49 Review of Demand

50 QD 2 QD 1 PriceQD Inverse relationshi p $ [ with 2 yr contract] D Reasons For Downsloping “D” Curve Income Effect 1. Income Effect –current buyers buy more. Substitution Effect 2. Substitution Effect– new buyers now purchase. Diminishing MarginalUtility 3. Diminishing Marginal Utility - because buyers of successive units receive less marginal utility, they will buy more only when the price is lowered. Change in QD Price change 1. Price change Movement 2. Movement [up/down the demand curve] Point to point 3. Point to point [along the curve] “D” “whole curve”.“all prices” “D” refers to the “whole curve”. [“all prices”] “QD”“point on the curve” “QD” refers to a “point on the curve” “particular price.” based on a “particular price.” $ iPhone [8GB]

51 “Demand Shifters” [“ TIMER” ] 1. Taste [direct] 2. Income [normal-direct] [inferior-inverse] 3. Market Size [number of consumers-direct] 4. Expectations [of consumers about future price-direct, about future availability-inverse, or about future income–direct. about future availability-inverse, or about future income–direct. 5. Related Good Prices [substitutes-direct] [complements-inverse] Changes in “D” [curve] Non price change 1. Non price change [“TIMER”] Whole “D” curve shifts 2. Whole “D” curve shifts [There is a change in “QD” but it is not caused by a change in “price.” QD-“singe price”D-”all prices” [QD-“singe price”; D-”all prices”] Complement [inverse] Substitute[Direct] Games for PS3 PS3 XBOX P D3D3D3D3 D1D1D1D1 D3D3D3D3 QD 3 QD 1 QD 2 D1D1D1D1 D2D2D2D2 P P1P1P1P1 QD 1 QD 2 P2P2P2P2 D1D1D1D1 D2D2D2D2 D P

52 D1 D1 D1 D1 D2D2D2D2 P QD 1 QD 2 increase in taste An increase in taste for DVDs results in an increase in demand increase in demand. decrease in taste A decrease in taste for videos results in a decrease in demand decrease in demand. D3D3D3D3 QD 3

53 D1 D1 D2 D2 D2 D2 P QD 1 QD 2 More income results in more demand for new cars; less demand for used cars. New Cars Used Cars Less income results in more demand for used cars; less demand for new cars.

54 D1 D1 D1 D1 D2 D2 D2 D2 P QD 1 QD 2 More demand for both normal & inferior goods New Cars Used Cars one billion Chinese new potential This is what we told one billion Chinese, as new potential consumerstrade relations 1972 consumers, when we opened trade relations with them in 1972.

55 D1 D1 D1 D1 D2 D2 D2 D2 P QD 1 QD 2 iRate I f Steve Jobs responds to iRate customers who iPhone iSorry bought the iPhone at $599 and says, “iSorry, we will raise the price back to $599 in 3 weeks.” iPhone $399 Buy it now to save money.

56 D1 D1 D1 D1 D2 D2 D2 D2 P QD 1 QD 2 coming out of recession Let’s say that we are coming out of recession & consumers Positive future income feel secure about their jobs. [ Positive future income ]

57 D1 D1 D1 D1 D2D2D2D2 P QD 1 QD 2 going into a recession Let’s say that we are going into a recession and consumers Negative future income don’t feel secure about their jobs. [ Negative future income]

58 Complement [ Inverse ] Substitute [ Direct ] Milk Cereal Pop Tarts D1D1D1D1 D2D2D2D2 P P1P1P1P1 QD 1 P2P2 D1D1D1D1 D2D2D2D2 D P QD 2

59 Substitutes - Direct Dr Pepper Coke P1P1P2P2P1P1P2P2 P1P1P2P2P1P1P2P2 QD 1 QD 2 D D D1D1D1D1 D2 D1D1D1D1 D2D2D2D2 Motorcycles Helmets

60 “Change in Demand” Change in Demand Non-Price Change Whole Curve Shift What is not held constant in these two graphs? in these two graphs? Change in QD Price Change Point to Point Movement [INVERSE][INVERSE][INVERSE][INVERSE] P1P1P2P2P1P1P2P2 P2P2P1P1P2P2P1P1 QD 1 QD 2 D QD 2 QD 1 D1D1 D2D2D2D2 D1D1D1D1 D2D2D2D2 Q 1 Q 2 Q 2 Q 1 P P Do not confuse these two with “Chg in QD” D Price

61 [D – “TIMER; QD – price change [inverse] [D – “TIMER; QD – price change [inverse] [Revised from previous] [Revised from previous] “Decrease in D” iPod nanos __1. Which of the following will cause an “Decrease in D” for iPod nanos ? a. increase in incomec. increase in the price of iPod nanos b. decrease in income d. decrease in the price of iPod nanos “Decrease in QD” iPod nanos ___2. Which will cause an “Decrease in QD” for iPod nanos ? a. decrease in incomec. decrease in the price of iPod nanos b. increase in incomed. increase in the price of iPod nanos “Increase in D” ___3. Which of the following will cause a “Increase in D” for HDTVs? a. increase in the price of HDTVsc. decrease in # of consumers b. decrease in the price of HDTVsd. increase in HDTV taste “Increase in QD” ___4. Which of the following will cause a “Increase in QD” for HDTVs? a. increase in the price of HDTVsc. decrease in # of consumers b. decrease in the price of HDTVsd. increase in IPOD tasteB D D B

62 “decrease in QD”KitKats 1. What would cause a “decrease in QD” for KitKats? a. increase in price of KitKats b. decrease in price of KitKats c. decrease in income d. increase in number of consumers “decrease in D”KitKats 2. What would cause a “decrease in D” for KitKats? a. increase in taste b. decrease in price of Kitkats c. decrease in incomed. increase in the price of KitKats “increase in QD”KitKats 3. What would cause an “increase in QD” for KitKats? a. increase in taste b. decrease in price of KitKats c. increase in price of KitKats “increase in D”KitKats 4. What would cause an “increase in D” for KitKats? a. increase in # of consumers b. decrease in taste b. decrease in price of KitKats Reese’s 5. A “decrease in the price of Reese’s would KitKats cause a(n) (increase/decrease) in (QD/D) for KitKats? QD & D P ractice Q uiz [“Revised”]

63 . Elastic/Inelastic Demand Go over Total Receipts Test For Elastic & Inelastic

64


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