2 Demand ReviewWhat are the two key aspects of the definition of demand?What is the Law of Demand?Give an example of the substitution effectGive an example of the income effectGive an example of the law of diminishing marginal utilityExplain how the law of diminishing marginal utility causes the law of demandHow do you determine the MARKET demand for a particular good? (from reading)Name 5 cities in Iowa.
3 The Demand CurveA demand curve is a graphical representation of a demand schedule.The demand curve is downward sloping showing the inverse relationship between price (on the y-axis) and quantity demanded (on the x-axis)When reading a demand curve, assume all outside factors, such as income, are held constant. (Remember: ceteris paribus)
4 This is a change in demand, not a change in quantity demanded Shifts in DemandCHANGES IN DEMANDCeteris paribus-“all other things held constant.”When the ceteris paribus assumption is dropped, movement no longer occurs along the demand curve. Rather, the entire demand curve shifts.A shift means that at the same prices, more people are willing and able to purchase that good.This is a change in demand, not a change in quantity demanded
5 This is a change in demand, not a change in quantity demanded Shifts in DemandCHANGES IN DEMANDCeteris paribus-“all other things held constant.”When the ceteris paribus assumption is dropped, movement no longer occurs along the demand curve. Rather, the entire demand curve shifts.A shift means that at the same prices, more people are willing and able to purchase that good.This is a change in demand, not a change in quantity demandedChanges in priceDON’T shiftthe curve!
6 Change in Demand Original Curve P QD $5 4 3 2 1 10 20 35 55 80 P D o Q Price of CornP$54321CORNOriginal CurvePQD$543211020355580DoQQuantity of Corn
7 Change in Demand What if Corn makes you smarter? P QD $5 4 3 2 1 10 20 Price of CornPWhat ifCorn makesyou smarter?$54321CORNPQD$543211020355580DoQQuantity of Corn
8 Change in DemandPlot the Increase inDemandPrice of CornP$54321CORNPQD$54321102035558030406080+DoQQuantity of Corn
9 Change in Demand Increase in Demand P QD $5 4 3 2 1 10 20 35 55 80 30 Price of CornP$54321Increase inDemandCORNPQD$54321102035558030406080+D1DoQQuantity of Corn
10 Change in Demand What if Corn causes hair loss? P QD $5 4 3 2 1 10 20 Price of CornWhat ifCorn causeshair loss?P$54321CORNPQD$543211020355580DoQQuantity of Corn
11 Change in Demand P QD $5 4 3 2 1 10 20 35 55 80 -- 10 20 40 60 P Price of CornPPlot the Decrease inDemand$54321CORNPQD$543211020355580--10204060DoQQuantity of Corn
12 Change in Demand Decrease in Demand P QD $5 4 3 2 1 10 20 35 55 80 -- Price of CornP$54321CORNDecrease inDemandPQD$543211020355580--10204060DD2oQQuantity of Corn
13 What Causes a Shift in Demand? 5 Determinates of Demand (SHIFTERS) :Tastes and PreferencesNumber of ConsumersPrice of Related GoodsConsumer IncomeFuture ExpectationsChanges in PRICE don’t shift the curve. It only causes movement along the curve.
14 Prices of Related Goods The demand curve for one good can be affected by a change in the price of ANOTHER related good.Substitutes are goods used in place of one another.If the price of one increases, the demand for the other will increase (or vice versa)Ex: If price of Pepsi falls, demand for coke will…2. Complements are two goods that are bought and used together.If the price of one increase, the demand for the other will fall. (or vice versa)Ex: If price of skis falls, demand for ski boots will...
15 IncomeThe incomes of consumer change the demand, but how depends on the type of good.Normal GoodsAs income increases, demand increasesAs income falls, demand fallsEx: Luxury cars, Sea Food, Jewelry, homes2. Inferior GoodsAs income increases, demand fallsAs income falls, demand increasesEx: Top Romen, used cars, used cloths,
16 In-and-Out Hamburgers (a normal good) PracticeFirst identify the determinant (Shifter). Then decide if demand will increase or decreaseIn-and-Out Hamburgers (a normal good)Population boomIncomes fall due to recessionPrice for Carne Asada burritos falls to $1Price increases to $5 per In-and-Out burgerNew health craze- “No ground beef”In-and-Out announce that they will significantly increase prices NEXT monthGovernment heavily taxes shakes and fries, which causes their prices to quadruple.In-and-Out lower price of burgers to $1
18 Supply Defined EXAMPLE: Mowing Lawns What is supply?Supply is the different quantities of a good that sellers are willing and able to sell at different prices.What is the Law of Supply?There is a DIRECT (or positive) relationship between price and quantity supplied.As price increases, the quantity producers make increasesAs price falls, the quantity producers make falls.Why? Because, at higher prices profit seeking firms have an incentive to produce more.EXAMPLE: Mowing Lawns