1. Chapter 4 Demand

2. 4.1: Understanding Demand Demand  the desire to own something and the ability to pay for it BOTH factors must be present for demand to exist

3. Do I really Demand this?

4. Law of Demand Consumers will buy more of a good when its price is lower, and less when the price is higher

5. Law of Demand in Action This pizza is $1.00 per slice, how much would you buy? What if it were $5.00?

6. Influencing Factors Substitution effect  When consumers react to an increase in a good’s price by consuming less of that good and more of a substitute good Consumers would choose an alternative to pizza if it went up in price

7. Income Effect The change in consumption that results when a price increase causes real income to decline Opposite is also true, if prices fall you now feel wealthier Buy more due to a lower price; Less due to a higher price

8. Demand Schedules

9. A table that lists the quantity of goods a person will buy at various prices in a market Shows how much you will buy at each individual price Example: Mr. Burden buys 3 slices of pizza at $1.50 per slice

10. Market Demand Schedules Table that lists the quantity of a good all consumers in a market will buy at various prices Example: The whole PHS faculty buys 55 slices of pizza at $1.50 per slice Page 89

11. Demand Curves

12. Graphic representation of a demand schedule Shows the same information contained in the demand schedule, just in a different, more visual, way

13. Demand Curve Setup Vertical axis will ALWAYS list the price Horizontal axis will ALWAYS list the quantity

14. Page 90 Notice two things about the curve on page 90 First, only shows the relationship between the price of the good and the quantity demanded Secondly, it is downward sloping. As price decreases, quantity demanded increases

15. Shifts in the Demand Curve Chapter 4, Section 2

16. Ceteris Paribus Latin phrase that means “all other things held constant” We are only taking the price of the good into account Demand curves are accurate as long as no other factors change besides the price

17. Change in Demand vs Change in Quantity Demanded Do not confuse the two A change in Quantity demanded is a change at one price only A change in Demand is a change at all price levels, therefore forming an entire new curve

18. Change in Demand Occurs when the entire demand curve shifts, consumers buy different quantities at EVERY price

19. What Causes a Change in Demand? 6 Total Factors Income, Consumer Expectations, Population, Demographics, Consumer Tastes and Advertising, and Prices of Related Goods

20. 1. Income

21. Income Consumer’s income effects their demand for goods When income rises, the demand curve shifts to the right (increases) When income falls, the demand curve shifts to the right (decreases)

22. Normal vs Inferior Goods Normal goods  A good that consumers will demand more of when their income rises Steak for dinner, not Ramen noodles

23. Inferior Goods A good that consumers will demand less of when their income increases Buy new cars instead of used; Name brands, not generic brands

24. 2. Consumer Expectations

25. Consumer Expectations Expectations about the future impact our demand for goods If you expect prices to rise in the future, your demand for that product will rise If you expect the price to fall in the future, your demand also falls

26. 3. Population

27. Population Rise in population leads to increased demand for houses, food, etc Consider the effects caused by baby boomer generation? Clothes Food Schools

28. Biggest Demand for Baby Boomers Now? Healthcare

29. 4. Demographics Facebook membership by age

30. Demographics The statistical characteristics of populations and population segments, especially when used to identify consumer markets Businesses use this data to identify who potential customers are, where they live, and how likely they are to purchase a specific product

31. Largest population on the rise? Which portion of the American population is growing at the largest rate? Due to this surge, businesses are devoting their resources to producing goods and services for these consumers Hint…think across the street

33. 5. Consumers Tastes and Advertising

34. Consumer Tastes and Advertising Advertising shifts demand curves…that is a fact! Advertising is everywhere, streets, TV, Radio, Online 1.9 Billion spent in advertising on Facebook and MySpace in 2008

35. 6. Price of Related Goods Complements  two goods that are bought and used together Example…Peanut butter and Jelly Substitutes  Goods that are used in place of one another Example…Beef and Chicken

36. Effect on Curves When price of a product rises, the demand for its complement will fall The opposite is also true When the price of a product rises, the demand for its substitute will rise Opposite is al true for this

37. Elasticity of Demand Chapter 4: Section3

38. Defining Elasticity A measure of how consumers respond to price changes Measures how drastically buyers will cut back or increase their demand for a good when the prices rises or falls

39. Inelastic Demand A good is INELASTIC if you buy the same amount or just a little less of a good after a large price increase; Not very sensitive to price changes These goods will most likely be your needs and necessities Medicine, baby formula/milk, etc

40. Elastic Demand A good is ELASTIC if you buy much less of a good after a small price increase Very responsive to price changes

41. Unit Elastic A good is UNIT ELASTIC is the change in demand is proportional after a price change Example: If a product is on sale for 20% off you will buy 20% more

42. Determining Elasticity If X<1  Inelastic If X>1  Elastic If X = 1  Unit Elastic

43. Elasticity Formula {Qb- QA)/ (Qb + Qa}/(Pb-Pa)/ (Pb + Pa} Qb = quantity before Qa= quantity after Pb = Price before Pa = Price after

44. Factors Affecting Elasticity #1 Availability of Substitutes If there are few substitutes available, you will buy more likely to buy the item even with an increase in price If substitutes are available, you are less likely to buy the item

45. #2 Relative Importance How much of your budget can you spend? If you spend a large share of your income on a good, a price increase will force you to make some tough choices

46. #3 Necessities vs. Luxuries Will always buy necessities  They will be Inelastic Luxuries are items we can more easily cut back on  They will be Elastic Necessities and luxuries will vary from person to person

47. #4 Change Over Time May take some time to change your spending habits 1970’s gas crisis is good example Price of gas rose quickly, but little changed during the short term People still bought same amount of gas

48. Over time though people started to demand smaller, more fuel efficient cars Reduced their consumption for gas and found substitutes So gas in the short term was inelastic, over time it became more elastic

49. Chevy Volt

50. $41,000 It can be plugged into a household electric socket and charged fully within about six hours. Completely charged it can drive roughly 40 miles on electricity alone If the battery does run down, the 1.0-liter, three-cylinder gas engine acts as a generator to charge the battery and provides enough power to for up to an additional 600 miles.