Presentation on theme: "Activator - Ch. 4 Sec 1 Three people enter a Mazda dealership all interested in buying a brand new car. All three initially stop to look at the Mazda RX8."— Presentation transcript:
1Activator - Ch. 4 Sec 1Three people enter a Mazda dealership all interested in buying a brand new car. All three initially stop to look at the Mazda RX8. The first person tells the salesperson that they “really like the RX8” but they “don’t have any money today”, and are “saving their money for a purchase within the next 6 months”. The second person tells the dealer that they “have the money to buy”, they “are going to ultimately buy RX8”, but they are shopping various dealerships and are “not willing to buy today”. The third person tells the dealer that they “love the RX8!”, they “have the money” and they “want to buy it today.” Answer the following questions based on the above scenario:List each customer (1-3). Next to each customer, write each of the following that apply to their situation:Desire to buyWillingness to buyAbility to buyWhich customer do think was most appealing to the salesperson, and why?Which customer would you have helped first, and why?
2Chapter 4 - Demand Section 1 – Understanding Demand Demand – desire, ability, and willingness to buy a good/serviceThe amount of a product that a consumer (individual) or group of consumers (market) will purchase at a given priceIn a market system, buyers and sellers determines the prices of goods and servicesMicroeconomics – The study of the economic behavior and decision making of small units, such as individuals, families, and firms (businesses)
3Application Chart – Demand Make a three column chart that represents 3 items that you want on one side, whether you can afford them or not in the next, and whether you are willing to buy them in the last.Desired ItemsAbility/AffordWillingnessDemand1.2.3.
4The Law of DemandLaw of Demand –prices are lower, consumers will buy more; prices are higher, consumers will buy less.Inverse relationship between price and the QD of a product.Prices strongly influence the quantity demanded of a productPricePrices ofProducts DecreasesDemand Quantity DemandedIncreasesPrice Prices ofProductIncreasesDemandQuantity Demanded Decreases
7The Income EffectIncome Effect – the change in consumption resulting from a change in price, “more bang for your buck”Consumers feel richer when prices drop, poorer when prices rise. Both affect the Quantity Demanded of a product.
8The Income EffectPurchases More Bang for your Buck
9Substitution Effect $3.99 $4.99 $3.99 Substitution Effect – when consumers react to an increase in a good’s price by consuming less of one good and more of other goods$3.99$4.99$3.99
10The Demand Schedule Price of Ice Cream Quantity Demanded $3.00 2.50 2 Demand Schedule - a table that lists the quantity of a good that a person will purchase at each price in a marketMarket Demand Schedule - lists the quantity of a good that all consumers will purchase at each price in the marketPrice of Ice CreamQuantity Demanded$3.002.5022.0041.5061.008.5010.1012Price of Ice CreamQuantity Demanded$3.002.50302.00501.501001.00200.50300.10400
11Application - The Demand Curve Demand Curve - graphically represents the demand scheduleDemand Curve is downward sloping because of the law of demandPrice per Ice Cream Cone1.502.002.50$3.001.000.50123456789101112Quantity Demanded of Ice-Cream Cones per weekPriceQuantity$3.002.5022.0041.5061.008.5010.1012
12Chapter 4 Section 2Plot the demand schedule below, which represents 2004 Florida Marlins avg. sales per game (in thousands)Price per Ticket20.0025.0030.00$40.0015.0010.00Quantity Demanded of TicketsPrice2004$40.0035.00430.00625.00820.001015.001210.0014Playoffs8101416182224Next Season248101235.00D3D1D2
13Section 2 - Shifts of the Demand Curve Changes in Demand are reflected as a shift in the curveShifts to the right indicate an increase in demandShifts to the left indicate a decrease in demandPriceIncreasein demandDecreasein demandDemandcurve, D 2Demandcurve, D 1Demand curve, D 3Quantity Demanded
14Difference Between A Change in Quantity Demanded and a Change in Demand QD - A change in the amount a consumer will purchase as a result of a change in price (ceteris paribus – all other things constant)Reflected as movement along the curveD – A change in the amount a person will buy as a result of an outside factor (change in ceteris paribus - popularity of product, consumer income, etc.)Reflected as a shift in the curve
15Flow Chart – Determinants of Demand – pgs. 85 - 87 What Causes a Shift?Consumer IncomeConsumer ExpectationsPopulationConsumer Tastes and AdvertisingPrice of Related GoodsDescription Consumer Income has a major influence on a consumer’s demandDescriptionDescriptionDescriptionDescriptionExample of Increase Demand People are paid more, they buy more normal goodsExample of Increase DemandExample of Increase DemandExample of Increase DemandExample of Increase DemandExample of Decrease DemandPeople are paid less they buy less normal goods and more inferior goodsExample of Decrease DemandExample of Decrease DemandExample of Decrease DemandExample of Decrease Demand
16What Causes a Shift? Consumer Income Consumer Expectations Population Consumer Tastes and AdvertisingPrice of Related ProductsGroup Assignment (pg ): Create a scenario that represents each of the five determinants of demand.Provide a scenario that shifts the demand curve to the right and the left.
17Consumer IncomeConsumer Income – A consumer’s income affects their demand for most goods and servicesIncrease in income will cause an increase in consumptionDecrease in income will cause a decrease in consumptionNormal good –Inferior good –
18Price of Related GoodsPrice of related goods – demand for goods can be affected by the price for related goodsComplements – the demand of one good increases as a result of the purchase of another goodSubstitutes – the demand for one good decreases because another good is used in its place
19Consumer Tastes and Advertising Consumer Tastes and Advertising – changes in popularity of products or the influence of trends and advertising can affect demandPopularity of product decreases, decreases in demandPopularity of a product increases, increases in demand
20Consumer Expectations Consumer Expectations – refers to the way people think about the future, as it relates to consumptionExpectations for the future can affect consumption for the present
21PopulationPopulation – an increase in the number of consumers can cause an increase or decrease in the demand for productsIncrease in population, increase in demandDecrease in population, decrease in demand
22Demand Application – Average sales of SUV’s per month (in millions) Plot the demand schedule below. The graph represents the demand for SUV’s during the early 1990’s. During the late 1990’s SUV’s became increasingly popular in the United States. During the mid 2000’s, gas prices increased nationally to average rates around 5.00 per gallon. Consumers expected these prices to remain in the future, which affected the demand for SUV’s around the country.Price per SUV202530$551510Quantity Demanded of SUVs5045PriceEarly 90’s$5550245440635830102514Late 90’s2468101420Gas Hikes1234684035
23Demand Application – Average sales of SUV’s per month (in millions) How did the curve change from the early 90’s to the late 90’sWhat was the cause of the change from the early 90’s to the late 90’s?What happened to the curve after the gas hikes?Price per SUV202530$551510Quantity Demanded of SUVs50454035D3D2D1
24Chapter 4 Section 3List 2 items that you would buy less of if the price increasedList 2 items that you would buy more of if the price decreasedList 2 items that you would continue to buy, even if the increased
25Section 3 – Elasticity of Demand Elasticity of Demand –how consumers will cut back or increase their quantity demanded for a product when prices rise or fallMeasures the extent to which changes in price causes changes in quantity demanded.Helps determine how much a price change will influence the qd of any given product
26Elastic DemandElastic – consumption changes drastically when a price rises or fallsA consumer is very responsive to price changes
27Inelastic DemandInelastic - changes in price causes a relatively small change in quantity demandedConsumers continue to purchase regardless of price change
28Determinants of Demand Elasticity Availability of Close SubstitutesPepsi/Coke, Butter/MargarineRelative ImportanceHow much you spend on a goodTable salt versus designer clothesNecessities versus LuxuriesMedicine versus a luxury automobileChange over timeLonger time horizon – more elasticGas in the short run is inelastic, but over time elastic
29Values of Elasticity Elasticity has a precise mathematical definition Percentage change in quantity demandedPercentage change in priceValue is less than 1, it is considered inelastic.Inelastic – Demand is < 1Value is greater than one, demand is elastic.Elastic – Demand is > than 1Value is equal to one, demand is unitary elastic.Unitary Elastic – Demand is = 1
33Price of a slice of pizza Total RevenueTotal Revenue – the amount paid by buyers and received by sellers of a goodPrice of the goods x quantity demanded = Total RevenuePrice of a slice of pizzaQuantity DemandedPer dayTotal Revenue$.50300150$1.00250$1.50200$2.00135270$2.50100$3.0050
34Elasticity Application 1 (Q2 – Q1) / [(Q2+Q1) / 2] (P2 – P1) / [(P2 + P1) / 2]Use the formula to show how you determine elasticity of demand for the graph.Q2 _______ - Q1_______ = ______ / Q2 ______+ Q1 _______ / 2 = _______ = ________P2 _______ - P1_______ = ______ / P2 ______+ P1 _______ / 2 = _______ = ________- Elasticity QD______ P______P = ________Did the price change cause an elastic or inelastic response in the QD for ice cream cones? ________________________________________________Elastic
35Elasticity Application 2 (Q2 – Q1) / [(Q2+Q1) / 2] (P2 – P1) / [(P2 + P1) / 2]Use the formula to show how you determine elasticity of demand for the graph.Q2 _______ - Q1_______ = ______ / Q2 ______+ Q1 _______ / 2 = _______ = ________P2 _______ - P1_______ = ______ / P2 ______+ P1 _______ / 2 = _______ = ________- Elasticity QD______ P______P = ________Did the price change cause an elastic or inelastic response in the QD for insulin? ________________________________________________Inelastic
36Elasticity Application 3 Scenario: The Apple store in St. John’s Mall made the decision to drop the price of their Ipod Nano from $150 to $125. As a result, the sale of Nano’s increased from 200 a week to Create a Demand Schedule and Curve based on the above information.Price Per Ipod NanoPrice of NanosQD per week150125150125200250QDUse the formula to show how you determine elasticity of demand for the graph.Q2 _______ - Q1_______ = ______ / Q2 ______+ Q1 _______ / 2 = _______ = ________P2 _______ - P1_______ = ______ / P2 ______+ P1 _______ / 2 = _______ = ________- Elasticity QD______ P______P = ________Elastic2. Did the price change cause an elastic or inelastic response in the QD for Nano’s? ___________________3. If the firm drops their price by _________%, they will see an increase in sales of __________%4. To determine if this is a good decision for the firm, calculate the total revenue of each price:- Multiply the first price of the Nano by the first QD – $______ x _______ = ___________________- Multiply the second price of the Nano by the second QD – $ ______ x _______ = __________________5. Which price point generates the most total revenue? ______________________$30,000$31250125
37.18What is the price elasticity of demand when the price changes from $1 to $2? _________ *Use the midpoint method formula to determine the answer to #1*Q2 – Q1__ ________ (Q2 + Q1)/ = ________________ = ___________ P2 – P1__ ________ (P2 + P1)/220170.121.671.5Based on the above result, demand for Moonbucks coffee at this price range is (elastic/unit elastic/inelastic)
381.22What is the price elasticity of demand when the price changes from $5 to $6? _________ *Use the midpoint method formula to determine the answer to #1*Q2 – Q1__ ________ (Q2 + Q1)/ = ________________ = ___________ P2 – P1__ ________ (P2 + P1)/22090.221.185.5Based on the above result, demand for Moonbucks coffee at this price range is (elastic/unit elastic/inelastic)
40The Flaw in Point Elasticity of Demand Elasticity = Percentage change in Quantity Demanded/Percentage change in Price% Q % PPrice8.00$10.008 10QuantityA10 – 8 X 10010= 20%$8 – 10 X100$8= 25%B AB20%25%= .8InelasticA B8 – X 1008= 25%$10 – 8 X100$10= 20%25%20%= 1.25Elastic
41Determinants of Demand Elasticity Can The Purchase Be Delayed?Insulin, gas, cigarettes, etc…2. Are Adequate Substitutes Available?Pepsi/Coke, Steaks/Chicken, etc…3. Does the Purchase Use a Large Portion of Income?Table Salt vs. AutomobilesDeterminants of ElasticityBrand New BMWGasolineInsulinCan the purchase be delayed ?YesNoAre adequate substitutes available?Does the purchase use a large portion of income?Type of ElasticityElasticInelastic
42Law of Diminishing Marginal Utility Diminishing Marginal Utility – a decrease in the (utility) usefulness due to the reduced satisfaction of a product.Utility – usefulness of a good/service to a consumer.
43Law of Diminishing Marginal Utility Buy 1 pairget 2nd ½ price
44Do Now – Ch. 5 Sec 1Following graduation, Braden McElroy opens a smoothie shop called, . Initially, he needs to determine the products that he wishes to sell at the shop. He decides that he will offer 5 main types of smoothies on his menuBraden’s Berry BlastoffBraden’s Banana BonanzaSt. Simon’s Succulent StrawberriesBrunswick’s Blueberry LagoonMocha Marsh SurpriseDuring the first month of operation he offered all of his smoothies at He found that people were willing to purchase “Braden’s Berry Blastoff”, “Braden’s Bananza Bonanza” and “St. Simon’s Succelent Strawberries”. Ultimately, Mocha Marsh Surprise sold very little, and he could barely keep “Brunswick’s Blueberry Lagoon in stock.What should Braden do with the price of #’s 1, 2, and 3?What should he do with the price of #4?What might he do with number 5?
45Application – Revenue Table Revune – amount of money a company receives by selling its goodsPrice of the goods x quantity demanded = Total RevenuePrice of a slice of pizzaQuantity DemandedPer dayTotal RevenueIncrease/Decrease Total Revenue$.50300NA$1.00250$1.50200$2.00135$2.50100$3.0050
46Application – Revenue Table Revune – amount of money a company receives by selling its goodsPrice of the goods x quantity demanded = Total RevenuePrice of a slice of pizzaQuantity DemandedPer dayTotal RevenueIncrease/Decrease Total Revenue$.50300$150NA$1.00250$250Increase$1.50200$300$2.00135$270Decrease$2.50100$3.0050