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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.

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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."— Presentation transcript:

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2 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. The first person tells the salesperson that they really like the RX8 but they dont 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: 1.List each customer (1-3). Next to each customer, write each of the following that apply to their situation: 1.Desire to buy 2.Willingness to buy 3.Ability to buy 2.Which customer do think was most appealing to the salesperson, and why? 3.Which customer would you have helped first, and why?

3 Chapter 4 - Demand Section 1 – Understanding Demand Demand – desire, ability, and willingness to buy a good/service The amount of a product that a consumer (individual) or group of consumers (market) will purchase at a given price In a market system, buyers and sellers determines the prices of goods and services Microeconomics – The study of the economic behavior and decision making of small units, such as individuals, families, and firms (businesses)

4 Application 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 Items Ability/Afford WillingnessDemand

5 The Law of Demand Law 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 product Demand Quantity Demanded Increases Price Prices of Products Decreases Price Prices of Product Increases Demand Quantity Demanded Decreases

6 Change in Quantity Demanded $3.50$1.00

7 Change in Quantity Demanded $3.50 $1.00

8 The Income Effect Income 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.

9 The Income Effect Purchases More Bang for your Buck

10 Substitution Effect Substitution Effect – when consumers react to an increase in a goods price by consuming less of one good and more of other goods $3.99$4.99 $3.99

11 The Demand Schedule Price of Ice Cream Quantity Demanded $ Demand Schedule - a table that lists the quantity of a good that a person will purchase at each price in a market Market Demand Schedule - lists the quantity of a good that all consumers will purchase at each price in the market Price of Ice Cream Quantity Demanded $

12 Application - The Demand Curve Price per Ice Cream Cone $ Quantity Demanded of Ice-Cream Cones per week PriceQuantity $ Demand Curve - graphically represents the demand schedule Demand Curve is downward sloping because of the law of demand

13 Plot the demand schedule below, which represents 2004 Florida Marlins avg. sales per game (in thousands) Price2004 $ Playoffs Chapter 4 Section 2 Price per Ticket $ Quantity Demanded of Tickets Next Season D1 D2 D3

14 Section 2 - Shifts of the Demand Curve Changes in Demand are reflected as a shift in the curve Shifts to the right indicate an increase in demand Shifts to the left indicate a decrease in demand Demand curve, D 1 Demand curve, D 2 0 Increase in demand Price Quantity Demanded Demand curve, D 3 Decrease in demand

15 Difference 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 curve D – 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

16 Flow Chart – Determinants of Demand – pgs Consumer Income Consumer Expectations PopulationConsumer Tastes and Advertising Price of Related Goods Description Consumer Income has a major influence on a consumers demand Description What Causes a Shift? Example of Decrease Demand People are paid less they buy less normal goods and more inferior goods Example of Decrease Demand Example of Increase Demand People are paid more, they buy more normal goods Example of Increase Demand

17 What Causes a Shift? 1.Consumer Income 2.Consumer Expectations 3.Population 4.Consumer Tastes and Advertising 5.Price of Related Products Group 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.

18 Consumer Income Consumer Income – A consumers income affects their demand for most goods and services Increase in income will cause an increase in consumption Decrease in income will cause a decrease in consumption Normal good – Inferior good –

19 Price of Related Goods Price of related goods – demand for goods can be affected by the price for related goods Complements – the demand of one good increases as a result of the purchase of another good Substitutes – the demand for one good decreases because another good is used in its place

20 Consumer Tastes and Advertising Consumer Tastes and Advertising – changes in popularity of products or the influence of trends and advertising can affect demand Popularity of product decreases, decreases in demand Popularity of a product increases, increases in demand

21 Consumer Expectations Consumer Expectations – refers to the way people think about the future, as it relates to consumption Expectations for the future can affect consumption for the present

22 Population Population – an increase in the number of consumers can cause an increase or decrease in the demand for products Increase in population, increase in demand Decrease in population, decrease in demand

23 Demand Application – Average sales of SUVs per month (in millions) Price Early 90s $ Late 90s Plot the demand schedule below. The graph represents the demand for SUVs during the early 1990s. During the late 1990s SUVs became increasingly popular in the United States. During the mid 2000s, 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 SUVs around the country. Gas Hikes Price per SUV $ Quantity Demanded of SUVs

24 Demand Application – Average sales of SUVs per month (in millions) Price per SUV $ Quantity Demanded of SUVs D1 D2D3 1.How did the curve change from the early 90s to the late 90s 2.What was the cause of the change from the early 90s to the late 90s? 3.What happened to the curve after the gas hikes?

25 Chapter 4 Section 3 1.List 2 items that you would buy less of if the price increased 2.List 2 items that you would buy more of if the price decreased 3.List 2 items that you would continue to buy, even if the increased

26 Section 3 – Elasticity of Demand Elasticity of Demand –how consumers will cut back or increase their quantity demanded for a product when prices rise or fall Measures 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

27 Elastic Demand Elastic – consumption changes drastically when a price rises or falls A consumer is very responsive to price changes

28 Inelastic Demand Inelastic - changes in price causes a relatively small change in quantity demanded Consumers continue to purchase regardless of price change

29 Determinants of Demand Elasticity 1.Availability of Close Substitutes Pepsi/Coke, Butter/Margarine 2.Relative Importance How much you spend on a good Table salt versus designer clothes 3.Necessities versus Luxuries Medicine versus a luxury automobile 4.Change over time Longer time horizon – more elastic Gas in the short run is inelastic, but over time elastic

30 Values of Elasticity Elasticity has a precise mathematical definition Percentage change in quantity demanded Percentage change in price Value is less than 1, it is considered inelastic. Inelastic – Demand is < 1 Value is greater than one, demand is elastic. Elastic – Demand is > than 1 Value is equal to one, demand is unitary elastic. Unitary Elastic – Demand is = 1

31 The Midpoint Method Price Elasticity = Price 8.00 $ Quantity 10 – 8_ 9 22% =.22 = 1 $10 – 8_ $9 =.22 Unitary Elastic A B B A 10 – 8__ 9.22 =.22 = 1 $10 – 8 9 Unitary Elastic A B =.22 (Q2 – Q1) / [(Q2+Q1) / 2] (P2 – P1) / [(P2 + P1) / 2]

32 Application – Elasticity of Ice Cream Cones Price $ Quantity Demanded of Ice-Cream Cones per week 4.00 $4 – 3 $3.5.67_.29 =.29 = – =.67 Elastic Price Elasticity = (Q2 – Q1) / [(Q2+Q1) / 2] (P2 – P1) / [(P2 + P1) / 2] (Q2 – Q1) / [(Q2+Q1) / 2] (P2 – P1) / [(P2 + P1) / 2] % change in qd % change in price

33 Application – Elasticity of Table Salt Price $ Quantity Demanded of Table Salt 4.00 $6 – 2 $ = 1 =.4 15 – =.40 Inelastic Price Elasticity = (Q2 – Q1) / [(Q2+Q1) / 2] (P2 – P1) / [(P2 + P1) / 2] (Q2 – Q1) / [(Q2+Q1) / 2] (P2 – P1) / [(P2 + P1) / 2] % change in qd % change in price

34 Total Revenue Total Revenue – the amount paid by buyers and received by sellers of a good Price of the goods x quantity demanded = Total Revenue Price of a slice of pizzaQuantity Demanded Per day Total Revenue $ $ $ $ $ $

35 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? ________________________________________________ Elasticity Application Elastic (Q2 – Q1) / [(Q2+Q1) / 2] (P2 – P1) / [(P2 + P1) / 2]

36 Elasticity Application 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 (Q2 – Q1) / [(Q2+Q1) / 2] (P2 – P1) / [(P2 + P1) / 2]

37 Elasticity Application 3 Scenario: The Apple store in St. Johns Mall made the decision to drop the price of their Ipod Nano from $150 to $125. As a result, the sale of Nanos increased from 200 a week to Create a Demand Schedule and Curve based on the above information. Price of Nanos QD per week Price Per Ipod Nano QD0 2. Did the price change cause an elastic or inelastic response in the QD for Nanos? ___________________ 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? ______________________ Elastic $30, $ 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 = ________

38 What 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)/2 = ________________ = ___________ P2 – P1__ ________ (P2 + P1)/ Based on the above result, demand for Moonbucks coffee at this price range is (elastic/unit elastic/inelastic)

39 What 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)/2 = ________________ = ___________ P2 – P1__ ________ (P2 + P1)/ Based on the above result, demand for Moonbucks coffee at this price range is (elastic/unit elastic/inelastic)

40 The Midpoint Method Price Elasticity = Price 8.00 $ Quantity 10 – 8_ 9 22% =.22 = 1 $10 – 8_ $9 =.22 Unitary Elastic A B B A 10 – 8__ 9.22 =.22 = 1 $10 – 8 9 Unitary Elastic A B =.22 (Q2 – Q1) / [(Q2+Q1) / 2] (P2 – P1) / [(P2 + P1) / 2]

41 The Flaw in Point Elasticity of Demand Elasticity = Percentage change in Quantity Demanded/Percentage change in Price Price 8.00 $ Quantity 10 – 8 X % 25% = 20% =.8 $8 – 10 X100 $8 = 25% Inelastic A B B A 8 – 10 X % 20% = 25% = 1.25 $10 – 8 X100 $10 Elastic A B = 20% % Q % P

42 Determinants of Demand Elasticity 1.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. Automobiles Determinants of Elasticity Brand New BMWGasolineInsulin Can the purchase be delayed ? YesNo Are adequate substitutes available? YesNo Does the purchase use a large portion of income? Yes No Type of ElasticityElasticInelastic

43 Law 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.

44 Law of Diminishing Marginal Utility Buy 1 pair get 2nd ½ price

45 Do Now – Ch. 5 Sec 1 Following 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 menu 1.Bradens Berry Blastoff 2.Bradens Banana Bonanza 3.St. Simons Succulent Strawberries 4.Brunswicks Blueberry Lagoon 5.Mocha Marsh Surprise During the first month of operation he offered all of his smoothies at He found that people were willing to purchase Bradens Berry Blastoff, Bradens Bananza Bonanza and St. Simons Succelent Strawberries. Ultimately, Mocha Marsh Surprise sold very little, and he could barely keep Brunswicks Blueberry Lagoon in stock. 1.What should Braden do with the price of #s 1, 2, and 3? 2.What should he do with the price of #4? 3.What might he do with number 5?

46 Application – Revenue Table Revune – amount of money a company receives by selling its goods Price of the goods x quantity demanded = Total Revenue Price of a slice of pizzaQuantity Demanded Per day Total RevenueIncrease/Decrease Total Revenue $.50300NA $ $ $ $ $3.0050

47 Application – Revenue Table Revune – amount of money a company receives by selling its goods Price of the goods x quantity demanded = Total Revenue Price of a slice of pizzaQuantity Demanded Per day Total RevenueIncrease/Decrease Total Revenue $.50300$150NA $ $250Increase $ $300Increase $ $270Decrease $ $250Decrease $3.0050$150Decrease


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