Shifts in demand

First Five D Demand for Jordan’s PRICEPRICE Quantity 1. How many Jordan’s are people willing and able to buy for $120 a pair? 2.If the price changes from $120 to $80, how many people would be able to buy the shoes? 3. If the price increased from $80 to $160, how many fewer people would be able to buy the shoes?

SWBAT explain factors that shift the demand curve and predict how each factor causes a shift in the curve. Objective

Demand – is the amount of a good or service that consumer is willing and able to buy at various possible prices during a given time period. Quantity demanded – describes the amount of a good or service that a consumer is willing and able to buy at each particular price during a given time period. Contains two important conditions: first the consumer must be willing and able to buy the good or service. Second, demand for a product must be examined for a specific time period – a day, a week, a month, a year, or some other definite period. Nature of Demand – Section 1

Market Demand The market demand curve is the sum of the individual demand curves + =

Demand can change. What is happening to quantity demanded at all prices in each of these graphs? PriceQd PriceQd

What makes demand shift? Brainstorm in teams of 3

What makes the demand shift? Income Price of related good (complement and substitute) Popularity, consumer preference, or tastes Future prices or consumer expectations Number of buyers

Income: normal vs. inferior goods House Public Transport How does income affect demand?

The amount of money, or income, that people have available to spend on goods and services is called their purchasing power. Any increase or decrease in a consumers’ purchasing power caused by a change in price is called the income effect. Income Effect

How do changes in the price of one good affect demand in another? Complements vs Substitutes

Price of related goods - complements TO BeefBun

OR Price of related goods - substitutes

Consumer preference (tastes, popularity)

The substitution effect describes the tendency of consumers to substitute a similar, lower-priced product for another product that is relatively more expensive. For example, when the price of steak increases, many consumers reduce the quantity of beef demanded and buy more chicken, a lower-priced substitute. Another example – generic products in a bad economy Sometimes the substitution effect does not apply. If an essential good or service has no readily available substitute, a rise in price may not lower the quantity demanded. For example, milk does not have a lower-priced readily available substitute. Substitution Effect

Substitute Goods: Goods that can be used to replace the purchase of similar goods when prices rise. Ex) Margarine and butter – very similar products. Complementary goods: goods that are commonly used with other goods. For example, paintbrushes and paint. As the price of a gallon of paint increases, the quantity of paint demanded and the quantity of paintbrushes demanded decreases. If paint goes on sale, demand for paintbrushes increases, even though the price has not changed. Another example, would be the price of a gallon of gas and cars. Substitute and complimentary goods.

Diminishing marginal utility – the natural decreases in the utility of a good or service as more units of it are consumed. For example, if you were to eat a donut it might be worth the 50 cents you pay for it, maybe even the second or third; however, the fourth, fifth, and so on, even at a lower price would lower the utility of the product. Therefore, there is a limit to a product’s demand. At some point, consumers cannot use any more of a product. Diminishing Marginal Utility

Consumer Expectations

Tell the truth: Demand Increasing It’s true that… the demand of a normal good increases if income increases. - With a partner, come up with 4 true statements about the ways that the demand can shift to the right (increase demand), using the terms we just reviewed - With a partner, come up with 4 true statements about the ways that the demand can shift to the right (increase demand), using the terms we just reviewed Example

Tell the truth: Demand Decreases It’s true that… the demand for a good decreases when the population decreases. This time, come up with 4 true statements about the ways that demand can shift to the Left (decrease), using the terms we just reviewed Example

What makes demand increase? Demand increases if Income increases; UNLESS good is inferior Demand increases if the price of a complement (related item) decreases Demand increases if the price of a Substitute (competing item) increases Demand increases if the Popularity rises Demand increases if the future price is expected to rise Demand increases if the number of buyers increases

What makes demand decrease? Demand decreases if income decreases UNLESS good is inferior Demand decreases if the popularity falls Demand decreases if the price of a complement (related item) increases Demand decreases if the price of a substitute (competing item) decreases Demand decreases if the future price is expected to fall Demand decreases if the number of buyers decreases

Elastic Demand – exists when a small change in a good’s price causes a major, opposite change in the quantity demanded. Thus, demand is elastic when a small decrease in a good’s price causes a significant increase in the quantity demanded. Demand is also elastic when a small increase in a good’s price results in a significant decrease in the quantity demanded. – - What types of goods tend to have elastic demand? the product is not a necessity There are readily available substitutes The product’s cost represents a large portion of consumer’s income. Pizza, cars, cell phones, etc.. Elastic Demand

Inelastic demand – exists when a change in a good’s price has little impact on the quantity demanded. – What types of goods tend to have inelastic demand? The product is a necessity There are few or no readily available substitutes for the product The product’s cost represents a small portion of consumers’ income Examples, salt, soap, aspirin, water Inelastic Demand

Price elasticity of demand = (Q2-Q1)/{Q1+Q2)/2} (P2-P1)/{(P1+P2)/2 Ed > 1 = demand is elastic Ed< 1 = demand is inelastic Calculating Elasticity

The simplest way to measure demand elasticity is through the total-revenue test. – Total revenue – sometimes called total receipts – refers to the total income that a business receives from selling its products. By monitoring any changes in a business’s (or market’s) total revenue before and after changes in the price of a product, you can determine the elasticity of demand for that product. Measuring Elasticity

Total Revenue and Elastic Demand A drop in a business’s total revenue from a price increase indicates elastic demand for the product. If lowering the price of a product raises total revenue, then demand is elastic. Measuring Elasticity Price Per TicketQuantity DemandedTotal Revenue $5.0010,000$50,000 $4.5022,500$101,250 $4.0030,000$120,000 $3.5031,250$109,375 $3.0032,500$97,500 $2.5033,750$84,375

Total Revenue and Inelastic Demand: – In Contrast, a rise in business’s total revenue because of a price increase indicates inelastic demand for the business’s good or service. Maximizing Revenue: - Measuring the varying elasticity of demand for their produce directs the owners toward the pricing decision that will earn the most revenue. For example, charging $4 dollars per movie ticket will maximize total revenue. Measuring Elasticity