Intro to Demand

Pair-Share Questions Why do stores have sales on their goods? Why are newspapers sold in vending machines that allow you to take more than one copy?

How much would you be willing and able to pay for a Snickers bar right now? PriceQuantity of Students $ $ $.7513 $ $1.252 $ $ 1.752

Demand Why are newspapers sold in vending machines that allow you to take more than one copy? How do they make money at all you can eat restaurants? Why do so many people shop on Black Friday?

Demand Demand - how much of a product consumers are both willing and able to buy at a certain price Demand is measured during a given period It assumes other things remaining constant.

Law of Demand The law of demand says that quantity demanded varies inversely with price, other things constant. ◦Higher price=low quantity demanded ◦Lower price= high quantity demand

Reasons for the Law of Demand Substitution effect ◦You can replace certain things other things if their price goes up ◦Coke-Pepsi ◦Hamburgers-pizza ◦Gas-public transportation

Demand Factors Income effect ◦If prices go up, you won’t be able to afford as much with the money you have Diminishing marginal utility ◦Utility- satisfaction gained ◦Definition- the more you consume, the less satisfaction you’ll get from each additional unit

Demand Schedule Price Quantity Demanded per Pizza per Week (millions) a$158 b1214 c920 d626 e332

Millions of pizzas per week $ Price per pizza Demand Curve for Pizza a b c d e D

Agenda 1. Warm-Up 2. Diminshing marginal utlilty lab 3. Discuss Changes in the Demand Curve 4. Read Article about Demand and Oil

Warm-up 1. Apply the law of demand to the consumer want of your choice. (Use the law of demand to explain how demand for a product can change. 2. Apply the substitution effect to movie tickets.

Diminishing Marginal Utility Lab Create a X/Y Graph Y axis will be labeled “Level of Satisfaction” 1-10 X axis will be labeled trials 1-5

Factors that Effect Demand

5 Things That Can Shift the Demand Curve 1. Changes in consumer income ◦Normal goods ◦Increased demand as income increases ◦Inferior goods ◦Decreased demand as income increases ◦Bus fares, economy cars, cheap food

2. Changes in the prices of related goods – Substitutes A good that can be used in place of another – Complements Goods or services that are related to each other A positive change in the demand for one will positively impact the other – Peanut butter and jelly – Blu Ray players and Blu Rays

5 Things Continued 3. Changes in the size or composition of buyers ◦More population = more demand ◦Different demographics impact demand 4. Changes in consumer expectations ◦Expectations of a raise in price hike or the opposite ◦Future income expectations 5. Changes in consumer tastes and preferences ◦Taste- the likes and dislikes of a consumer

Change in Demand Curve The only time you shift the entire curve is if one of the 5 determinants is met! ◦This is called a change in demand If there is only a change in price for the good, move along the curve ◦This is called a change in quantity demanded

Agenda 1. Warm- Up 2. Discuss Elasticity of Demand 3. Read and Discuss Elasticity Article 4. Elasticity Practice

Warm-Up 1. Explain the difference between change in the demand of a product and a change in the quantity demanded. 2. Give an example of a. complimentary good ◦B. a substitute for a good

Elasticity of Demand

Elasticity= responsiveness and sensitivity of demand to a price change How much will consumers’ demand change when prices change?

Computing the Elasticity of Demand Elasticity values ◦Greater than one = elastic ◦Less than one = inelastic ◦One = unitary elastic An elastic good or service is very sensitive to price When something is inelastic, price changes don’t’ impact quantity demanded much

Computing the Elasticity of Demand Once you divide, the number you get is called the coefficient of elasticity Elasticity of demand = Percentage change in quantity demanded Percentage change in price

Elasticity and total revenue ◦Elasticity is important to producers to decide whether or not to raise or lower prices to make money ◦If the good or service is elastic lowering the price would result in more sales ◦It would be unwise to lower an inelastic good or service because it won’t produce much more sales anyway

Determinants of Demand Elasticity Availability of substitutes ◦The more substitutes a good or service has, the higher the elasticity of it Share of consumer’s budget spent on the good ◦The more spent on a good, the more elastic it is Is it a necessity? Can it be repaired? A matter of time ◦The more time people have to adjust, the more elastic the item will be ◦Long run vs. Short run Product Short Run Long Run Electricity (residential) Air travel Medical care and hospitalization Gasoline Movies Natural gas (residential)

Selected Elasticities of Demand Product Short Run Long Run Electricity (residential) Air travel Medical care and hospitalization Gasoline Movies Natural gas (residential)1.42.1

GoodElastic or InelasticWhy? Exotic Vacation Bread Wonder Bread Porsche Car Children’s Toy Children’s Shoes Snickers Bar