Chapter 3 Demand

Ch. 3 Section 1- Nature of Demand Demand- the amount of a good or service a consumer is willing and able to buy at various possible prices during a given time period. Quantity Demanded- amount of a good or service that a consumer is willing and able to buy at each particular price during a given time period. Law of demand –Describes the relationship between price and quantity demanded it is inverse – principle that, all other factors being equal, consumers will purchase or demand more of a good at lower prices and less at higher prices.

3 economic concepts help explain the law of demand: 1.Income effect- an increase or decrease in consumer purchasing power caused by a change in price. –Purchasing Power- the amount of income that people have to spend on goods and services. 2. Substitution Effect- consumer’s tendency to substitute a lower price good for a similar 1 that is priced higher. 3. Diminishing marginal utility- the usefulness of each unit consumed decreases with each additional unit.

Demand schedule- lists the quantity of goods that consumers are willing and able to buy at many possible prices. Demand curve- plots the information in a demand schedule that shows the relationship between the price of an item with the quantity demanded. Create your own demand schedule & curve. Reference the one on page 55 for help.

Mexico Grumbles over Rise in Tortilla Prices 1.What is the relationship between the demand for ethanol and the price of tortillas? 2.Why do some officials blame the NAFTA agreement? 3.Why is the price of tortillas so important in Mexico? 4.Why are small producers concerned that WalMart is keeping their prices artificially low?

Ch. 3 Section 2- Changes in Demand Determinants of demand: Factors other than price that influence the amount of demand for a good or service. –Shifts the curve to the right (increase) or the left (decrease).

1. Consumer tastes and preferences- popularity 2. Market Size- can increase due to advertising- can shift due to gov’t. controls (cutting off or opening up trade), technology- can create new products and markets 3. Consumer Expectations- consumers expect a change in income so they change their buying habits. Ex. pay raise, tax refund

4. Income 5.Prices of related goods- changes in a product’s price can effect the demand for related goods Substitute goods- goods that can be purchased instead of a similar good. Ex. Butter and margarine. Complementary goods- these are frequently used simultaneously. Ex. milk and cereal

Complements or Substitutes What is the difference between a complement and a substitute?

Product 1Product 2Substitute or Complement 1.PepsiCoke 2. HamburgerKetchup 3. HamburgerBean Burrito 4. ComputerFlash Drive 5. PencilNotebook Paper 6. DVDsVideo Tapes 7. HeadphonesIPod

Product 1Product 2Substitute or Complement 1.PepsiCokeSubstitute 2. HamburgerKetchupComplement 3. HamburgerBean BurritoSubstitute 4. ComputerFlash DriveComplement 5. PencilNotebook PaperComplement 6. DVDsVideo TapesSubstitute 7. HeadphonesIPodComplement

Fill in the answers to the following questions with (increase/decrease) or (complement/ substitutes. Exp. The price of Big Macs increases causing a decrease in the Big Mac market. Therefore, the demand for Mc Fries decreases because the two items are complements.

1.The cost of Honda Accords decreases, causing ________ in the Honda market. Therefore, the demand for the Toyota Camry (assume they have about the same value) __________ because the two items are______________. 2.The cost of automobile maintenance increases, causing__________ in the maintenance field. Therefore, the demand for public transportation _______because it is____________.

1.The cost of Honda Accords decreases, causing increase in the Honda market. Therefore, the demand for the Toyota Camry (assume they have about the same value) decreases because the two items are _substitutes__. 2.The cost of automobile maintenance increases, causing _decrease_ in the maintenance field. Therefore, the demand for public transportation increases_ because it is _a substitute_.

3. The price of movie theater tickets increases, causing ________ in the movie ticket market. Therefore, the demand for movie rentals_________ because the two items are _____________. 4. The price of CD players decreases, causing ____________ in the CD player market. Therefore, the demand for CDs __________ because they are ______________.

3. The price of movie theater tickets increases, causing decrease in the movie ticket market. Therefore, the demand for movie rentals increases because the two items are substitutes. 4. The price of CD players decreases, causing __an increase_ in the CD player market. Therefore, the demand for CDs _increases__ because they are __complements.

Which way would a demand curve shift in the following scenarios? Write “left” or “right” and which determinant of demand caused the shift. 1. Papa John’s Pizza is offering $1 pizzas for students on Monday nights. 2. The government releases a report that Taco Bell’s meat is actually dog food. 3. Susan’s job at Six Flags ends in late October. 4. John has taken a second job. 5. Abercrombie opened a new store dedicated to pre- teens. 6. The local Pepsi plant has an explosion and has to close, what happens to the demand for Coke? 7. The price of jelly increases 200%, what happens to the demand for peanut butter?

Chapter 3 Section 3 Elasticity of Demand Elasticity of Demand- extent to which a change in a good’s price will affect the quantity consumers demand. Draw 3 demand curves in your notes: one vertical, one horizontal and one almost horizontal to a certain price and then vertical Vertical- a change in price has little impact on quantity demanded (Inelastic) Horizontal- small change in price results in a large change in quantity demanded (Elastic) Mixture- a change in price results in a large change in quantity demanded until the price reaches a certain point and then the price has little effect on the quantity demanded. What products fit each of these?

Elastic demand Changing a good’s price brings about a substantial, opposite change in the quantity demanded. Description of products: A. product is not a necessity B. there are easily available substitutes C. the cost of the product is a large percentage of a consumer’s income

Inelastic Demand Changing a good’s price has only a tiny impact on the quantity demanded. Description of products: A. product is a necessity B. there are few or no readily available substitutes C. product only costs a small portion of a consumers’ income

What are some products that might have a perfectly elastic or perfectly inelastic demands? Total revenue- total income that a business obtains from selling its products