Ch 4/5 Supply and Demand

4.1-What is Demand?

4.1 Vocabulary Demand Microeconomics Demand Schedule Demand Curve Law of Demand Market Demand Curve Marginal Utility Diminishing Utility

What is Demand? People sometimes think of demand as the desire to have or to own a certain product. In this sense, anyone who would like to own a swimming pool could be said to “demand” one. In order for demand to be counted in the marketplace, however, desire is not enough; it must coincide with the ability and willingness to pay for it.

Demand is the desire, ability, and willingness to buy a product. What is Demand? Demand is the desire, ability, and willingness to buy a product.

What is Demand Only those with demand (ability, desire, and willingness to buy) can compete with others who have similar demands Demand is a major part of Microeconomics The area of economics that deals with behavior and decision making by small units, such as individuals and firms Collectively help explain how prices are determined and how individual economic decisions are made

What is Demand? Demand involves two variables Price Quantity Together the two are used to make a Demand Schedule Shows the various quantities demanded of a particular product at all prices Price Quantity Demanded $30 $25 $20 1 $15 3 $10 5 $5 8

What is Demand? When graphed, a Demand Schedule will form a Demand Curve The Law of Demand states that we will buy more of a product at lower prices and less at higher prices We use Market Demand Curves to find the demand curve of the whole market

What is Demand?

What is Demand? What happens as we buy more of the same product?

What is demand? The Marginal Utility is decreased Additional satisfaction/usefulness a consumer gets from having ne more unit of a product The principle of Diminishing Marginal Utility says that the extra satisfaction decreases as we uses additional quantities of the product

Price per Doughnut Able to Buy Willing to Buy 1.50 1.25 1.00 .75 .50 Directions: Pretend you receive a weekly $10 allowance. Although you might want to spend all $10 on doughnuts, remember that your $10 allowance must pay for all of your expenses during the week, such as soft drinks, ice cream, books, toys, movies, video games and donations. Record the number of doughnuts you would be willing and able to buy at each price during one week, using one week’s allowance. Remember, if you are willing and able to buy a number of doughnuts at a certain price, you should be willing and able to buy at least this same number of doughnuts — and probably more — at any lower price. Price per Doughnut Able to Buy Willing to Buy 1.50 1.25 1.00 .75 .50 .25

Factors Affecting Demand What might affect the demand on a market?

4.2 Factors Affecting Demand

4.2 Vocabulary Change in Quantity Demanded Income Effect Substitution Effect Change in Demand Substitutes Complements

Factors Affecting Demand Occasionally something happens that changes people’s willingness and ability to by. This usually happens two different ways Change in Quantity Demanded Change in Demand

Factors Affecting Demand The Change in Quantity Demanded shows a change in the amount of the product purchased when there is a change in price (graphically represented as movement along the demand curve) When prices of a product drop, consumers end up paying less and an income effect is created As prices drop consumers are left with extra real income When prices increase consumers are usually left with a substitution effect The price can cause consumers to substitute a cheaper product for the more expensive one

Factors Affecting Demand

Factors Affecting Demand Sometimes the price doesn’t change, but other factors do. This creates a Change in Demand Shift of the demand curve when people by different amounts at every price Can be caused by a change in income, tastes, price change of a related product, consumer expectations, and number of buyers

Factors Affecting Demand

D. Substitution Effect E. Consumer Income F. Population Write down the correct letter and indicate what will happen to demand for the underlined good with an arrow. 1. Because the price of chicken has dropped by 10% the last few months, the demand for beef has decreased Which one of the following caused this change in demand? A. Change in Consumer Taste B. Consumer Confidence C. Complementary Good Availability D. Substitution Effect E. Consumer Income F. Population 2. A recent health study indicated that by consuming two meals of fish a week would reduce the risk of heart attack by 50%. Because of this consumers are purchasing more fish. Which one of the following caused this change in demand? 3. Because more people are buying digital phone’s, fewer analog cell phone's (old) are being purchased. Which one of the following caused this change in demand? A. Change in Consumer Taste B. Consumer Confidence C. Complementary Good Availability D. Substitution Effect E. Consumer Income F. Population Up, D Up, A Down, A

4.3 Elasticity of Demand

4.3 Vocabulary Elasticity Inelastic Demand Elasticity Unit Elasticity

Elasticity of Demand An important cause and effect relationship of economics is elasticity A measure of responsiveness that shows how one variable responds to a change in another variable Quantity and Price Elasticity can help us figure out how sensitive consumers will be to price changes

Elasticity of Demand Demand is Elastic when a change in price causes a large change in demand Demand is Inelastic when a change in price causes a small change in demand Demand is Unit Elastic when a change in price causes a proportional change in demand

Elasticity of Demand Demand is elastic if the answer to the following questions are “Yes” Can the purchase be delayed? Some cant regardless of price changes. Are adequate substitutes available? Price changes can cause consumers to substitute one product for a similar product Does the purchase use a large portion of income? Demand elasticity can increase when a product commands a large portion of a consumers income

Elasticity of Demand

Determining Elasticity Elastic= Change in Price Change in Expenditures Inelastic= Change in Price Change in Expenditures Unit elastic= Change in Price Expenditures don’t change

Elasticity of Demand 1. Jim and Jane have opened a new restaurant in town, JJ’s Burgers. Their burgers are quite popular, especially the Big Kahuna burger, which was written about in the local weekly newspaper and mentioned by a local entertainment blogger online. Jim tells Jane that since the burger is so popular, they should raise the price to make more money. Given what you know about price elasticity of demand, is Jim correct that a price increase would bring in more money? 2. The Big Kahuna burger sells for $10.00 and 200 are sold each week. What is JJ’s total revenue from Big Kahuna burgers? 3. Jim suggests a 10 percent price increase for the Big Kahuna burger, raising the price to $11.00. After the price change, JJ’s sells 160 Big Kahuna burgers a week. What is the percentage change in the quantity demanded after the price change? 4. What is the price elasticity of demand for JJ’s Big Kahuna? Use the price elasticity formula to determine if the price elasticity is elastic or inelastic.

1. Jim and Jane have opened a new restaurant in town, JJ’s Burgers 1. Jim and Jane have opened a new restaurant in town, JJ’s Burgers. Their burgers are quite popular, especially the Big Kahuna burger, which was written about in the local weekly newspaper and mentioned by a local entertainment blogger online. Jim tells Jane that since the burger is so popular, they should raise the price to make more money. Given what you know about price elasticity of demand, is Jim correct that a price increase would bring in more money? Not necessarily; it depends on the price elasticity of demand. If Jim and Jane lose many customers because of the price change, they could lose money. 2. The Big Kahuna burger sells for $10.00 and 200 are sold each week. What is JJ’s total revenue from Big Kahuna burgers? $2,000 3. Jim suggests a 10 percent price increase for the Big Kahuna burger, raising the price to $11.00. After the price change, JJ’s sells 160 Big Kahuna burgers a week. What is the percentage change in the quantity demanded after the price change? 20 percent 4. What is the price elasticity of demand for JJ’s Big Kahuna? Use the price elasticity formula to determine if the price elasticity is elastic or inelastic. 20/10 = 2 (Elasticity is >1, so it is elastic.)