Demand

Supply and Demand Economics in a market economy, at its most basic & fundamental form is SUPPLY & DEMAND.

Economics from the perspective of the consumer Demand Perspective Economics from the perspective of the consumer

DEMAND Quantity of goods and services that a consumer is WILLING and ABLE to purchase at various prices

Quantities Purchased at Various Prices DEMAND – 3 Components Able Willing Quantities Purchased at Various Prices

What does it mean to have demand for something?

Demand - Able You must have enough money to make the purchase. If you can’t afford something (a private jet, for instance), you don’t have an effective demand for it.

DEMAND - Willing You must be willing to make the purchase. If you’re not willing to spend your income on it, you do not have an effective demand for it.

DEMAND - Quantities purchased at Various Prices Qty Demanded changes when price changes

Demand Schedule List of quantities that would be purchased at various prices in table format

Demand Schedule Price $25 $30 $35 18 15 12 Quantity Purchased Weekly $20 $25 $30 $35 21 18 15 12

Demand Curve Demand curve plots these (from Demand Schedule) points Shows graphically the relationship between price & quantity demanded

Horizontal Axis - Quantity Demanded Demand Curve Vertical Axis - Prices Horizontal Axis - Quantity Demanded

Law of Demand Inverse Relationship Between Prices and Quantity Demanded: Price Increases -> Less Quantity Demanded Price Decreases -> More Quantity Demanded

Demand Curve (Inverse Relationship) Price Demand Quantity

Reasons Why The Demand Line Is Downward Sloping Why Qty Demanded & Price go in opposite directions

Marginal Utility Utility = Usefulness or Satisfaction Marginal Utility is the amount of satisfaction derived from 1 additional unit of a product

Law of Diminishing Marginal Utility As additional units of a product are consumed during a given period of time, the additional satisfaction derived from the good decreases

Law of Diminishing Marginal Utility Price Willing to Pay Qty

Proves Inverse Relationship between Prices and Quantity Demanded b/c… At higher quantities, people want it less and so they’ll be less willing to pay higher prices

Income Effect The effect that increasing or decreasing prices have on the purchasing power of your income

Income Effect Cont’d What’s the Purchasing Power of $5 (your income) for the items on the dollar menu? allows you to be able to purchase 5 items What if the dollar menu became the half dollar menu? What if the dollar menu became the $2 menu? Price changes affect the buying power of your INCOME & thus your ability & willingness to purchase products

Proves Inverse Relationship between Prices & Quantity Demanded b/c… At Higher Prices, people’s incomes will be ABLE to buy LESS

Substitution Effect Change in the combination of goods purchased as a result of increasing or decreasing relative prices

Substitution Effect Cont’d What might people do if the price of movie theater tickets go up to $25? Go see more Plays Get more Angel Tickets Netflix Subscription Rent more DVDs from Redbox

Proves Inverse Relationship between Prices & Quantity Demanded b/c… At higher prices, people will substitute that product with cheaper substitutes

Homework: “Demand 3 Paragraphs” Explain in your own words each in a separate paragraph The Income Effect Diminishing Marginal Utility The Substitution Effect Each of the paragraphs must include an ORIGINAL example that is explained

Determinants of Demand

Change in Quantity Demanded v. Change in Demand

Change in Quantity Demanded Caused by an increase or decrease in PRICE for that G or S Causes movement ALONG the demand line Point A P1 Price Point B P2 QD1 QD2 Quantity Demanded/Purchased

Change in Demand Caused by 1 or more determinants of demand, NOT a change in price for that g or s Causes a shift of the ENTIRE demand line Price D2 D1 Quantity Purchased/Demanded

Determinants of Demand Demand changes even if there is no change in price It will shift the entire demand line

The Determinants Consumer income Consumer attitude Price of a complimentary product Price of a substitute Population Weather Expectations

Change in Income Generally, an increase in income leads to an increase in demand. This is b/c consumers are more willing and able to buy more products Write 3 things you would buy if you received a raise to $20/hr

Cont’d Normal goods- Demand increases as income increases. D decreases as income decreases Inferior goods- Demand decreases as income increases. D increases as income decreases Ex. Ground Meat

Change in Income Cont’d If someone who was unemployed for 2 yrs finds employment at a solid-paying job, what will happen to his/her demand for normal goods? What will happen to his or her demand for inferior goods like canned goods from a generic producer?

Changing Attitudes Tastes and Preferences Trends Fads

Changing Attitudes Cont’d List in your notes 5 examples of trends and fads that have come and gone or are currently in but you expect will end in the near future

Trends/Fads That Have Come and Gone

Change in Price of a Complementary Good Complementary goods- Separate products that are used together. If 1 goes on sale, you buy it & buy its’ complement List 4 Examples

Complementary Goods Cont’d If the price of peanut butter was to increase, what would happen to the qty demanded for peanut butter? Qty Demanded for Peanut Butter will DECREASE What will happen to the demand for Jelly? Demand for Jelly will DECREASE

Complementary Goods Cont’d If the price of Hot Dogs decreases, what will happen to the qty demanded for Hot Dogs? Qty Demanded for Hot Dogs will INCREASE What will happen to the demand for Hot Dog Buns? Demand for Hot Dog Buns will INCREASE

Change in Price of a Complementary Good Cont’d If qty demanded changes (up or down) for an original good, then the demand changes for the complimentary good in the SAME way

Complementary Goods Cont’d In Price for an Original Good Qty Demanded for the Original Good Demand for the Complementary Good The OPPOSITE of each is TRUE

Change in Price of a Substitute Substitute goods- Products similar enough they can replace the other List 4 Examples

Substitute Goods Cont’d If the price of margarine goes up, what will happen to the qty demanded for margarine? Qty demand for margarine will DECREASE What will happen to the demand for butter? The demand for butter will INCREASE

Changing Price of Substitute If qty demanded changes (up or down) for an original good, then the demand changes for the Substitute good in the OPPOSITE way

Substitute Goods Cont’d In Price for an Original Good Qty demanded for the Original Good Demand for the Substitute Good The OPPOSITE of each is TRUE

Change in # of Buyers Changes to population #s is a determinant of demand. Why? In your notes, explain why population changes would have an effect on demand. Use 1 example and explain it.

Weather Weather is a determinant of demand. Why? In your notes, explain why weather would have an effect on demand for many products. Use 1 example and explain it.

Expectations For Future Income When consumers are pessimistic about their future incomes, the overall level of demand for goods and services in the economy decreases. The opposite is true.

= = Expectations Cont’d Expectations for Future Income Demand for goods and services = Expectations for Future Income Demand for goods and services =

Expectations for Future Prices Expectations Cont’d Expectations for Future Prices When people expect a G or S to drop in price in the future. . . When people expect a G or S to increase in price in the future. . .

In Times Past Really Good White Beans Existed Expectations Income Tastes & Preferences Related Goods Change in Price of Substitute Goods Change in Price of Complementary Goods Weather # of Buyers Expectations

Expectations for Future Prices Expectations Cont’d Expectations for Future Prices When people expect a G or S to drop in price in the future. . . When people expect a G or S to increase in price in the future. . .

Demand Shifts & Elasticity of Demand

The Determinants of Demand change demand at EVERY price This can be represented on a Demand Graph

Graph: Increase in Demand - Right Using your first graph and a pencil, draw a second line that would represent an INCREASE in demand. Name this line D2

Graph: Decrease in Demand - Left Using your second graph and a pencil, draw a second line that would represent a DECREASE in demand. Name this line D2

Hold up the appropriate shift that represents the effect of the comeback of bell-bottoms

Demand Curve: Tastes and Preferences Price D2 D1 Quantity

Hold up the appropriate shift that represents the effects of a job demotion due to a business consolidation

Decrease in Demand: Income Price D1 D2 Quantity

The price of Pepsi goes up The price of Pepsi goes up. Hold up the appropriate shift that represents effect on Coca-Cola

Substitutable Goods: Demand will go up for Coke Price D2 D1 Quantity

Price Elasticity of Demand Draw two graphs (both on the same side of the paper), one with a steep slope and one with a gradual slope

Elasticity Elasticity means RESPONSIVENESS We measure responsiveness

Price Elasticity of Demand Measurement of how responsive the quantity purchased changes when there is a change in price

Price Elasticity of Demand Cont’d Equation: % change in quantity demanded % change in price

Demand Elastic There are products where if the price changes, the Qty Demand will change SIGNIFICANTLY. These products are said to have ELASTIC demand

Elastic Demand Price is elastic if calculated value of price elasticity (equation) is greater than one

Products W/ Elastic Demand Non-necessity Movie Theater Tickets There are readily available substitutes for the product Cereal The product’s cost represents a large portion of consumers’ income Car

Elastic Demand Price D Quantity

Inelastic Demand Inelastic implies less sensitivity to change in price Price inelastic if calculated value of price elasticity (equation) is less than one As the price of a good increases the quantity demanded decreases minimally

Products w/ Inelastic Demand A Necessity Tap Water There are few or no readily available substitutes for the product Gasoline The product’s cost represents a small portion of consumers’ income Candy

Inelastic Demand Price D Quantity

Unitary Price Elasticity (Unit Elastic) % change in the quantity demanded equals % change in price

Total Revenue Total amount of money a company receives from its sales Total Revenue = price x quantity sold Quantity sold is dependent on price

Relationship between Price, Elasticity, Total Revenue Elastic Demand Inelastic Demand Decreasing Price Increases Total Revenue Decreasing Price Decreases Total Revenue Increasing Price Decreases Total Revenue Increasing Price Increases Total Revenue