Demand CHAPTER 3 SECTION 1: Nature of Demand Holt Economics 4/20/2017 CHAPTER 3 Demand SECTION 1: Nature of Demand SECTION 2: Changes in Demand SECTION 3: Elasticity of Demand Chapter 3

Objectives: Nature of Demand SECTION 1 How does demand differ from the quantity demanded? What does the law of demand state? What do demand schedules and demand curves illustrate?

Difference between demand and the quantity demanded: SECTION 1 Nature of Demand Difference between demand and the quantity demanded: demand—amount of a good or service that a consumer is willing and able to buy at various prices during a given period of time. quantity demanded—amount of good or service that a consumer is willing and able to buy at each particular price during a given period of time. Notice, that in both definitions- you must be willing and able to buy.

P Qd Law of demand: Nature of Demand SECTION 1 As Price goes up, Quantity Demanded goes down. P Qd

Income Effect Change in purchasing power because of a change in price 1 chocolate bar-$1.00 On sale for $.50

Substitution Effect Substitute a similar lower priced product for one that is more expensive. Hershey bars cost $7.00 a piece. What are you going to do? If Nestle chocolate bars were free, would you demand 1,000,000,000 of them?

Diminishing Marginal Utility As more units of a product are consumed, the satisfaction received from each additional unit declines. This is why demand for a product is not limitless.

What demand schedules illustrate: SECTION 1 Nature of Demand What demand schedules illustrate: Demand schedules show in table format: the quantity of products consumers are willing and able to buy at a series of possible prices Price Quantity Demanded 1.00 14000 2.00 9000 3.00 3000

What demand curves illustrate: Demand curves show in graph format the data listed in demand schedules

Creating Demand Charts Draw the appropriate Demand Curve for each Demand Schedule. At which price does the seller receive the highest Total Revenue?

1. Draw the appropriate Demand Curve. for each Demand Schedule. 2 1. Draw the appropriate Demand Curve for each Demand Schedule. 2. At which price does the seller receive the highest Total Revenue? #1 Demand for gasoline in one week period. Quantity in gallons Price Q-Demanded 4.00 5000 gal 3.95 10000 gal 3.90 13000 gal 3.85 26000 gal 3.80 27000 gal 3.75 28000 gal

4.00 3.90 3.80 3.75 Pr ice D1 5,000 10,000 15,000 20,000 25,000 30,000 Quantity

Demand for Pepsi sold at Quick Stop in one day. #2 Demand for Pepsi sold at Quick Stop in one day. Quantity in cups of Pepsi. Price Q-Demanded 1.75 20 1.70 25 1.65 45 1.60 55 1.55 70 1.50 75

1.75 1.65 1.55 Pr ice D1 20 25 30 40 45 50 60 65 70 75 80 85 Quantity

#3 Demand for music CDs sold in one year. Price Q-Demanded $25.00 10000 $23.00 12000 $20.00 15000 $18.00 25000 $15.00 27000 $10.00 30000

25.00 10.00 Pr ice D1 10,000 30,000 Quantity

#4 Demand for flip-flops at the local Target store in June. Price Q-Demanded $15.00 180 $13.00 200 $11.00 300 $9.00 400 $7.00 850 $5.00 1000

15.00 5.00 Pr ice D1 180 1,000 Quantity

P Qd This is the law of demand Shown as movement along the Demand Curve. This is caused only by change in price.

What a Change in Qd Looks Like: 3.00 2.00 1.00 Pr ice 2000 4000 6000 8000 10000 12000 14000 Quantity

SECTION 2 Changes in Demand When a product’s demand shifts, different quantities of a product are demanded at each and every price.

Pr ice D2 D1 Quantity

Determinants of product demand shifts: SECTION 2 Changes in Demand Determinants of product demand shifts: consumer tastes and preferences market size income consumer expectations prices of related goods Substitute Complementary

Difference between substitute goods and complementary goods: SECTION 2 Changes in Demand Difference between substitute goods and complementary goods: substitute goods—used to replace the purchase of similar goods when prices increase complementary goods—commonly used with other goods

Headlines: For each Headline: Determine what direction the demand curve will move. Determine which determinant of demand is making the curve to move. Draw the graph.

Product: Hot Dogs Price of Hot Dog Buns Sky Rocket because Wheat Producers go on strike!!!! Direction? _____________ Determinant? _____________ Draw Graph: To the Left Prices of Related Goods- Complementary

Pr ice D1 D2 Quantity

Product: Hershey Chocolate Hershey Bars: Part of a Healthy Diet! Shift?________ Det._________ Graph:

Product: Apple iPod Amid Strong Sales Apple Doubles Prices of all iPods.

Product: Wal-Mart Stock Wal-Mart Expected to have Best 4th Quarter Earnings in 10 Years. Shift?________ Det._________ Graph:

Product: Televisions Study Shows U.S. Citizens Making 75% More Than 10 Years Ago.

Product: Come up with your own Headline: Come up with your own. Trade with the person in-front of/behind you.

Objectives: Elasticity of Demand SECTION 3 What is demand elasticity? What is the difference between elastic and inelastic demand? How is demand elasticity measured?

SECTION 3 Elasticity of Demand Demand elasticity reflects the extent to which changes in a product’s price affect the quantity demanded by consumers.

Difference between elastic and inelastic demand: SECTION 3 Elasticity of Demand Difference between elastic and inelastic demand: elastic demand—when a small change in a product’s price results in a significant change in the quantity demanded

Elastic Demand Curve Pr ice Quantity Small change in Price Large change in Qd Quantity

Difference between elastic and inelastic demand: inelastic demand—when a change in a product’s price has only a slight effect on the quantity demanded

Inelastic Demand Curve P1 Big Change in Price P2 Q1 Q2 Small Change in Qd

Demand elasticity is measured by using the total-revenue test. SECTION 3 Elasticity of Demand Demand elasticity is measured by using the total-revenue test.

CHAPTER 3 Wrap-Up 1. State the law of demand in your own words. Be sure to include how the income effect, the substitution effect, and diminishing marginal utility relate to the law of demand. 2. What causes movement along a demand curve—in other words, a change in the quantity demanded? How does this movement differ from a shift in demand?

CHAPTER 3 Wrap-Up 3. What is the difference between a complementary good and a substitute good? Give an example of each kind of good for each of these products: ice cream, baseball game tickets, pencils. 4. Why is determining demand elasticity important to business owners? How can business owners measure demand elasticity?