Ch. 4 Demand EQ- WHAT IS CONSUMER DEMAND AND HOW DOES IT CHANGE ACCORDING TO PRICE AND EXTERNAL SHIFTER? POPE- 2015

Basic Terms of Economics  Demand - the combination of the willingness (have motivation) and ability ( have money) among consumers to purchase at a particular price  Law of Demand- there is an inverse (opposite) relationship between the price of a good and the quantity consumers are willing to purchase.  What helps explain this relationship?  The availability of substitutes- goods that do similar functions- explains this negative relationship

Basic Terms in Economics:  Ceteris paribus (Latin)- “all other things stay constant “ EXAMPLE: I will buy about $2,300 worth of gas in the year , ceteris paribus. Meaning, if nothing in my current travel patterns changes, I should only spend $2,300 on gas. EXAMPLE: It can be predicted that if the price of beef decreases, ceteris paribus, the quantity of beef demanded by buyers will increase. Meaning, if nothing in the market for beef changes, there is a inverse relationship between price and demand.

Q $ What does the graph show? Inverse Relationship!

Law of Diminishing Utility  As consumption increases, additional benefit decreases.  When benefits > costs: consumption continues  When benefits < costs: consumption ends  Simply put, too much of something is a bad thing. This is why the curve slopes downward.  Example:  The 1 st bottle of water satisfied your thirst.  The 2 nd bottle of water made you feel full.  The 3 rd bottle of water made you sick.

Utility (happiness) Quantity Consumed The Law of Diminishing Utility

A market demand schedule is a table that shows the quantity of a good people will demand at different prices. CELL PHONE EXAMPLE  Consider the market for cell phones (Verizon).  A market demand schedule lays out the amount of cell phones that are demanded in the market for a spectrum of prices.  We can graph these points (price and the demand for them) to make a demand curve for cell phones. Where do we get the data for our Demand Curve? From a “Market Demand Schedule”

Example of Demand I am willing to sell several A’s in AP Economics. How much will you pay? PriceQuantity Demanded Demand Schedule 8 Copyright ACDC Leadership 2015

Market Demand Schedule Cell Phone Price (monthly bill) Millions of Cell Phone Subscribers $ $ $ $ $ $ $ Price (monthly bill) Quantity (of Cell Phone Subscribers) Assume this is for a unlimited minute & data package. Notice that the demand/price relationship is more responsive at certain price points.

Price (monthly bill) Quantity (of Cell Phone Subscribers) law of demandNotice how the law of demand is reflected by the shape of the demand curve. As the price of a good rises …... consumers buy less. Demand Curve Market Demand Schedule

 The slope of the demand curve at any quantity shows the maximum price that consumers are WILLING and ABLE to pay for that additional unit. Q: What happens as prices ↑ & Q ↓ ? A: utility diminishes Demand Curve & Utility Law of Diminishing Utility Price (monthly bill) Quantity (of Cell Phone Subscribers)

ELASTICAND INELASTIC DEMAND

The Demand & Price relationship is not the same for every product. LAW OF DEMAND: INVERSE RELATIONSHIP BETWEEN PRICE AND QUANTITY. …but sometimes the relationship between PRICE and a change in DEMAND is not as strong for some goods. : PRICE STRONGER LAW RELATIONSHIP : PRICE WEAKER LAW RELATIONSHIP MORE SUBSITITUTES LESS SUBSITITUTES

Elasticity of Demand  Elasticity is a measure of responsiveness between change in demand and a change in the price.  It tells how much demand changes when you change the price.  2 types of Elasticity  Inelastic  Elastic

Elastic Demand  Elastic Demand- quantity demanded is sensitive.  Easy to substitute a good that has elastic demand. HAS MANY SUBSTITUTES.  When price increase, demand decreases, business revenue decreases  Example: price of a good with many substitutes, such as bottle water or soda

Inelastic Demand  Inelastic Demand: quantity demanded is not sensitive to price changes.  Hard to find substitutes for the good. HAS FEW OR NO SUBSTITUTES.  When price increases, business revenue increases  Example: needed medication for an illness, such as Chemo- Therapy & gas. Necessities are inelastic.

Elastic and Inelastic Demand Curves Gasoline Tacos (from 8 to 7 units).  If the market price for gasoline was to rise from $1.00 to $5.00, the quantity demanded in the market decreases insignificantly (from 8 to 7 units). (from 8 to 1 unit).  If the market price for tacos rises from $1.00 to $5.00, the quantity demanded in the market decreases significantly (from 8 to 1 unit). sensitive elastic  Taco demand is highly sensitive to price changes and can be described as elastic; gasoline demand is relatively insensitive to price changes and can be described as inelastic. ELASTIC INELASTIC

Elasticity Over Time  Short-run : Consumers don’t have enough time to adjust the price change in a short period of time  Demand tends to be inelastic in the short-run  Long-run : Consumers have enough time to adjust to the price change in a short period of time  Demand tends to be much more elastic in the long-run

“Changes in Quantity Demanded” “Changes in Demand” Versus What will cause the demand curve to shift?

Changes in Demand vs. Changes in Quantity Demanded  Changes in Demand  Shifts of the entire demand curve  Changes in Quantity Demanded  Movement on the same demand curve due to price change 15 $ Price Quantity Quantity A shift to the right = increase in demand A shift to the left = decrease in demand $ Price

The Determinants of Demand  The only factors that can cause a demand curve to shift to the left (decrease) or right (increase) 15 $ Price Quantity

Position of the Demand Curve?  What specific things determine the position of the demand curve? 1. Price of Related Products 2. Outlook (consumer expectations) 3. Income 4. Number of Consumers 5. Tastes These are called the Determinants of Demand “P.O.I.N.T.”

Substitute Goods: –As price of one rises the demand for the other rises –As price of one falls demand for the other falls 1. PRICE OF RELATED GOODS Example: Dr. Thunder and Dr. Pepper. (assuming they taste the same) = $D THE DETERMINANTS OF DEMAND “POINT”

“POINT” Complementary Goods: (they go well together) –As the price of one rises the demand for the other falls –As the price of one falls the demand for the other rises. Example: Gas, SUVs, and tires. += $ Which way will the Demand curve for Tires shift? A: Shift to the left DEMAND 1. PRICE OF RELATED GOODS THE DETERMINANTS OF DEMAND

3. INCOME 1. PRICE OF RELATED GOODS 2. OUTLOOK OF THE FUTURE Substitutes vs Complements This could work in numerous ways. For example: You hear there is going to be a recession so you stop spending today –OR– you hear that a sale on some clothing is ending soon so you run to make a purchase today. “POINT” INCOME effects S SS Superior and Inferior Goods in different ways. THE DETERMINANTS OF DEMAND

Superior Goods:  As income rises, demand will increase (shift right)  As income falls, demand will decrease (shift left) –Example: Expensive versus cheap cars Vs. Income Effects on Superior and Inferior Goods

Inferior Goods: risesfalls  As income rises demand falls fallsrises  As income falls demand rises Example: Compact cars, MP3 Players, etc. Income Effects on Superior and Inferior Goods

5. TASTES (Affected by attitudes, quality, advertising, etc.) 4. NUMBER OF BUYERS 3. INCOME 1. PRICE OF RELATED GOODS 2. OUTLOOK OF THE FUTURE Substitutes vs Complements Superior vs Inferior Goods This could work in numerous ways. For example: You hear there is going to be a recession so you stop spending today –OR– you hear that a sale on some clothing is ending soon so you run to make a purchase today. THE DETERMINANTS OF DEMAND “POINT”

Review (Grab a Marker Board) 1. A demand curve shows the inverse relationship between…  Price and quantity 2. What is the law of diminishing utility mean?  As consumption increases, additional benefits decrease 3. What does elastic mean?  Quantity demanded is sensitive 4. What does inelastic mean?  Quantity demanded is not sensitive to price changes.

Review 5. If demand increases then the curve shifts…  Right 6. If demand decreases then the curve shifts…  Left 7. Changes in Quantity Demanded moves what?  Moves price on the curve 8. Changes in Demand moves what?  The curve