Economics 1/3/11 OBJECTIVE: Demonstration of Chapter#3 and begin examination of demand. I. Administrative Stuff -attendance -distribution of test II. Chapter#3 Test III. Journal #11 pt.A -Read “Profiles in Economics” p.94 -Answer question #1 p.94 IV. Journal #11 pt.B -notes on demand

Calculator BRING YOUR CALCULATOR THIS WEEK!!!!

What is demand? Demand – the desire, ability, and willingness to buy a product. In a market economy, you compete with other consumers who demand the same products as you. If a lot of people demand the same product, the price will rise. If there are a lot of the same product, and very few people who demand it, the price will fall.

Demand Schedule demand schedule - a listing that shows the various quantities demanded of a particular product at all prices that might prevail in the market at a given time.

Demand Curve demand curve - a graph showing the quantity demanded at each and every price that might prevail in the market.

Simplistic view of demand As price increases, demand decreases As price decreases, demand increases This is an inverse relationship When an inverse relationship is graphed, the slope is negative

Marginal Utility Utility – the amount of usefulness or satisfaction that someone gets from the extra use of a product Marginal utility – the extra usefulness or satisfaction a person gets from acquiring or using one more unit of a product

Diminishing Marginal Utility The more and more of a product we acquire, the extra satisfaction we get from using additional quantities of a product begins to diminish.

Example #1: How much satisfaction would you get from this?

Example #1: How much satisfaction would you get from this?

Example #1: How much satisfaction would you get from this?

Example #2

Demand Changes Change in quantity demanded – movement along the demand curve Change in demand – shift in the demand curve

Change in Demand v. Change in Quantity Demanded

Economics 1/4/11 OBJECTIVE: Examine the factors that affect demand. I. Journal #12 pt.A -Read “The Business Week Newsclip” p.100 -Answer questions (1-3) p.100 II. Quiz#7 III. Return of Chapter#3 Test IV. Journal #12 pt.B -notes on demand changes Progress Report Printed Tomorrow!

Demand Changes Change in quantity demanded – movement along the demand curve Change in demand – shift in the demand curve

Change in Quantity Demanded When a change in price causes a change in quantity demanded. In this case, a lower price leads to an increase in quantity demand.

Change in quantity demanded Income effect – the change in quantity demanded because of a change in price alters consumers’ real income. Substitution effect – the change in quantity demanded because of a change in the relative price of a product

Example of the income effect If the price of a movie drops from $9 to $3, you might see more films because you have to work 2/3 less than you did before to see one movie. When the price of goods and services drop and your income stays the same, you can buy more. It has a similar effect of a pay raise if prices remain the same.

Example of the substitution effect If Wendy’s raised the price of their $.99 extra value menu to $1.99 you may choose to substitute Wendy’s food with McDonalds $1.00 menu.

Change in Demand When there is no change in price, but there is a change in the amount demanded at each and every price level. In this case, price didn’t change but more was demanded.

Change in Demand Consumer income – as income goes up, the amount of goods and services you can buy also goes up Consumer tastes – advertising, news reports, and style changes cause consumers to demand more or less of a product Substitutes – products that can be used in place of other products i.e. butter/margarine

Complements – goods that increase our use of other goods Change in expectations – the willingness to buy more or less of a product based on future predictions Number of consumers – as more consumers enter the market demand curve will shift to the right & vice versa.

Change in Demand v. Change in Quantity Demanded

Complements What are the complements for Tony the Tiger? If Larry’s Foodland put milk on sale, what might this do to Tony the Tiger?

How Milk Prices affect Tony The decrease in the price of milk will increase the demand for cereal. Milk Cereal

Substitutes What are the substitutes for this Fabio endorsed product? What would happen if Larry’s Foodland increased the price of butter?

How higher butter prices help Fabio An increase in the price of butter will increase demand for the substitute good, “I Can’t Believe It’s Not Butter” Butter Margarine

Economics 1/5/11 OBJECTIVE: Examine demand elasticity. I. Journal #13 pt.A -Read “The Global Economy” p.102 -Answer questions (1-2) p.102 II. Journal #13 pt.B -notes on elasticity III. Math Practice -complete worksheet on demand NOTICE: Progress Report Due Friday!

Elasticity Elasticity – a measure of responsiveness that tells how a dependent variable such as quantity responds to an independent variable such as price. 3 Types of Demand Elasticity -Elastic Demand -Inelastic Demand -Unit Elastic Demand

Elastic Demand A small change in price causes a big change in quantity demanded. Slope is less than -1 Example -fresh foods (green beans, tomatoes, apples)

Inelastic Demand A big change in price causes a small change in quantity demanded. Slope is greater than -1 Examples: -table salt -gasoline

Unit Elastic Demand Any change in price causes a proportional change in quantity demanded. Slope equals -1

Total Expenditure Test To determine total expenditure, multiply the price of a product by the quantity demanded for any point along the demand curve. Example: -at $20 quantity demanded is 5 -formula p x q = total expenditure 20 x 5 = 100 By selecting two points along the demand curve, the elasticity of demand can be determined.

Determining Elasticity TypeChange in Price Change in Expenditure Movement of P&E Slope ElasticdecreaseincreaseoppositeLess than -1 Unit Elastic decreaseNo change proportional Equal to -1 Inelasticdecrease sameGreater than -1

Elasticity Formulas Formula to determine elasticity % change in Q = elasticity % change in P Formula to determine % change in P or Q (NEW P or Q) – 1 = decimal equivalent (OLD P or Q) Move decimal two places to the right to get % change in P or Q.

Example #1 The manufacturer of a pain medication reduces the price for medication by 30% and the percent change in quantity demanded is 30%. What is the elasticity for the pain medication? % change in Q = 30% % change in P = -30% Elasticity = -1

Example #2 A Chinese Buffet increased prices from $4.95 all you can eat to $5.95 all you can eat. The number of big eaters went from 58 to 36. What is the elasticity for All You Can Eat Chinese? First we need to figure out the % change in P & the % change in Q.

Chinese Buffet % change in P NEW P = 5.95 OLD P = 4.95 (5.95) – 1 = (4.95).20 20% % change in Q NEW Q = 36 OLD Q = 58 (36) – 1 = (58) %

Chinese Buffet % change in Q =-37% % change in P =20% -37% = 20% Elasticity = The elasticity for the Chinese Buffet is elastic

If you owned the Chinese Buffet, would you keep the price of the Buffet at 5.95? 5.95 x 36 = $ x 58 = $287.10

Example #3 The managers of a rock band plan to give a concert in an auditorium that seats 800 people. They believe that they can sell 600 tickets at $20 each or 800 tickets at $15 each. Create a demand schedule and a demand curve for concert tickets. Then, using the total expenditure test, determine the elasticity and advise the managers on how much they should charge for the concert.

Economics 1/6/11 OBJECTIVE: Working with demand elasticity. I. Administrative Stuff -attendance -follow ups II. Math Practice with Economics III. Demand Quiz IV. Mindjogger -video quiz on Chapter#4 Demand NOTICE: Progress Report Due Tomorrow!

Economics 1/7/11 OBJECTIVE: Examine gold mines. I. Administrative Stuff -Attendance II. Modern Marvels: Gold Mines -answer questions about film