Demand Chapter 3

Introduction  As a review:  Entrepreneurs and businesses will only make a profit if they bring something to the market that consumers value MORE than the cost of producing the product or service.  A market an arrangement that allows buyers and sellers to make exchanges.  INDIANA AUTO AUCTION

Demand and the Price Effect  “ Price directed economy ”  Whoever is willing and able to pay the price for the product gets the product.  Why do prices go up and down in the economy?  Law of Demand : an inverse relationship between that quantity demanded of a product and the price of the product.

Law of Demand:

Law of Demand from the economist’s viewpoint  Demand: Down to the Dirt

 Demand: quantities of a particular good or service that consumers are willing and able to buy at different prices at a particular time.  Hamburgers:  If your favorite hamburger’s price rose to $100, how many would you buy in a week?  If your favorite hamburger’s price fell to $.50, how many would you buy in a week?  What price do you feel makes your favorite hamburger a good value?  What is the highest price you would pay for your favorite burger?

 Althea’s demand for gas Price per gallonGallons per week $6.005 $ $ $ $ $1.0030

Board Question (Tuesday)  What is the law of demand?  The inverse relationship between the quantity demanded of a product and the price of the product.  Is the demand curve upward sloping or downward sloping?  Downward sloping —”down to the dirt”

Buying Power  Prices are incentives and disincentives. How?  Price effect: the inclination (tendency) of people to buy less of something at higher prices than they would buy at lower prices.

Four factors to explain the price effect  Buying power  Diminishing personal value  Diminishing marginal utility  Availability of substitutes

Buying Power  Buying Power: the quantity of goods and services a person can buy with a given amount of money.  Let’s look at CD’s Quantity DemandedPrice 300$ $ $ $ $ $30.00

Diminishing Personal Value  When a good or service can be used for numerous reasons, a person will rank the uses according to their personal value.  People value some of the uses of their products more than others

Diminishing Marginal Utility  Utility : usefulness or satisfaction of an action  Marginal: the extra, or additional, costs or benefits of a decision  Diminishing Marginal Utility: the point reached when an additional unit of a product consumed is less satisfying than the one before  Eating at Thanksgiving/Christmas

 How does diminishing marginal utility affect prices ?  Desire for a second item of the same product will be less than the first.  Producers recognize this and will price the second item less than the first item.

Substitutes  Substitute: a good or service that can replace another good or service.  Althea’s use of gasoline-Substitutes  Car pool with friends  Ride the bus  Ride her bike  Coke and Pepsi  Hamburgers or pizza  As the price of a good or service increases, substitutes are sought and used.

Board Question (Wednesday)  What are the four factors that explain why people buy less of an item due to the price effect?  Buying power  Diminishing personal value  Diminishing marginal return  Substitutes

Review from Wednesday  0zTE 0zTE  These are all movements Along the demand curve.

Market Demand  Market Demand: total of all individual demands in a given market at a particular demand. Price per gallon Althea’s demand Frank’s demand Nikki’s demand Henry’s demand Market demand $ $ $ $ $ $

Price Elasticity of Demand  Price Elasticity of Demand : measure of the impact of the price effect.  How much the quantity demanded will change when the price changes.  If the price effect (coefficient) is large, the demand is said to be elastic  Price change would have a large effect on amount demanded  If the price effect (coefficient) is small, the demand is said to be inelastic  Price change would have a small effect on amount demanded.

Availability of Substitutes  More available substitutes = More elastic demand  Coke increases their price  Substitutes:  Juice  Water  Pepsi  7-up

Percentage of budget  A product’s price is more elastic when the price is a large portion of the person’s income.  Large appliances  Airline Tickets  Automobiles

Time  The longer the time that people have to adjust to the higher prices, the more elastic the demand for the product is.  Gasoline  Initial increase: inelastic; no time to adjust  Over time: elastic as people adjust their habits.

Board Question (Thursday)  Give three reasons why the price elasticity would be different for different products.  Availability of substitutes  Percentage of a budget  Time

Relationship between the Price Effect and a Change in Demand  Remember:  Market demand : the various quantities of a product that people are willing and able to buy at different possible prices.  All quantities at All different prices!  For Demand to change, entire demand curve must shift, either to the right or to the left  Right: Demand has increased  Left: Demand has decreased

What causes a Shift in the demand curve?  Income—normal goods vs. inferior goods  Price of other goods—substitutes and compliments  Change in the weather or season  Number of consumers  Tastes and preferences  Expectations of future prices/income

Income  When a person’s income goes up :  Purchase of normal goods goes up ;  Purchase of inferior goods goes down  When a person’s income goes down:  Purchases of normal goods goes down;  Purchases of inferior goods goes up.

Price of Substitutes  When the fall in the price of one good reduces the demand for another good, the two are considered substitutes.

Price of compliments  When the fall in the price of one good increases the demand for another good, the two goods are considered compliments  Peanut butter and jelly  Hog dogs and buns

Change in the weather or season  Demand for certain products can shift, depending on the season.  Demand for gasoline shifts to the right during vacation season; natural gas for heating also shifts to the right during heating season  Demand for:  Snow shovels  Speed boats  Bathing suits

Number of consumers in the market  Size of the market affects demand  The more consumers in the market: demand will shift to the right;  The fewer consumers in the market: demand will shift to the left

Tastes and Preferences  Fashions change:  Clothing  Autos

Expectations in future prices or income  Consumers think price will go up in the near future, demand will increase today; shift to the right.  Consumers think price will go down in the near future, demand will decrease today; shift to the left.

 0zTE 0zTE  Start at 2:55  These are all shifts in the Demand Curve