1. Unit 4: Demand
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ACDC Leadership 2015

2. Chicken Wing Video

3. DEMAND DEFINED What is Demand? What is the Law of Demand?
Demand is the different quantities of goods that consumers are willing and able to buy at different prices.
(Ex: You are able to purchase diapers, but if you aren’t willing to buy then there is NO demand)
What is the Law of Demand?
There is an INVERSE relationship between price and quantity demanded
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4. Example of Demand
I am willing to sell several A’s in AP Economics. How much will you pay?
Price
Quantity
Demanded
Demand Schedule
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6. Why does the Law of Demand occur?
The law of demand is the result of three separate behavior patterns that overlap:
The Substitution effect
The Income effect
The Law of Diminishing Marginal Utility
We will define and explain each…
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7. Why does the Law of Demand occur?
1. The Substitution Effect
If the price goes up for a product, consumer buy less of that product and more of another substitute product (and vice versa)
2. The Income Effect
If the price goes down for a product, the purchasing power increases for consumers -allowing them to purchase more.
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8. Why does the Law of Demand occur?
3. Law of Diminishing Marginal Utility
Utility = Satisfaction
We buy goods because we get utility from them
The law of diminishing marginal utility states that as you consume anything, the additional satisfaction that you will receive will eventually start to decrease
In other words, the more you buy of ANY GOOD the less satisfaction you get from each new unit consumed.
Discussion Questions:
What does this have to do with the Law of Demand?
How does this effect the pricing of businesses?
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9. Can you see the Law of Diminishing Marginal Utility in Disneyland’s pricing strategy?

10. The Law of Diminishing Utility
Utility (happiness)
Quantity Consumed

11. Graphing Demand
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12. Let’s draw a new demand curve for milk…
The Demand Curve
A demand curve is a graphical representation of a demand schedule.
The demand curve is downward sloping showing the inverse relationship between price (on the y-axis) and quantity demanded (on the x-axis)
When reading a demand curve, assume all outside factors, such as income, are held constant. (This is called ceteris paribus)
Let’s draw a new demand curve for milk…
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13. GRAPHING DEMAND Draw this large in your notes Demand Schedule
Price of Milk
Draw this large in your notes $5 4 3 2 1
Price
Quantity
Demanded $5 10 $4 20 $3 30 $2 50 $1 80 Q
Quantity of Milk
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14. GRAPHING DEMAND Demand Schedule Price of Milk $5 10 $4 20 $3 30 $2 50
Quantity
Demanded $5 10 $4 20 $3 30 $2 50 $1 80
Demand Q
Quantity of Milk 14

15. Where do you get the Market Demand?
Billy
Jean
Other Individuals
Market
Price
Q Demd $5 1 $4 2 $3 3 $2 5 $1 7
Price
Q Demd $5 $4 1 $3 2 $2 3 $1 5
Price
Q Demd $5 9 $4 17 $3 25 $2 42 $1 68
Price
Q Demd $5 10 $4 20 $3 30 $2 50 $1 80 P P P P $3 $3 $3 $3 D D D D Q Q Q Q 3 2 25 30

16. Demand

17. Demand Review
What are the two key aspects of the definition of demand?
What is the Law of Demand?
Give an example of the substitution effect
Give an example of the income effect
Give an example of the law of diminishing marginal utility
Explain how the law of diminishing marginal utility causes the law of demand
How do you determine the MARKET demand for a particular good?
Name 10 fast food places
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18. Shifts in Demand

19. Shifts in Demand
Ceteris paribus-“all other things held constant.”
When the ceteris paribus assumption is dropped, movement no longer occurs along the demand curve. Rather, the entire demand curve shifts.
A shift means that at the same prices, more people are willing and able to purchase that good.
This is a change in demand, not a change in quantity demanded
PRICE DOESN’T SHIFT THE CURVE
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20. Change in Demand What if milk makes you smarter? Demand Schedule
Price of Milk
What if milk
makes you smarter? $5 4 3 2 1
Price
Quantity
Demanded $5 10 $4 20 $3 30 $2 50 $1 80
Demand Q
Quantity of Milk 20

21. Change in Demand What if milk makes you smarter? Demand Schedule
Price of Milk
What if milk
makes you smarter? $5 4 3 2 1
Price
Quantity
Demanded $5 10 $4 20 $3 30 $2 50 $1 80
Demand Q
Quantity of Milk 21

22. Change in Demand Demand Schedule Price of Milk $5 30 $4 40 $3 50 $2 701
Price
Quantity
Demanded $5 30 $4 40 $3 50 $2 70 $1
Demand Q
Quantity of Milk 22

23. Prices didn’t change but people want MORE Milk
Change in Demand
Demand Schedule
Price of Milk
Increase in Demand
Prices didn’t change but people want MORE Milk $5 4 3 2 1
Price
Quantity
Demanded $5 30 $4 40 $3 50 $2 70 $1 D1
Demand Q
Quantity of Milk 23

24. Change in Demand What if milk makes causes baldness? Demand Schedule
Price of Milk
What if milk
makes causes baldness? $5 4 3 2 1
Price
Quantity
Demanded $5 10 $4 20 $3 30 $2 50 $1 80
Demand Q
Quantity of Milk 24

25. Change in Demand What if milk makes causes baldness? Demand Schedule
Price of Milk
What if milk
makes causes baldness? $5 4 3 2 1
Price
Quantity
Demanded $5 10 $4 20 $3 30 $2 50 $1 80
Demand Q
Quantity of Milk 25

26. Change in Demand Demand Schedule Price of Milk $5 $4 5 $3 20 $2 30 $1
Quantity
Demanded $5 $4 5 $3 20 $2 30 $1
80 60
Demand Q
Quantity of Milk 26

27. Prices didn’t change but people want LESS Milk
Change in Demand
Demand Schedule
Price of Milk $5 4 3 2 1
Decrease in Demand
Prices didn’t change but people want LESS Milk
Price
Quantity
Demanded $5 $4 5 $3 20 $2 30 $1
80 60 D2
Demand Q
Quantity of Milk 27

28. The demand stays the same
Change in Demand
Demand Schedule
Price of Milk
What happens to
the demand for milk if
the price of milk
goes up? $5 4 3 2 1
Price
Quantity
Demanded $5 10 $4 20 $3 30 $2 50 $1 80
NOTHING!
The demand stays the same
Demand Q
Quantity of Milk 28

29. Change in Qd vs. Change in Demand
There are two ways to increase quantity from 10 to 20
Price of Milk P
A to B is a change in quantity demand (due to a change in price)
A to C is a change in demand (shift in the curve) A C $3 $2 B D2 D1
Q Milk
Quantity of Milk

30. What Causes a Shift in Demand?
5 Shifters (Determinates) of Demand:
Price of Related Goods
Outlook/ Future Expectations
Income
Number of Consumers
Tastes and Preferences
Changes in PRICE don’t shift the curve. It only causes movement along the curve.
P.O.I.N.T
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31. Prices of Related Goods
The demand curve for one good can be affected by a change in the price of ANOTHER related good.
Substitutes are goods used in place of one another.
Ex: If price of Pepsi falls, demand for coke will…decrease.
If the price of one increases, the demand for the other will increase (or vice versa)
2. Complements are two goods that are bought and used together.
Ex: If price of hot dogs falls, demand for hot dog buns will…increase.
If the price of one increase, the demand for the other will fall. (or vice versa)
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32. THE DETERMINANTS OF DEMAND
Unit 4: Demand
1. PRICE OF RELATED GOODS
Substitute Goods:
As price of one rises the demand for the other rises
As price of one falls demand for the other falls
“P.O.I.N.T”
Example: Dr. Thunder and Dr. Pepper.
(assuming they taste the same) $ = D
SWS

33. THE DETERMINANTS OF DEMAND
1. PRICE OF RELATED GOODS
“P.O.I.N.T”
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 + =
DEMAND

34. Substitutes or Complements?

35. Substitutes 35 35

36. Substitutes 36 36

37. Substitutes 37 37

38. Substitutes 38 38

39. Substitutes 39 39

40. Substitutes 40 40

41. Substitutes 41 41

42. Substitutes 42 42

43. Complements 43 43

44. THE DETERMINANTS OF DEMAND
1. PRICE OF RELATED GOODS
“POINT”
Substitutes vs Complements
2. OUTLOOK OF THE FUTURE
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.
3. INCOME
Superior vs Inferior Goods
4. NUMBER OF BUYERS
5. TASTES (Affected by attitudes, quality, advertising, etc.)

45. Income
The incomes of consumer change the demand, but how depends on the type of good.
Normal Goods
Ex: Luxury cars, Sea Food, jewelry, homes
As income increases, demand increases
As income falls, demand falls
2. Inferior Goods
Ex: Top Ramen, used cars, used clothes
As income increases, demand falls
As income falls, demand increases
Spam-Inferior
Yachts- Normal
Off Brand Cereal-Inferior
McDonald’s-Inferior
Toilet Paper- Probably no connection to income (The point-some products are very reliant on income and others are not)
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46. Inferior Goods 46 46

47. Practice Questions
1. Which of the following will cause the demand for milk to decrease?
Increase in the price of a substitute
A decrease in income assuming that milk is a normal good
A decrease in the price of milk
An increase in the price of milk
A decrease in the price of a complementary good
Answer B
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48. Practice Questions
2. Which of the following will cause the quantity demanded of milk to decrease?
Increase in the price of a substitute
A decrease in income assuming that milk is a normal good
A decrease in the price of milk
An increase in the price of milk
A decrease in the price of a complementary good
Answer D
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49. Practice
Identify the determinant (shifter) then decide if demand will increase or decrease
Shifter
Increase or Decrease
Left or Right 1 2 3 4 5 6 7 8
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50. Hamburgers (a normal good)
Practice
Identify the determinant (shifter) then decide if demand will increase or decrease
Hamburgers (a normal good)
Population boom
Incomes fall due to recession
Price of tacos, a substitute, decreases
Price increases to $5 for hamburgers
New health craze- “No ground beef”
Hamburger restaurants announce that they will significantly increase prices NEXT month
Price of fries, a complement, increases
Restaurants lower price of burgers to $.50
Number of consumers, increase.
Income, decrease.
Price of Related Goods (Substitute), decrease.
Price doesn’t shift curve, no change.
Tastes and preferences, decrease.
Expectations, increase.
Price of Related Goods (Complements), decrease. 50 50

51. Elastic
and
Inelastic Demand

52. 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
: PRICE
WEAKER LAW RELATIONSHIP
STRONGER LAW RELATIONSHIP
LESS SUBSITITUTES
MORE SUBSITITUTES

53. 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

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

55. 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!

56. Elastic and Inelastic Demand Curves
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).
5.00
Gasoline
INELASTIC
1.00
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). 1 2 3 4 5 6 7 8 9 10
5.00
Tacos
1.00
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 1 2 3 4 5 6 7 8 9 10

57. Elasticity Over Time
Short-Run - Consumers don’t have enough time to adjust to the price change in a short period of time (ex: stuck with the current product with no substitutes).
Demand tends to be inelastic in the short-run
Long-Run - Consumers have enough time to adjust in a longer period of time (ex: we will find a substitute to gas if the price remains high).
Demand tends to be much more elastic in the long-run