1. Explorations in Economics Alan B. Krueger & David A. Anderson

2. Chapter 4: The Demand for Goods and Services -Module 10: Determining Demand -Module 11: Shifts of the Demand Curve -Module 12: Elasticity of Demand

3. MODULE 10: Determining Demand KEY IDEA: When the price of a good or service increases, consumers buy less of it for two reasons: (1) they substitute the good with other goods whose prices haven’t increased, and (2) their income will buy less of the good at the higher price. OBJECTIVES: To describe the law of demand and the role of the substitution effect and the income effect. To explain what economists mean by “all else equal.” To show the relationship between a demand schedule and a demand curve.

4. THE LAW OF DEMAND

5. Demand: for goods, resources, or services Demand: – Willingness and ability to buy a good at a range of prices – Downward sloping – As price goes up quantity demanded goes down – As the price goes down quantity goes up. Law of Demand: There is always an inverse relationship between the price of a good and the quantity demanded. 12/25/2015Chapter 4-Mods 10, 11 & 12

6. Law of Demand: Demand Curve Few consumers are willing and able to buy a good at a high price. At lower prices there will be more consumers who are willing and able to benefit from the good and quantity demand increases. Downward sloping Demand Curve: showing the inverse relationship between the good and quantity demanded. 12/25/2015Chapter 4-Mods 10, 11 & 12

7. THE LAW OF DEMAND Substitution Effect There are two distinct reasons why a consumer buys less of a good after its price increases: the substitution effect and the income effect. The substitution effect arises when an increase in the price of a good causes a consumer to switch away from that good and toward other goods that do not experience a price increase. Likewise, a decrease in the price of a good causes consumers to switch toward that good.

8. THE LAW OF DEMAND Income Effect The income effect is the change in consumption that occurs when a price increase causes consumers to feel poorer or when a price decrease causes them to feel richer.. There are two distinct reasons why a consumer buys less of a good after its price increases: the substitution effect and the income effect. example of the price of groceries decreasing makes consumers feel richer and they can buy more clothing or fancy coffee

9. THE LAW OF DEMAND

10. THE LAW OF DEMAND AND THE “ALL ELSE EQUAL” ASSUMPTION Economists use the Latin term ceteris paribus, meaning “all else equal,” to indicate that they are looking only at a specified relationship, such as the one between price and quantity demanded. In a science class, you hold other variables constant. Price changes lead to movement along the curve, Ceteris Paribus

11. THE DEMAND SCHEDULE & THE DEMAND CURVE A demand schedule is a table that relates the quantity demanded of a particular good to its price.

12. INDIVIDUAL DEMAND SCHEDULE & THE DEMAND CURVE A demand curve is a graphical representation of the demand schedule for a good, showing the quantity demanded at each price.

13. THE DEMAND SCHEDULE & THE DEMAND CURVE The market demand curve for a good is a graphical representation of how the quantity demanded by ALL consumers in the market varies with the price.

14. THE DEMAND SCHEDULE & THE DEMAND CURVE The market demand curve for a good is a graphical representation of how the quantity demanded by ALL consumers in the market varies with the price.

15. THE DEMAND SCHEDULE & THE DEMAND CURVE The market demand curve for a good is a graphical representation of how the quantity demanded by all consumers in the market varies with the price.

16. https://www.youtube.com/watch?v=kUPm2tMCbGE 12/25/2015Chapter 4-Mods 10, 11 & 12

17. Module 10 Review What is… A. Substitution effect? B. Income effect? C. Law of demand? D. Market demand curve? E. Demand schedule? F. Demand curve? G. Quantity demanded? H. Ceteris paribus?

18. MODULE 11: Shifts of the Demand Curve KEY IDEA: The demand curve for a good can shift due to changes in tastes income, the prices of related goods, expectations about the future, and the number of buyers in a market. OBJECTIVES: To identify what shifts the demand curve to the left and what shifts it to the right. To distinguish between the terms quantity demanded and demand. To explain how goods are categorized as normal goods, inferior goods, substitutes, and complements.

19. MOVEMENTS ALONG A DEMAND CURVE A movement along a demand curve caused by a price change is called a change in the quantity demanded, not to be confused with a change in demand.

20. SHIFTS OF THE DEMAND CURVE A shift of the demand curve represents a change in the amount people are willing and able to buy at every price.

21. SHIFTS OF THE DEMAND CURVE

22. SHIFTS OF THE DEMAND CURVE

23. # 1 Taste & Preferences All of the following shift the demand curve: Tastes and preferences Popularity, famous people. Advertising agencies influence taste. – More popular demand shifts right If more people demand a good, the price will increase. A more popular good will increase the quantity demanded at EVERY price which is a shift of the curve.

24. # 2 Income The amount of money people earn affects the amount they are willing and able to spend. A rise in income means there is more money to spend on consumption. – Income (if income increases) - normal good (the demand shifts right) - inferior good (the demand shifts left) If a good is normal or superior good we will DEMAND more at every price when our incomes rise. If a good is an inferior good we will DEMAND less at every price when our incomes decrease. 12/25/2015Chapter 4-Mods 10, 11 & 12

25. # 3: Prices of Related Goods The Prices of Related Goods (if the price increases) - substitute goods (demand will increase) - complementary goods (demand will decrease) Complements: when people buy one of these goods, they are likely to also buy the other. Substitutes: a decrease in the price of a substitute encourages some customers to switch to that good, which decreases the demand for the other.

26. Price of Related Goods Substitute goods like Coke and Pepsi—If the price of Pepsi increases the DEMAND for COKE will increase. Complementary goods like peanut butter and jelly—If the price of jelly increases the DEMAND for peanut butter will decrease. SubstituteComplement 12/25/2015Chapter 4-Mods 10, 11 & 12

27. # 4: Expectations Expectations (a predicted shortage will increase demand) Your expectations about the future price of a good can influence your demand for that good today. – If you think the price of a good will fall in the future, you are likely to postpone your purchase of that good until the price is lower. – Because the expectation about future prices affect the quantity demanded at every price, the demand curve shift

28. Expectations If people expect there to be a shortage of Twinkies they may stock up now—increasing the demand for Twinkies causing the price to increase. 12/25/2015Chapter 4-Mods 10, 11 & 12

29. # 5 : Number of Buyers – The Number of Buyers (more buyers increases demand) Increases- say because the population grows—then the market demand curve shifts to the right. 12/25/2015Chapter 4-Mods 10, 11 & 12

30. WHAT CAUSES THE DEMAND CURVE TO SHIFT? All of the following shift the demand curve: Tastes and preferences (more popular demand shifts right) Income (if income increases) - normal good (the demand shifts right) - inferior good (the demand shifts left) The Prices of Related Goods (if the price increases) - substitute goods (demand will increase) - complementary goods (demand will decrease) Expectations (a predicted shortage will increase demand) The Number of Buyers (more buyers increases demand)

31. Your Turn Each group will get one of the 5 factors that causes the demand curve to shift. You will analyze one factor as a group and then present your findings to the class. 12/25/2015Chapter 4-Mods 10, 11 & 12

32. Module 11 Review What is… A. Change in the quantity demanded? B. Change in demand? C. Normal goods? D. Expectations? E. Substitutes? F. Complements? G. Conspicuous consumption? H. Taste? I. Inferior goods? J. Income?

33. MODULE 12: Elasticity of Demand KEY IDEA: An important aspect of demand is how sensitive quantity demanded is to price changes. OBJECTIVES: To explain how economists measure the sensitivity of quantity demanded to price changes. To identify what makes the demand for a good more or less sensitive to changes in its price. To show the connection between price sensitivity and the total revenue of firms in a market.

34. WHAT IS ELASTICITY? Elasticity of demand is a measure of how strongly consumers respond to a change in the price of a good, calculated as the percentage change in the quantity demanded divided by the percentage change in price. Demand is elastic if consumers respond to a change in PRICE with a relatively large change in the quantity demanded Demand is inelastic if consumers respond to a change in PRICE with a relatively small change in the quantity demanded. Demand is unit-elastic if consumers respond to a change in price by changing the quantity demanded by the same percentage.

35. WHAT MAKES DEMAND MORE OR LESS ELASTIC? Necessities versus luxuries: If you need it, your demand is relatively inelastic. The availability of close substitutes: No substitutes means your demand is inelastic. The share of income spent on the good: If It is a large expense, your demand is elastic. Time: If you can wait, your demand is elastic.

36. Perfectly Elastic Demand

37. Perfectly Inelastic Demand

38. PREDICTING ELASTICITY

39. COMPARING ELASTICITIES The larger the elasticity, the greater the percentage change in quantity demanded relative to the percentage change in price and the stronger the response to a price change. By calculating the value of elasticity, economists can categorize the demand for goods according to how sensitive consumers are to price changes. We can specify whether demand is elastic, inelastic, or unit elastic, depending on the value of elasticity.

40. COMPARING ELASTICITIES

41. SPENDING, REVENUE, AND ELASTICITY

42. ELASTICITY, TOTAL SPENDING, & TOTAL REVENUE Total revenue is all the money consumers spend on a good, and firms receive for a good, during a particular period of time: it is the price of the good multiplied by the quantity of the good sold. Changes in Total Revenue with Elastic Demand Price increases = total revenue decreases Price decreases = total revenue increases

43. ELASTICITY, TOTAL SPENDING, & TOTAL REVENUE Total revenue is all the money consumers spend on a good, and firms receive for a good, during a particular period of time: it is the price of the good multiplied by the quantity of the good sold. Changes in Total Revenue with Inelastic Demand Price increases = total revenue increases Price decreases = total revenue decreases

44. ELASTICITY, TOTAL SPENDING, & TOTAL REVENUE Total revenue is all the money consumers spend on a good, and firms receive for a good, during a particular period of time: it is the price of the good multiplied by the quantity of the good sold. Constant Total Revenue with Unit-Elastic Demand Price increases or decreases = total revenue unchanged.

45. ELASTICITY, TOTAL SPENDING, & TOTAL REVENUE Changes in Total Revenue with Elastic Demand Changes in Total Revenue with Inelastic Demand Constant Total Revenue with Unit- Elastic Demand

46. Module 12 Review What is… A. Elasticity of demand? B. Elastic demand? C. Inelastic demand? D. Necessity? E. Unit- elastic demand? F. Total revenue? G. Luxury? H. Close substitute?