Demand IB Economics.

Demand IB Economics

Demand for chocolate bars experiment

Getting an idea of what demand is The demand for chocolate bars experiment
In my shop I have 4 items for sale 50p 50p 50p 50p

Getting an idea of what demand is
Stage 1 Each item is 50p each You have £2.50 to spend and must spend it all You can buy any number of one product and do not have to buy all of the products When you have made your decision draw a table like the one below and fill it out Product Quantities Can of coke (50p) Snickers bar (50p) Pint of milk (50p) Mars bar (50p)

Stage 2 It’s a new day and you have consumed everything that you bought yesterday A global shortage of peanuts has put the price up of a snickers bar to £1 50p £1 50p 50p

Demand for chocolate bars experiment continued
Stage 2 It’s a new day and you have consumed everything that you bought yesterday A global shortage of peanuts has put the price up of a snickers bar to £1 You still have £2.50 income to spend and must spend it all You can buy any number of one product and do not have to buy all of the products When you have made your decision draw a table like the one below again and fill it out with your new preferences Product Quantities Can of coke (50p) Snickers bar (£1) Pint of milk (50p) Mars bar (50p)

Stage 3 – calculating market demand Organise yourself into a group Work out the market quantities for your group for stages 1 and 2. Do this by adding together the quantities for each product at each price level demanded by each person in your group. See an example below Product Quantities - Stage 1 (Snickers cost 50p) Quantities - Stage 2 (Snickers cost £1) Can of coke ||||| ||||| |||| ||||| |||| Snickers bar ||||| ||||| ||| |||| Pint of milk ||||| ||||| || ||| Mars bar ||||| ||||| ||||| |||| ||||| ||||| |||| What this represents is the demand for each product – the amount each person would like to purchase at the price stated. By adding together each individual’s demand we get the market demand Make your team a table like the one above and complete it

Stage 3 – calculating market demand Now lets represent this information in the form of a graph Use the graph paper provided Price goes on the vertical axis Quantity demanded goes on the horizontal axis Plot the quantity demanded of snickers bars for your group against the price (see the example below) You will see two points on the graph – one for the quantity demanded at 50p and another for the quantity demanded at £1 Draw these two points and draw a straight line through them like below

Stage 3 – calculating market demand Now compare your graph with the other group’s graph Are they the same shape? Do they both slope downwards from left to right? So what can you conclude about the relationship between price and the amount demanded? Use your graph to estimate the following for your group What is the demand likely to be if the price were 75p? What is the demand likely to be if the price were 25p? What is the demand likely to be if the price were 60p?

Let's now take the game one step further. Stage 4 It is now day three and the peanut crisis has eased. Snickers now cost 50p once more. The government has decided to provide all students with a grant As a result your income has increased and you now have £4 to spend. Again, in your group work out market demand by adding together each person's demand for each product The rules are the same as before Fill out your individual table to find your individual demand Fill out your group table to find your market demand (the sum of all your individual demands) Then create a table like the one below Product Quantities - Stage 1 (Income is £2.50) Quantities - Stage 4 (Income is £4) Can of coke Snickers bar Pint of milk Mars bar

Stage 4 continued Comparing stage 1 and stage 4 what can we see? Was the demand for all of the goods greater than before? This is because demand is not static – it changes as a result of changes in factors that affect demand (other than price) So we know now that one of these factors is income; we saw that when we had an increase in income our demand levels increased. What other factors might increase demand? What factors might decrease demand? On your original graph plot the new snickers demand. Assume that you would get the same increase in demand at £1 and plot your second point. Now draw your new demand line What do we see? Now lets have a look at the theory of demand

The Theory of Demand

The Demand Curve Often we desire certain things like luxury cars or jewellery but we don’t have the ability to buy them so they are not a part of what economist consider demand Demand is the amount that consumers are willing and able to buy at each given price level This is what we call effective demand because it is backed by purchasing power The demand curve illustrates the relationship between the price and the amount consumers intend to buy at each given price (note the word intend – demand diagrams show planned or intended spend not realised or actual demand) We can see that there is an inverse or negative relationship – as the price goes up the demand goes down Note also the notation that we use Quantity Demanded Demand P1 Q1 Q3 Q2 P2 P3 Price Remember……Demand goes Down!!! A demand curve shows the relationship between the price of an item and the quantity demanded over a period of time. For normal goods, more of a product will be demanded as the market price falls. Watch this video Demand Curve

Drawing diagrams It is really important that you learn to draw the diagrams well because there are a lot of marks to gain if you do it correctly Use a ruler and a sharp pencil Label the axes properly (quantity always goes on the x axis and price on the y when we draw demand diagrams) If you were illustrating a certain market e.g. cars you would write Quantity of cars or price of cars We draw demand curves as a straight line We can draw several curves on one diagram but we have to label them each differently The first demand curve we drew would be labelled D1 The first demand curve we drew would be labelled D2 We label the prices and the quantities on the axis in the same way We always draw the curve first and then draw the dotted lines to show the new prices and quantities Later you will shade parts of diagrams and it is good to have different colours (pencil only) to hand although in the exam you will only have black Diagrams must be large enough so that labels can be seen clearly You MUST always explain/analyse what is happening in a diagram. This is why it is good to use different colours because you can use the colour to describe the area or line you are discussing. I WILL GIVE YOU A HARD TIME IF YOU DRAW SMALL AND MESSY DIAGRAMS!!!!!!!

The individual demand curve for a good and market demand
Each consumer will buy as much of a product they deem as worth it at each given price level A demand curve can be plotted for each individual To identify the market demand we calculate the sum of the demand from all individuals Below individual 1 buys 3 cans of coke, individual 2 buys 2 cans of coke and so the overall demand or the market demand is 2+3 = 5 This is exactly what you did with the demand for snickers. You worked out your individual demand and then the group (market) demand Quantity D 50p 5 Price 3 2 Individual demand 1 Market Demand Demand curves for coke

The shape of demand curves
As we have already said the demand curve typically slopes down from left to right There is a negative relationship between price and quantity This is because of the assumptions we make about consumers They want to maximise the benefits they can receive with their limited income They will only buy something if they feel it is worth it The benefits from buying it have to outweigh the opportunity cost of using the money for something else This is what we call rational behaviour – it would be irrational to buy something that we didn’t think was worth it!! The law of economics says that as we buy more and more of something the benefit we get from each extra unit will fall think about if you bought a cake and ate it, bought another and ate it, bought another and ate it…each time the cake would be less appealing and eventually you might not want to buy any at all! This is true with all products although the point at which the value falls will depend on the person and the product So, the point is.. As we buy more it becomes less valuable which means we will only buy more if the price falls (it has to be worth it!) – hence the downward sloping curve.

Movements along the demand curves
When there is a change in price there is a movement along the demand curve When there is a fall in price there is an extension in demand (demand grows because the price is less and it is worth buying more) There is a movement down the curve (there is an increase in the quantity demanded) When there is an increase in price there is a contraction in demand (because the price is more it becomes less valuable and we buy less) There is a movement up the curve (there is a decrease in the quantity demanded) Remember – movements along the curve are always caused by a change in price – nothing else!!!! Important wording!

A contraction of demand
How to describe this? At the original price P1 there is a demand for the quantity Q1. As the price increases to P2 consumers see less value in the product and demand less. There is a contraction of demand and the quantity demanded reduces to Q2. Note: I talk about 1) where we were to start with, then 2) where we have got to and why that has happened. Price P2 A contraction of demand due to a higher price P1 At higher prices, consumers generally willing to purchase less than at lower prices D Q2 Q1 Quantity Demanded

A contraction of demand due to a higher price
Time for you to draw! In the market for strawberries there has been an increase in price Draw the diagram and analyse (describe what is happening) Answer: Describe the starting point Describe the change Describe what is happening in the diagram At the original price P1 there is a demand for the quantity Q1 of strawberries. As the price increases to P2 consumers see less value in the strawberries and demand less. There is a contraction of demand and the quantity demanded reduces to Q2. Quantity Demanded D P1 Q1 Q2 P2 A contraction of demand due to a higher price Price At higher prices, consumers generally willing to purchase less than at lower prices

A contraction of demand due to a higher price
Time for you to draw! In the market for copper there has been an increase in price Draw the diagram and analyse (describe what is happening) Answer: Describe the starting point Describe the change Describe what is happening in the diagram At the original price P1 there is a demand for the quantity Q1 of copper. As the price increases to P2 consumers see less value in the copper and demand less. There is a contraction of demand and the quantity demanded reduces to Q2. Quantity Demanded D P1 Q1 Q2 P2 A contraction of demand due to a higher price Price At higher prices, consumers generally willing to purchase less than at lower prices

An extension of demand due to a lower price
How to describe this? At the original price P1 there is a demand for the quantity Q1. As the price decreases to P2 consumers see more value in the product and demand more. There is an extension of demand and the quantity demanded increases to Q2. Note: I talk about 1) where we were to start with, then 2) where we have got to and why that has happened. Quantity Demanded Demand P1 Q1 Q2 P2 An extension of demand due to a lower price Price At lower prices there is a financial incentive to demand more of a good or service

An extension of demand due to a lower price
Time for you to draw! In the market for gold there has been a decrease in price Draw the diagram and analyse (describe what is happening) Answer: Describe the starting point Describe the change Describe what is happening in the diagram At the original price P1 there is a demand for the quantity Q1 of gold. As the price decreases to P2 consumers see more value in the gold and demand more. There is an extension of demand and the quantity demanded increases to Q2. Quantity Demanded Demand P1 Q1 Q2 P2 An extension of demand due to a lower price Price At higher prices, consumers generally willing to purchase less than at lower prices

Shifts of the demand curves
When we did our Snickers experiment we saw that an increase income made us buy more at the same price. When we drew the 2nd curve we saw that it had moved outwards What makes someone want to buy more of something at the same price? Think about a holiday in a villa in Spain - why would there be more demand for this even though the price had not changed? Income – if average incomes rise demand may rise Cost of flights – if the cost went down more people may consider - complementary goods Other European holidays become more expensive – the villa in Spain would be more attractive. The other European holidays would be known as a substitute substitutes – a competing alternative Complementary goods – goods that are consumed together e.g. DVDs and DVD players

Shifts of the demand curves
Things that cause a shift of the demand curve (and none of those are price!!) are called determinants of demand Prices of complements (things you buy with that product) e.g. ink cartridges with printers Advertising and branding that creates desire and loyalty for a product Trends/Fashion Price – not a determinant! Income level – this is the most important prices of substitutes (similar products) e.g. Xbox and playstation are substitutes Remember CATPIS!! Watch this video

The curve moves to the Right so the demand is moRe
Shifts in Demand The shift of the demand curve to the right means that there is more demand at every given price level. This is called a change in demand (not a change in quantity demanded like before) How to describe this? This diagram shows how there has been an increase in demand at the same price (P1). The demand curve has shifted from D1 to D2 because there has been ______ (fill this blank with - an increase in income, or increase in substitute price, or decrease in complementary price or whatever the reason). This factor has made the consumers think that the product is more valuable at price P1 and therefore they want to buy more. The original quantity demanded was Q1 and the new quantity demanded is higher at Q2. There is an increase in demand for every given price level Price Quantity Demanded D1 P1 Q1 Q2 D2 Increase in Demand The curve moves to the Right so the demand is moRe

Shifts in Demand Time for you to draw and write an explanation In the market for strawberries there has been a medical journal published that says strawberries prevent cancer. Draw a diagram and analyse Analysis Describe the starting point. At P1….. Describe what has happened (what happens when this journal is published) Describe what has happened to the demand curve At P1 the quantity of strawberries demanded is Q1. Due to the fact that strawberries are seen as a cancer preventing agent there will be an increase in demand for strawberries The demand curve shifts outwards from D1 to D2 and the quantity demanded increases to Q2 Price Increase in Demand P1 The curve moves to the Right so the demand is moRe D2 D1 Q1 Q2 Quantity Demanded

Shifts in Demand Time for you to draw and write an explanation In China there is a massive increase in demand for washing machines. Copper is used to create the electrical wires. What happens in the market for copper? Draw a diagram and analyse Analysis Describe the starting point. At P1….. Describe what has happened (change in demand for washing machines) Describe what has happened to the demand curve At P1 the quantity of copper demanded is Q1. Due to the fact that there is an increased demand for washing machines there is an increase in demand for copper. The demand curve shifts outwards from D1 to D2 and the quantity demanded increases to Q2 Price Increase in Demand P1 The curve moves to the Right so the demand is moRe D2 D1 Quantity Demanded Q1 Q2

The curve moves to the Left so the demand is Less
Shifts in Demand The shift of the demand curve to the left means that there is less demand at every given price level How to describe this? This diagram shows how there has been a decrease in demand at the same price (P1). The demand curve has shifted from D1 to D2 because there has been ______ (fill this blank with – a fall in incomes, or decrease in substitute price, or increase in complementary price or whatever the reason). This factor has made the consumers think that the product is less valuable at price P1 and therefore they want to buy less. The original quantity demanded was Q1 and the new quantity demanded is lower at Q2. There is a decrease in demand at every given price. Decrease in Demand Price P1 The curve moves to the Left so the demand is Less D1 D2 Q2 Q1 Quantity Demanded

Shifts in Demand Time for you to draw and write an explanation The government has just banned smoking inside public buildings. Describe the effect on the market for cigarettes Draw a diagram and analyse Analysis Describe the starting point. At P1….. Describe what has happened (ban) Describe what has happened to the demand curve At P1 the quantity of cigarettes demanded is Q1. Due to the change in law there is less demand for cigarettes The demand curve shifts inwards from D1 to D2 and the quantity demanded reduces to Q2 Decrease in Demand P1 The curve moves to the Left so the demand is Less D1 D2 Q2 Q1 Quantity Demanded

Shifts in Demand Time for you to draw and write an explanation The government has launched an advertising campaign to show the negative effects of too much sugar in your diet. What will happen to the sugar market? Draw a diagram and analyse Analysis Describe the starting point. At P1….. Describe what has happened (advert) Describe what has happened to the demand curve At P1 the quantity of sugar demanded is Q1. Due to the advertising campaign there is less demand for sugar The demand curve shifts inwards from D1 to D2 and the quantity demanded reduces to Q2 Decrease in Demand P1 The curve moves to the Left so the demand is Less D1 D2 Q2 Q1 Quantity Demanded

Normal and Inferior Goods
When we say that as income rises the demand for a good will increase we are making an assumption that the good we are discussing is a normal good For normal products, more is demanded as income rises, and less as income falls There are exceptions called inferior goods They are often cheaper poorer quality substitutes for some other good With a higher income a consumer can switch from the cheaper substitute to preferred alternative As a result, less of the inferior product is demanded at higher levels of income An example is cheap bread in developed countries or rice in developing countries Inferior good – less is demanded when income rises Normal good – more is demanded when income rises

Market for Tennis Balls in Glasgow
Does it look Shifty? Here are some scenarios. On your mini white boards draw the change The price of tennis balls falls The price of tennis rackets goes up It is anticipated that tennis balls will go down in price in the next few months Slazenger, Adidas and Dunlop start advertising campaigns for their sports equipment The population of Glasgow increases There are no British success stories at Wimbledon for years and years Average incomes in Glasgow rise The price of tennis balls goes up Cricket becomes cheaper to play and more fashionable as a summer activity Market for Tennis Balls in Glasgow Price of Tennis Balls Mind your P’s and Q’s!!

Composite Demand There are a couple of types of demand that you need to know about other than effective demand. The first is Composite Demand and the second is Derived Demand Wheat is used for pasta It is also used for biofuel With global warming and the need to find more efficient fuels biofuel is increasing in demand As the demand for biofuel increase so does the increase in demand for wheat (derived demand) Wheat is needed for both pasta and biofuel (composite demand) As demand increases for wheat the price goes up The price goes up for pasta and biofuel Derived demand is when the demand for one good or service comes from the demand for another good or service Italian pasta manufacturers have warned that the price of pasta, one of Italy's staple foods, will go up by about 20% this autumn. Global warming and the growing use of durum wheat as a bio-fuel are blamed. Composite demand – a good that is demanded for more than one use – if there is an increase in one this could lead to a shortage in the other and a higher price

Derived demand Derived demand is when the demand for one good or service comes from the demand for another good or service The housing market is a good example of the idea of derived demand. When construction of new homes rises, so too does the demand for materials used in new properties as well as demand for labour Other examples An increase in demand for healthcare will lead to an increase in demand for doctors An decrease in demand for cars will lead to a decrease in demand for steel Growth in global economic output will lead to an increase in the demand for oil

Adam Smith Important to remember…
When we talk about market forces (supply and demand) we are assuming that the market is perfectly competitive there are lots of small firms that have no price making power firms are price takers – they have to take their price from the market The market price comes about because of supply and demand (market forces) There is an invisible hand that sets the market price (Adam Smith) When you are describing a change in a market the change in demand comes first and the price changes as a result (not the other way around) More about this later…… Adam Smith

Consumer Surplus Consumer surplus is a measure of welfare gained as a result of consuming goods and services Watch this pajholden video

Starter from Easy Mark Qs

Complete the following 2 questions
Remember to include Definition/s Diagram/s Analysis (description of what is happening and the changes in the diagram) get your wording right (look at the previous slides) Label the diagram and refer to it e.g. “in figure 1 demand has……” Example Distinguish between a shift of the demand curve for a product and a movement along the product’s demand curve With reference to two different determinants of demand explain why the demand for bicycles might increase

The HL Bit!

QD = a – bP Linear Demand Functions
We can show the relationship between the demand for a product and individual determinants of demand by using an equation This is the demand function A simple demand function relating the quantity demanded of a product to the price of the product is usually shown in this form QD = a – bP QD is the quantity demanded P is the price a is the quantity that would be demanded if the price was zero b is the slope of the curve Read through page 25/26 from the 4th paragraph - an example of such….. Complete the student workpoint 2.2 on page 27 Quantity demanded if price is zero The price QD = a – bP Quantity demanded The slope of the curve

Demand IB Economics.

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