Agenda- 10/26 1.Review Test/Makeups 2.Ch. 4 Lecture #1-13 (RS) 3.Ch. 4 Sec. 1 Book Questions (LS) 4.HW: Finish book questions

Unit 2 – Microeconomics Ch. 4 - Demand :

First, some shorthand… Goods = G Services = S Increase = ↑ Decrease = ↓ Price = P Demand = D Quantity demanded = Qd Income = I Change = Δ

DEMAND Quantity of goods and services that a consumer is WILLING and ABLE to purchase at various prices

Demand Schedule: List of quantities that would be purchased at various prices Demand curve plots these points Shows graphically the relationship between price and quantity demanded

Demand Schedule Price Quantity Purchased Weekly (Q d) $20 $25 $30 $

Demand Curve (Inverse Relationship) Demand (D) Price (P) Quantity (Q d ) Law of Demand

The quantity demanded of a good will be higher at lower prices than the quantity demanded at higher prices

Price goes up, Quantity Demand goes Down P ↑, Qd ↓ Price goes down, Quantity Demand goes Up P ↓, Qd ↑

Proof of the Law of Demand: Income Effect Substitution Effect Marginal Utility

Income Effect Effect increasing or decreasing prices has on purchasing power (less “income”)

Substitution Effect Change in the combination of goods or services purchased as a result of increasing or decreasing relative prices of possible substitute products.

Homework (left-side) P. 92 – “Econ Analysis” p. 93 – Demand & Prices ? p. 94 – Economic Analysis ? P. 94 – “Reading Check” p. 95 –Reading Check P # 1-4

Marginal Utility Amount of satisfaction derived from one additional unit of a product Law of diminishing marginal utility- as additional units of a product are consumed during a given period of time, the additional satisfaction derived from the good decreases

Law of Diminishing Marginal Utility Graph Utility Units of Goods Diminishing Marginal Utility

Econ in ACTION! I need a volunteer ( a thirsty one!)

Change in Quantity Demanded (Q d ) v. Change in Demand (D) In Quantity Demanded Caused by an increase or decrease in price Causes a movement ALONG the demand line In Demand Explains why people are willing to buy more or less of a good Causes a shift of the ENTIRE demand line

Homework (hold the applause) Demand Packet – –has Vocabulary (that will be on the test) –Applicable examples –BRING A DRY ERASE PEN WEDNESDAY OR LOSE POINTS!!!

Determinants of Demand Factors that determine how much will be purchased at any given price Demand changes even if there is no change in price The change will shift the entire demand line

The Determinants Consumer income Consumer attitude Price of a complimentary productPrice of a complimentary product Price of a substitute Price Expectations Population Weather

Change in Income Normal goods- Demand increase as income increases (ie Coke or Pepsi) Inferior goods- Demand decreases as income increases (ie Sam’s Club Soda vs. Coke or Pepsi)

Changing Attitudes Tastes and Preferences (ie Jeans vs. Cords) Trends (ie Casual attire more acceptable in business now.) Fads (ie Skinny Jeans vs. Bell Bottoms)

Changing Price of Compliments Complimentary goods- Products that are used together (ie peanut butter and jelly.) Decrease in the price of one can increase the demand for the other

Changing Price of Substitutes Substitute goods- Products similar enough they can replace the other Change in the price of other products causes change in demand for a good

Expectations People’s expectations about the future can change demand. –You may wait for new technology to increase quality and/or reduce price. –You may rush out and buy supplies if the weather report says a terrible storm is about to arrive.

population A change in the number of consumers for a product –More consumers = increased demand –Less consumers = decreased demand Change in Qd vs Change in D

Change in Demand Remember: The entire line shifts! Increase Price (P) Quantity (Q) Decrease Original Demand (D)

Did someone say “Whiteboards?” Have a whiteboard and dry-erase marker ready to graph the following examples and list the determinant.

Graph the effects of the popularity growth of skinny- jeans

Demand Curve: Tastes and Preferences Price Quantity D1D1 D2D2

Graph the effects of a cut in paid work hours on your demand for eating out

Income: demand decrease b/c your income has decreased Price Quantity D2D2 D1D1

The price of Pepsi goes up. Graph the effect on Coca- Cola

Substitutable Goods: Demand will go up for Coke Price Quantity D1D1 D2D2

The price of grape jelly goes down. Graph the effect on peanut butter.

complimentary Goods: Demand will go up for peanut butter Price Quantity D1D1 D2D2

The weather channel says there will flooding in your neighborhood tomorrow. Graph the change for demand of sand bags today.

Expectations: demand for sandbags increases Price Quantity D1D1 D2D2

The weather channel says there will be rain & lightening storms at the Michigan / ohio st. football game. Graph the change in demand for t-shirt apparel at the stadium at kickoff.

Change in population and weather: demand decrease b/c less people will go to the game to buy; t-shirts not warm; not “trendy”; “Expect” to be cold Price Quantity D2D2 D1D1

The weather channel says there will be rain & lightening storms at the Michigan / ohio st. football game. Graph the change in demand for Sweathsirt/jacket apparel at the stadium at kickoff.

Weather-demand increase b/c people expect to be freezing!; jacket “population” increases; “preference”; “Substitute” for t-shirt; “compliments” the weather Price Quantity D2D2 D1D1

Demand Summary Demand ACDC

Price Elasticity of Demand Measurement of the relative responsiveness of the change in quantity demanded as a result of a change in price

Elasticity Equation e = % Qd % P -Greater than 1 = Elastic -Less than 1 = Inelastic

Elastic Demand Elastic implies responsiveness (read don’t write this one) Price is elastic if calculated value of price elasticity is greater than one As the price of a good increases the quantity demanded decreases significantly

Demand Schedule for an Elastic Good Price % Quantity Purchased Weekly% $ $1.05 5% $ % $ % % 7 30% 4 60%

Elastic Demand Price Quantity D

Inelastic Demand Inelastic implies less sensitivity to change in price (read don’t write this one) Price inelastic if calculated value of price elasticity is less than one As the price of a good increases the quantity demanded decreases minimally

Demand Schedule Price % Quantity Purchased Weekly% $ $ % $ % $ % % 9 10% 8 20%

Inelastic Demand Price Quantity D

Determinants of Price Elasticity Number of substitutes (more substitutes then more elastic; less substitutes, then more inelastic) Importance of product in consumer’s budget (small fraction of budget then price elastic) Time period considered (shorter time period then more inelastic demand) Elasticity of Demand (stop at 3:08)

Unitary Price Elasticity % P = % Qd 1:1 ratio

Total Revenue Total amount of money a company receives from its sales Total Revenue = price x quantity sold Quantity sold is dependent on price

Relationship between Price, Elasticity, Total Revenue Elastic DemandInelastic Demand Decreasing Price Increases Total Revenue Decreasing Price Decreases Total Revenue Increasing Price Decreases Total Revenue Increasing Price Increases Total Revenue

Ch. 4 book assignment – Page 112 – 113 –# 19, 20, 22, 24, 29, 30 Oh, and have you finished (you know you haven’t): 1.Ch. 4 Sec.1 Book Work? 2.Demand Packet (Ted’s Tape Production Company)? 3.Determinants of Demand WS? 4.Demand Elasticity WS? If you have, study for the quiz tomorrow…