Unit 2

Understanding Demand Demand is the desire to own something AND the ability to pay for it. The Law of Demand states that as a price goes up, the quantity demanded goes down and vice versa.

Reasons for Demand The Substitution Effect - Oreos! The Income Effect - $$$ Diminishing Marginal Utility – The Buffet Effect

Substitution Effect Oreo’s are expensive, Chips Ahoy! are slightly cheaper. Because I can buy more Chips Ahoy! with less money, the demand for Oreo’s drops.

Income Effect When prices are down, you feel wealthier and buy more of a good. Hence, why Wal-Mart has been so successful

Diminishing Marginal Utility The last reason is that as you consume more and more of a good, it becomes less valuable to you, therefore demand drops. Ex. – Going to the movies Ex. – At the China Buffet, your first plate tastes wonderful, second plate is still good, third plate is ok, and any plate after this makes you feel sick, and not worth the money you spent.

The Demand Schedule

If you were a business…. Why would you want to know how a town reacts to different goods and prices? Come up with 3 examples

The Demand Curve

Section 2

Change in Demand Ceteris Paribus – all other things constant Demand never stays constant, there are many factors that cause demand to change.

Income Normal Goods vs. Inferior goods We prefer normal goods when income rises When we make more, normal goods demand rises ( steak ) When we make less, inferior goods demand rises ( ramen)

Consumer Expectations Our expectations about future prices affect how much we are willing and able to buy the product now. Gas prices – When gas prices are expected to rise, we want to fill up the tank before the prices go up.

Population As population rises, overall demand for goods go up. Example: Immigration

Consumer Tastes and Advertising Fads come and go, just like our demand for different goods. Ex. – In the early 2000’s, the demand for “Tall Tee” XXXXXXXXXXL shirts rose significantly when rappers began wearing them in their music videos. Ex: - Demand for clean minimalist designs in normal goods has increased over the past 5 years.

The Tall Tee…….. Sadly, white middle class America were the biggest consumers of this craze and looked rather ridiculous in the process. I hope you or your family members were not casualties of this fad…..

Advertising Apple iPhone Ads that decreased demand for goods!

Complements and Substitutes Complements – goods that are bought and used together Substitutes – goods used in place of another

Shifts in Demand

Chapter 5

Supply Supply – the amount of goods available Law of Supply – the higher the price, the more that will be produced. Law of Supply Supply is NOT an amount! It’s a behavior!

Reason? It is more costly to produce two items than one, therefore more must be charged.

Supply Schedule and Curve

What causes shifts in supply? Important factors for shift in supply Input costs Government action Subsidies, taxes, regulation Future expectations Competition/number of suppliers Natural and Manmade phenomenon