DEMAND NATURE OF DEMAND Ch. 3, Sec. 1

Bell Ringer When does the substitution effect not apply to demand?

Nature of Demand Demand : amount of a good or service that a consumer is willing to buy at various possible prices Quantity Demanded : amount of a good or service that a consumer is willing to buy at each particular price Law of Demand : In a free-enterprise system PRICE_ is the key variable affecting demand. Law of Demand studies the relationship between PRICE _ and QUANTITY DEMANDED_.

Cont… Cause / Effect Price of computers increases = demand ______________ Price of computers decreases = demand ______________ Three economic concepts help explain the law of demand: Income effect The substitution effect and diminishing marginal utility

Cont… Purchasing Power : amount of __________ that people have available to spend Name the person in the room with the most purchasing power! Income Effect: any increase or decrease in a consumer's purchasing power caused by a change in _________ Examples: ________,________, and ________ Substitution Effect : describes the tendency of consumer to substitute a lower priced item for another Examples:1) 2) Demand Schedule : list of the quantity of goods that consumers are willing to buy at a series of possible prices Demand Curves : a graph that shows the relationship between the price of a product and the quantity demanded

CFU - Vocabulary - Demand Fill in the blank with the correct term. 1. In a free-enterprise system, _______ is the main component affecting demand. 2. Demand schedules and curves illustrate the relationship between ________ and _____________. 3. When a consumer buys a product at a specific price it is called ____________. 4. A consumers _________ will effect his/her purchasing power. 5. ___________ is an inverse or opposite relationship

DEMAND SCHEDULE Price per Car Stereo Quantity Demanded $500 $400$1,000 $300$1,500 $200$2,500 $100$5,000

Law of Demand Law of Demand: Income Effect Substitution Effect Diminishing Marginal Return as more units of a product are consumed, the satisfaction received from consuming each additional unit declines (utility) *there is a limit to a product's utility to a consumer = a limit to demand

Changes in Demand Demand Shifts : markets DO Not stand still Shifts = to the right = increases = to the left = decreases What causes these shifts in demand? Determinants of Demand: non-price factor that affects demand for a product

Bell Ringer How can consumer tastes & preferences influence demand?

Changes in Demand, Ch.3, Sec.2 Objective – TLWBAT: 1. Explain what it means for a product/ demand to shift. 2. Identify & describe the factors that can shift demand for a product. 3. Explain how substitute goods differ from complementary goods.

Causes of Changes in Demand 1. Consumer Tastes and Preferences 2. Market Size 3. Income 4. Prices Related to Goods 5. Consumer Expectations

Consumer tastes & preferences What happens to the demand curve when consumer preference grows for a product or service? Answer: Demand _____ What happens to the demand curve when consumer preference fades for a product or service: Answer: Demand _____

Market Size Market expansion leads to more consumers than before which means a greater potential demand. Market contraction leads to less consumers creating a smaller potential demand. Reasons for expansion or contraction: 1. decisions by private businesses – Ex. 2. gov’t. policy decisions – Ex. 3. new technology – Ex.

Income Income increases & people have more money to spend. The result is a greater demand for goods & services & a shift to the right in demand curve. Income decreases leads to _________ in demand b/c consumers less willing to _______ money & contribute to demand.

Prices of Related Goods There are 2 types of related goods: 1. Substitute Goods – goods that can replace the purchase of similar goods when prices rise. Ex: butter & margarine Complimentary Goods –goods that are commonly uesed w/other goods. Ex: price of gallon of paint increases so paint brushes decrease in demand.

Consumer Expectations Have you ever bought anything in anticipation of having more money from a new job? If so, you shifted demand by way of expectation of future income. Ex: You work at a restaurant & owner announces that all employees will receive a $.50 raise. You have been hoping to buy a CD & decide to buy the CD in anticipation of the raise.

Checking for Understanding In a market, a shift to the right means ____. What causes shifts in demand? What happens to demand curve when consumer preference fades? What are 3 reasons for expansion or contraction of market size? Income decreases lead to _______. Name the 2 types of related goods? __ & __ Define Consumer Expectation & give an example.

Linking Economics & Psychology Checking for Understanding P. 61 Questions 1. What are some of the positive & negative aspects of using psychological research in developing advertising campaigns? 2. In what ways can an understanding of psychology help consumers evaluate an advertisement?

Linking Cont… Answers: 1.positive aspects — ad campaigns more successful, & producers sell more as a result; consumers feel better about product they buy; ads more exciting & interesting; ads better able to inform consumers about products they want; 2.Negative aspects — consumers decide to buy a product on emotional responses to ads, not b/c they actually need product or it is a good buy; ads may not provide much actual product information.

Linking cont… 2. If consumers understand the methods advertisers are using to try to influence their buying behavior, they will be better able to ignore the psychology of advertising and focus on making the best economic decision.

Bell Ringer Is the demand for portable tape players elastic or inelastic?

Elasticity of Demand Ch.2, Sec. 3 TLWBAT: 1. Define demand elasticity. 2. Describe the difference between elastic & inelastic demand. 3. Explain how demand elasticity is measured.

Elasticity of Demand Elasticity of Demand – is the degree to which changes in a good’s price affect the quantity demanded by consumers. Elastic of Demand - exists when a small change in price causes a major change in quantity demanded. 1. the product is not a necessity 2. there are readily available substitutes 3. the product's cost represents a large portion of the consumers income

Good Elasticity can change if: the product is not a necessity there are readily available substitutes the product’s cost represents a large portion of the consumers income.

Elasticity Examples: Examples: Pizza - Is pizza a necessity? Are they readily available substitutes for pizza? Does the cost of pizza represent a large portion of your income?

Inelastic Demand Inelastic Demand: exists when a change in price has little impact on quantity demanded. A good has this when: 1. the product is a necessity 2. there are few readily available substitutes 3. the product's cost represents a small portion of your income

Inelasticity Cont… List five examples of items that have inelastic demand:

Elasticity in Specific & General Markets Specific Market – small part of the product’s overall “scene” Ex: demand is elastic b/c if there is competition among stores regarding differences in price, demand will drop at some stores. General Market – included all the background of the product’s market Ex: demand is inelastic if flour rises b/c the quantity stays the same b/c flour is a basic staple

Measuring Elasticity Total-Revenue Test: total receipts / income from selling its product. By monitoring any changes in a business’s total revenue before & after change in price of product, you can determine elasticity for that product. Degree of elasticity can vary for different price ranges.

Total Revenue & Elastic Demand Drop in business’s total revenue from a price increase indicates elastic demand for product. You can confirm elasticity of demand by looking at demand curve in Figure 3.6 (p.67) Price per Ticket Quantity Demanded Total Revenue $5.0010,000$50,000 $4.5022,500$101,250 $4.0030,000$120,000

Total Revenue & Inelastice Demand Turn to p.67 in textbook & look at Effect of Demand Elasticity (Figure 3.6) & Total Revenue Illustration. (A-B) Looking at Figure 3.6 on p.67, you can find the point where total revenue is maximized. In other words, what is price movie theaters should charge to achieve highest revenue? (price is $4.00)

Checking for Understanding Read p. 69, Economics in the News & answer 2 question on What do you think? P. 71 – Interpreting the Chart questions P. 71 – Analyzing Primary Sources questions. TEST TOMORROW ON CH.2 & NOTEBOOK CHECK!!!