Economics, Unit 4 Chapter 4 Demand

Activating Question When you prepare to buy something, what influences your decision the most?

Demand –The desire to own something and the ability to pay for it. –When a good’s price is lower, consumers will buy more and when a good’s price is higher, consumers will buy less of it. –Whether your income is $10.00 or $10,000,000, the price of a good will strongly influence your decision to buy. –Example: Would you buy a slice of pizza for $1.00? $2.00? $10.00?

Law of Demand –It is a result of two separate behavior patterns that overlap. –They explain why an increase in price decreases quantity of purchases. –These two behavior patterns are: Substitution Effect and Income Effect.

Substitution Effect –When a consumer reacts to a rise in price of one good by consuming less of that good and more of a substitute good. –OR Price drops and a good becomes cheaper, consumers will buy more causing quantity of the good demanded to rise. –Example: Price of pizza,, so buy tacos instead –Price of pizza, buy less tacos & more pizza

Income Effect –Rising prices makes us feel poorer so we cut back on purchases of some goods. We buy fewer slices of pizza AND we do NOT substitute other goods. –NOTE: Economists measure consumption in the amount of a good that is BOUGHT, NOT the amount of money spent to buy it.

Complete this chart with Price of Pizza Increases Consumption of: Price of Pizza Decreases Consumption of: PizzaTacosPizzaTacos Income effect Substitution Effect Combined Effect

Building the Law of Demand Price of Pizza Increases Consumption of: Price of Pizza Decreases Consumption of: PizzaTacosPizzaTacos Income effect↓↓↑↑ Substitution Effect ↓↑↑↓ Combined Effect ↓↕↑↕

Demand Schedules –To have demand for a good, you must be willing and able to buy it at the specified price. –You want the good and can afford it. –If you want a car, and can’t truly afford it, then you do NOT demand it Sorry. –A Demand Schedule show the good that a person will purchase at each price in a market.

Pizza Demand Schedule Me aka Individual Demand Schedule My Class Aka Market Demand Schedule Price per slice How many slices I want per day Price per slice Quantity demanded per day

Demand Curves If take your demand schedule graph from the previous slide and plot it, you will have created a DEMAND CURVE. Y-axis: Price per slice (in dollars) start at 0 and go up to $3.00 X-axis: Slices per day (0 – 5) Try it.

Demand Curves The graph shows the relationship between price of one good and quantity a person will purchase ALL other factors held constant (price of other goods, your income, quality of pizza) The graph curves down to right. Why?

Demand Curve Limitations Used to predict how ppl will change their buying habits when price of a good rises or falls. ONLY accurate for one very specific set of market conditions. Example: nearby factory closes, less ppl at lunch, sell less pizza even though price is the same.

Question Which of the following is plotted on the vertical axis of a demand curve? A. Demand schedule B.Price C.Quantity D.Market demand schedule

Homework Page 83, #’s 5 and 6 Freyer Model: demand, substitution effect and income effect