How does a business owner know how much to produce? How much to put on the shelves?

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Change in Quantity Demanded (▲QD) vs. Change in Demand (▲D)

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Presentation transcript:

How does a business owner know how much to produce? How much to put on the shelves?

Demand You’re in charge of providing a group of children with a quick breakfast everyday before school. Assume you are given a set budget per week for the food. – Price = $3.99 – how many gallons do you buy? – Price = $.99 – how many gallons? – Price = $5.99 – how many gallons? – Price = $10.99 – how many do you buy?

Law of Demand What seems to be the relationship between price and quantity demanded? Why do you think this happens?

Income effect Substitution Effect

Can you draw the relationship on a graph? P Q

Change in Quantity Demanded D1D1 Change in quantity demanded (a movement along the curve) B 0 Price (per unit) Quantity demanded (per unit of time) 100 $2 $1 200 A

Limits to the Demand curve Limits to the Demand curve – Predicting total sales of milk – Demand Curve tells me? – Anything else to consider? What if price stays the same? What if price stays the same? – Ceteris Paribus

Can you draw the effect on a graph? P Q

Shift in Demand vs. Change in Quantity Demanded Price is same, change in DEMAND- WHY?