Chapter 4: Demand

Table of Contest Slope Normal/Inferior Goods Law of Demand Change in QD vs. Demand PYNTE

Donut Activity

Slope  The angle of a line  Rise over Run  Change in Y over the change in X  Equation: Y2 – Y1 X2 – X1

Slope YX PriceQuantity $120 $210

Slope YX PriceQuantity $120 $210 Y2 – Y1 X2 – X1 _2 – 1_ _1_ -10 NEGATIVE SLOPE DEMAND

What is the difference between… Demand Created when consumers are willing and able to purchase Negative Slope (Down & to the Right)Supply Businesses are willing and able to sell Positive Slope (Up & to the Right)

Supply and Demand (From Pieces to Weight by 50 Cent, pages 46-47) “I think its taught backward in school. There, its “supply and demand,” where companies come up with a whole bunch of [stuff] and supply it. Then the companies fool people into thinking that they need the [stuff] they’re pushing, thereby creating an artificial demand. But the streets figured it correctly: The demand comes first, and whoever has the supply will profit.”

Demand Example “Every aspect of human behavior reacts to cost in some way. When the cost of something falls, it becomes more attractive to us. You can learn that by deriving a demand curve, or you can learn it by shopping the day after Christmas, when people snap up things that they weren’t willing to buy at full price several days earlier. Conversely, when the cost of something goes up, we use less of it. --Naked Economics, page 10

Income Effect INCREASE POORER  As prices INCREASE, you feel POORER DECREASE RICHER  As prices DECREASE, you feel RICHER PP

Income Effect “Being able to buy goods cheaper is essentially the same thing as having more income” --Naked Economics, p. 36

Substitution Effect  Consumption is a reaction to prices of other goods

What is the difference between… Substitute  Goods used in place of one another  Example: Hamburgers for Hot Dogs Complement Goods that are bought and used together Examples: Hamburger and Hamburger bun

Substitution Effect  If the Price of a substitute good DECREASES, the quantity of the product you wanted to buy DECREASES Example: You want Hot Dogs! Hamburger PQ Q Hot Dog Result: you buy LESS hot dogs!

Substitution Effect You wanted a PlayStation 3. The Nintendo Wii just went on sale at Best Buy. Most people will buy the Nintendo Wii— NOT the PlayStation 3

Substitution Effect  If the Price of a substitute good INCREASES, the quantity of the product you wanted to buy INCREASES Hamburger Hot Dog Example: You want Hot Dogs! P Q Q Result: you buy MORE hot dogs!

Opening Questions 1.A positive slope represents _____________ 2.A negative slope represents ____________ 3.A complement to jeans is ____________ 4.A substitute to jeans is ______________ 5.If the price of jeans increases, what happens to the quantity demanded of khakis? __________

Opening Questions 1.A positive slope represents Supply 2.A negative slope represents Demand 3.A complement to jeans is Shirt 4.A substitute to jeans is Khakis 5.If the price of jeans increases, what happens to the quantity demanded of khakis? Increases

What is the difference between… Normal Good  A good that consumers demand MORE of as their income INCREASES  Ex: Butter, Filet mignon Inferior Good  A good that consumers demand LESS of as their income DECREASES  Ex: Margarine, hamburger

What is the difference between… Necessity  A good people will always buy, even when the price increases  AKA: need  Ex: Milk, Water, life- saving medicines Luxury  A good people do NOT necessary need for survival  AKA: want  Ex: Mercedes-Benz, Steak

What is the difference between demand that is… ELASTIC  Very sensitive to a change in PRICE  Many substitutes  Majority of budget  A luxury  Response quickly over time INELASTIC  NOT very sensitive to a change in PRICE  Lack of substitutes  Small amount of budget  A necessity  Can NOT respond quickly to change

Demand Schedule  A table that lists the quantity of a good A PERSON will purchase at each different price

Demand Curve  A graphic representation of a demand schedule  The quantities demanded by an INDIVIDUAL at different prices  Slopes “Down and to the Right”; has a Negative slope

Market Demand Schedule A table that lists the quantities of a good that ALL CONSUMERS in the market will purchase at each different price

Market Demand Curve  A graphic representation of a market demand schedule  The quantities demanded by ALL CONSUMERS at the same prices  Slopes “Down and to the Right”; has a Negative slope

Law of Demand  As prices DECREASE, Consumers purchase MORE of a product  As price INCREASE,  Consumers purchase LESS of a product P QDQDQDQD P QDQDQDQD

Inverse Relationship  Explains the Law of Demand BOTH OPPOSITE  When BOTH variables move in OPPOSITE directions

What makes you want to buy something? Where you live (weather) Price Quality Income/money to spend Addiction Investment Upgrade / add-on Convenience Comfort Pleasure Advertisements Necessity / survival Desire / want Look / appearance Other people have it Brand name

Change in Quantity Demanded PRICE!!!  Cause: ONLY by a change in PRICE!!! (“ceteris paribus”) MOVEMENT  Result: MOVEMENT along the demand curve

Ceteris Paribus PRICE  Means “all other things held constant” except PRICE  Explains changes in quantity demanded

Increase in Quantity Demanded PRICE!!!  Cause: ONLY by a DECREASE in PRICE!!! MOVEMENT  Considered a MOVEMENT along the demand curve to the RIGHT

Increase in Quantity Demanded

Decrease in Quantity Demanded PRICE!!!  Cause: ONLY by An INCREASE in PRICE!!! MOVEMENT  Result: MOVEMENT along the demand curve to the LEFT

Decrease in Quantity Demanded

Review Starting at point X, which point represents: 1.An Increase in Quantity Demanded 2.A Decrease in Quantity Demanded 3.Caused by Price Increasing 4.Caused by Price Decreasing

Review Starting at point X, which point represents: 1.An Increase in Quantity Demanded - Z 2.A Decrease in Quantity Demanded - S 3.Caused by Price Increasing - Z 4.Caused by Price Decreasing - S

What is the difference between… PRICE (ceteris paribus) Cause(s)QUANTITY (PYNTE variables) Movement along Demand Curve ResultsShift of the Demand Curve Change in Quantity Demanded CalledChange in Demand

Movements and Shifts

Change in Demand  Caused : Consumers purchasing different QUANTITIES of a product than before  Result:SHIFT of the demand curve  Usually keeps the SAME SLOPE

Increase in Demand INCREASES  Cause: Quantity INCREASES RIGHT  Result: Shift to the RIGHT

Decrease in Demand DECREASES  Cause: Quantity DECREASES LEFT  Result: Shift to the LEFT

Causes of Change in Demand P: Price of Related Good Y: Income N: Number of Demanders T: Taste E: Expectations

P rice of related goods Substitute  Goods used in place of one another  Example: Hamburgers for Hot Dogs Complement Goods that are bought and used together Examples: Hamburger and Hamburger bun

Price of Related Goods: Substitution 1. Price of hamburgers Increases (Hamburgers) *** HOT DOGS ***

Price of Related Goods: Substitution 2. Price of hamburgers Decreases (Hamburgers) *** HOT DOGS ***

Price of Related Goods: Complement 1. Price of hot dog buns Increases (Hot Dog buns) *** HOT DOGS ***

Price of Related Goods: Complement 2. Price of hot dog buns Decreases (Hot Dog buns) *** HOT DOGS ***

Y --Income Normal Good  A good that consumers demand MORE of as their income INCREASES  Ex: Butter, Filet mignon Inferior Good  A good that consumers demand LESS of as their income DECREASES  Ex: Margarine, hamburger

Income: Normal Good 1.Income Increases2. Income Decreases

Income: Inferior Good 1.Income Increases2. Income Decreases

N —Number of Demanders 1.Population Increases2. Population Decreases

T --Taste 1.People Prefer2. People do NOT Prefer

E xpectations E xpectations 1. Expect the BEST Expect price to Increases *** NOW *** (Later)

*** NOW *** (Later) E xpectations E xpectations 1. Expect the WORST Expect price to Decreases

Causes of Change in Demand P: Price of Related Good Y: Income N: Number of Demanders T: Taste E: Expectations

Original Product: Oranges The Price of Apples has increased. What is the PYNTE variable? _____

Original Product: Oranges The Price of Apples has increased. What is the PYNTE variable? P (substitution)

Original Product: Oranges The Price of Apples has increased. What is the PYNTE variable? P (substitution) Which direction does the graph shift?

Original Product: Oranges The Price of Apples has increased. What is the PYNTE variable? P (substitution) Which direction does the graph shift? OrangesApples Price Quantity

Original Product: Oranges The Price of Apples has increased. What is the PYNTE variable? P (substitution) Which direction does the graph shift? OrangesApples Price Quantity

Original Product: Oranges Oranges will be on sale next week. What is the PYNTE variable? _____

Original Product: Oranges Oranges will be on sale next week. What is the PYNTE variable? E (Expectation)

Original Product: Oranges Oranges will be on sale next week. What is the PYNTE variable? E (Expectation) Which direction does the graph shift?

Original Product: Oranges Oranges will be on sale next week. What is the PYNTE variable? E (Expectation) Which direction does the graph shift? NOWLater Price Quantity

Original Product: Oranges Oranges will be on sale next week. What is the PYNTE variable? E (Expectation) Which direction does the graph shift? NOWLater Price Quantity

Original Product: Hamburger A. The price of chicken falls. What is the PYNTE variable? _____

Original Product: Hamburger A. The price of chicken falls. What is the PYNTE variable? P (Substitution)

Original Product: Hamburger A. The price of chicken falls. What is the PYNTE variable? P (Substitution) Which direction does the graph shift?

Original Product: Hamburger A. The price of chicken falls. What is the PYNTE variable? P (Substitution) Which direction does the graph shift? HamburgerChicken Price Quantity

Original Product: Hamburger A. The price of chicken falls. What is the PYNTE variable? P (Substitution) Which direction does the graph shift? HamburgerChicken Price Quantity

Standards E A