Unit 4: DEMAND

What is Demand? 1. Demand (D) is: the amount of goods and services that consumers are willing and able to buy at varying prices The desire to own something and the ability to pay for it

Law of Demand The law of demand states: that consumers buy more of a good when its price decreases and less when its price increases.  When the price of the good increases, consumers will buy less of it.

Law of Demand Cont… The price of a good will strongly influence your decision to buy. The law of demand is the result of two separate behavior patterns that overlap, the substitution effect and the income effect. These two effects describe different ways that a consumer can change his or her spending patterns for other goods

Law of Demand 1. shows a cause and effect relationship: A. Cause = Price B. Effect = Quantity Demanded If: P = Price QD = Quantity Demanded (and) = increase= decrease = causes

Law of Demand Cont.. 2. As the price of an item decreases, the quantity demanded for an item will increase : PQD

Law of Demand Cont… 3. As the price of an item increases, the quantity demanded for the item will decrease P QD

Demand Demand: A.Is illustrated by the demand curve (see graph) B.It reflects a range of possibilities C.It does not consider actual availability Demand Curve D1

Demand 3.Quantity Demanded (QD) is: A.the amount of goods and services that will be bought at a specific time and at a specific price B.QD= a specific number (see graph) QD= 26 D1

Demand 5.Demand Curve is: A.a graphic illustration showing the relationship between prices and quantity demanded B.curves go down/right (see graph) P= 3 Q = 26 D1

Demand Schedule A Demand Schedule is: a table that lists the quantity of a good a person will buy at each different price. A Market Demand Schedule is: a table that lists the quantity of a good all consumers in a market will buy at each different price. Price of DVD’s in ($) Quantity Sold Demand Schedule for New DVD Movies

Substitution Effect The substitution effect occurs when consumers react to an increase in a good’s price by consuming less of that good and more of other goods. EXAMPLE = price of pizza rises, pizza becomes more expensive compared to tacos, salad, subs or burgers. As the price of a slice of pizza increases, consumers have an incentive to buy one of those alternatives as a substitute for pizza. This will cause a drop in the demand for pizza.

Income Effect The income effect happens when a person changes his or her consumption of goods and services as a result of a change in real income, which is the amount of money they make. EXAMPLE= When the price of clothing, food and gasoline increases, your limited budget just wont buy as much as it used to. It feels as if you have less money and you must cut back your purchases of some goods.

SECTION 1 QUESTIONS 1. What is the law of demand? 2. How do the substitution effect and income effect influence decisions? 3. What is a demand schedule? 4. What is a demand curve?

Section 1 Assessment 1. The law of demand states that A) consumers will buy more when a price increases. B) price will not influence demand. C) consumers will buy less when a price decreases. D) consumers will buy more when a price decreases. 2. If the price of a good rises and income stays the same, what is the effect on demand? A) the prices of other goods drop B) fewer goods are bought C) more goods are bought D) demand stays the same

Section 1 Assessment 3. Which of the following describes the substitution effect? A) As the price of a good falls, people will substitute other products. B) As the price of a good rises, people will substitute other products C) As demand rises, people will substitute other products D) As demand falls, people will substitute other products

Section 1 Assessment 4. What do you think it means when an economists says that a consumer has demand for a good or service? A) The consumer is able to afford the good or service, but may be unwilling to buy it. B) The consumer wants the good or service but may not actually have the money for it. C) The consumer is able to buy the good or service but not at the price demanded D) The consumer is willing and able to buy the good or service at the specified price.

Bell Ringer Take out a scratch sheet of paper. You have two (2) minutes to answer the following questions: 1.When the price goes up, the quantity demanded goes ____ 2.When the price goes down, the quantity demanded goes ____ 3.What does the term Quantity Demanded mean? 4.Which way does a demand curve go? 5.What is a Demand Schedule?

Shifts in Demand Curves A.Curve moves left or right of the original curve A.Results of a change in demand (D)

Shifts in Demand Curves C.Different from change in the quantity demanded (QD) D.A shift to the right represents an increase in demand C.A shift to left represents a decrease in demand Shifts in the Demand Curve D1 D2 D3 Price Quantity Demanded Increase Decrease

What Causes Shifts in Demand? 1. Change in Income (Increase or Decrease) Normal Goods: a good that consumers demand more of when their income increases Inferior Goods: good that consumers demand less of when their income increases

Causes Cont… 2. Consumer Expectations: Whether or not we expect a good to increase or decrease in price in the future greatly affects our demand for that good.

Causes Cont… 3. Population Changes in the size of the population also affects the demand for most products

Causes Cont… 4. Consumer Taste & Advertising (Fashions, fads, etc.) Advertising and social trends play an important role in many trends and therefore influences demand. Fads come and go!

Prices of Related Goods The demand curve for one good can be affected by a change in the demand for another good Compliment Goods goods that are bought and sold together  Peanut Butter and Jelly  Shampoo & Conditioner

Prices of Related Goods Cont.. The demand curve for one good can be affected by a change in the demand for another good Substitute Goods goods used in place of one another.  Mr. Dew vs. Mt. Breeze  Name brand vs. store brand

Section 2 Questions 5. What factors can cause shifts in the demand curve? Give an example of each. 6. How does the change in the price of one good affect the demand for a related good?

Section 2 Assessment 1. Going out and buying a diamond wedding ring now, because diamond producers have announced that diamond prices will go up at the end of the month, is a good example of what Demand Determinant? 2. Due to a sharp increase in the inflation rate, the federal government decides to give all Social Security recipients a 5% cost of living increase. This is a good example of what type of Demand Determinant?

Section 2 Assessment 3. Changes in clothing style would be an example of which demand determinant? 4. An automobile and automobile tires would be a good example of what type of demand determinant? 5. On the board, draw a demand curve: A. Label price and quantity demanded B. Label curve D1 C. Show an increase in Demand (D2) D. Show a decrease in demand (D3)

Section 2 Assessment 1. Which of the following statements is accurate? A) When two goods are complementary, increased demand for one will cause decreased demand for the other. B) When two goods are complementary, increased demand for one will cause increased demand for the other. C) If two goods are substitutes, increased demand for one will cause increased demand for the other. D) A drop in the price of one good will cause increased demand for its substitute.

Section 2 Assessment 2. For most goods, a rise in people’s income means that there will be: A) a substitution effect B) a rise in prices C) an increase in demand D) a decrease in demand 3. A demand curve illustrates: A) The differences in price charges by different stores B) The quantities demanded at each price by consumers C) The differences in demand for different products D)The products which are most in demand

Section 2 Assessment 4. Substitutes are: A) goods that are bought and used together B) goods used in place of one another C) goods that cannot be replaced D) goods that cause a shift in the demand curve 5. How can expectations about the future change consumers behavior? A) Immediate demand for a good will drop if its price is expected to stay the same B) Immediate demand for a good can rise if the good is expected to be plentiful C) Immediate demand for a good will go up if the price is expected to rise

Bell Ringer 1. Draw a demand curve: A. Label price and quantity demanded B. Label curve D1 C. Show an increase in Demand (D2) D. Show a decrease in demand (D3) 2. List the 5 determinants of demand and provide an example of each.

Elasticity of Demand Elasticity of Demand = is a measure of how consumers react to a change in price. Elasticity of demand dictates how drastically buyers will cut back or increase their demand for a good when the price rises or falls. Inelastic v Elastic Demand

Inelastic Demand Demand for a good that consumers will continue to buy despite a price increase is inelastic or relatively unresponsive to price change. Examples= gasoline, life threatening medicines, certain foods, water/utilities, housing, transportation, jewelry, clothing, entertainment

Elastic Demand Demand for a good that is very sensitive to changes in price is elastic. A consumer with highly elastic demand for a good is very responsive to price changes. (tight budgets) Examples= gasoline, life threatening medicines, certain foods, water/utilities, housing, transportation, jewelry, clothing, entertainment Name brand to generic brand foods

Factors Affecting Elasticity 1. Availability of adequate substitutes If there are few substitutes for a good, then demand will not likely decrease as price increases Yes = elastic demand No = inelastic demand 2. Relative Importance How much of your budget do you spend on a good large percent = elastic demand small percent = inelastic demand

Factors Affecting Elasticity Cont.. 3. Necessities vs. Luxuries Whether a person considers a good to be a necessity or a luxury has a great impact on the good’s elasticity of demand for that person Necessities = inelastic demand luxuries = elastic demand 4. Change over Time When a price changes, consumers need time to change their shopping habits. Consumers do not react quickly to a price increase. It takes time to find substitutes

Section 3 Questions 7. What is elasticity of demand? 8. What is inelastic and elastic demand? Give an example of each. 9. What factors affect elasticity?

Section 3 Assessment 1. If the government were planning on taxing certain products, which products would be easier to tax: Products that are elastic or inelastic? WHY? 2. List two products that tend to be elastic 3. List two products that tend to be inelastic

Section 3 Assessment 1. What does elasticity of demand measure? A) an increase in the quantity available B) a decrease in the quantity demanded C) how much buyers will cut back or increase their demand when prices rise or fall D) the amount of time consumers need to change their demand for a good 2. What effect does the availability of many substitute goods have on the elasticity of demand for a good? A) demand is elastic B) demand is inelastic C) demand is unitary elastic D) the availability of substitutes does not have an effect

Section 3 Assessment 3. If you keep buying despite a price increase, your demand is: A) elastic B) inelastic C) normal D) strong 4. Which of the following is an example of a good with inelastic demand? A) televisions B) computers C) life saving medicines D) chewing gum