Unit 2 Chapter 4

Demand Objectives Be able to explain the law of demand Be able to understand how the substitution effect and the income effect influence decisions. Be able to create a demand schedule for an individual and a market. Be able to analyze the information presented in a demand curve.

Law of Demand Simply put: When a good’s price is lower, consumers will tend to buy more of it In Contrast: When the price is higher, consumers will tend to buy less.

Consumer is King!

Law of Demand PRICE As prices go down… DEMAND Quantity Demanded goes up.

Law of Demand PRICE As prices go up… DEMAND Quantity demanded goes down

Demand Curve Y axis: Price X axis: Quantity Demanded – how much!

Demand Curve As price INCREASES in this graph what happens to Quantity Demanded?

Demand Schedule

Income Effect on Demand When the price of coffee, movie tickets or gas increases what happens? Your limited budget doesn’t buy as much You feel like you have less money You must conserve or cut back on one good or another.

Income Effect on Demand What if the price of coffee, movie tickets, or gas goes DOWN? You feel like you have more money Increased budget You can spend more on something else more desirable

Income Effect Continued Normal Goods: Goods consumers demand more of when their income increases. (Consume less when income is low) Examples?

Inferior Goods: Goods consumers demand more of when their income decreases (Consume less when income is high) Examples?

Tastes & Preferences - Advertising: ads #intro branding/10-best-ads-super-bowl-xlviii

Population Actual number of people in an area Religion Ethnic/Race

Complements Substitutes Both affect the law of demand A change in one product changes the demand for another product Prices of Related Goods

Substitutes – goods that can easily take the place of another Complements – goods that are usually consumed together

Substitutes ?

Definition of Milk : 1. a fluid containing proteins, fats, and LACTOSE secreted by the MAMMARY GLANDS of females for the nourishment of their young. - Merriam-Webster Dictionary

3. A liquid, such as coconut milk, milkweed sap, plant latex, or various medical emulsions, that is similar to milk IN APPEARANCE.

Components Milk: 87% Water 3-4% Protein 5% Lactose 3-4% Fat ~1% Vitamins & Minerals Soy ‘Milk’: 93% Water 2-3% Protein 2% Fat 2% Carbohydrate 1% Vitamins & Minerals

Substitutes ? JUICE Juice

Example: You have Econ in the morning Stop and buy 3 Rockstars to help you stay awake Rockstar’s are $3 Would you buy 3 Rockstars for $4 or $5? What might you do instead? You might reduce your consumption from 3 to 2 or 1 Rockstars.

Substitution Effect on Demand When the price of Rockstars rises what happens? Rockstars become more expensive when compared to other goods such as coffee or soda. What are consumers more likely to buy?

Law of Demand PRICE As prices go up… DEMAND Quantity demanded goes down

Demand Curve As price DECREASES in this graph what happens to Quantity Demanded?

Law of Demand PRICE As prices go up… DEMAND Quantity demanded goes down

Example

Review: Income rises, demand for which type of good increases? Income decreases, demand for which type of good increases?

Remember, Law of Demand: States that if a price increases, consumers will want less of it. Take this one step further: HOW MUCH less will they want?

Law of Demand PRICE As prices go up… DEMAND Quantity demanded goes down

Elasticity Elasticity of Demand: responsiveness of quantity demanded to a change in product PRICE.

If Price Changes... HOW MUCH will Quantity Demanded change?

Elasticity How consumers react to a change in product’s price will vary depending on the TYPE of product.

Inelastic vs. Elastic Elastic – has substitutes The more substitutes = more elastic!! More sensitive to changes in price/income If prices rise or income changes, will buy cheaper substitutes

Inelastic vs. Elastic Inelastic – no substitutes – insensitive to changes in price/income Will buy no matter what the price, as there is nothing else consumers can use instead!

We are trying to increase revenue. Which of these two products should we raise the price on? Why?

Elastic – Which means? Inelastic – Which means? If raise price, consumers will buy less. -Can buy other substitutes! If raise price, consumers will still buy. -Can’t buy substitutes

Elasticity of Demand You can increase revenue if you raise prices in which type of demand? Elastic or Inelastic?