[ 3.2 ] Shifts in Demand

Changes in Demand Ceteris Paribus “All other things held constant” Refers to data on an demand chart; only price changes Move along the curve Demand Shifts Shift of the curve is what economists refer to as a change in demand Shift in the demand curve means that at every price, consumers buy a different quantity than before Shift to Right = Increase in demand Shift to Left = decrease in demand

The Non-Price Determinants of Demand: factors other than price that can affect demand for a particular good or service Changes in Income normal good: a good that consumers demand more of when their incomes increase inferior good: a good that consumers demand less of when their incomes increase Consumer Expectations current demand for a good is positively related to its expected future price Changes in Demographics Demographics also have a strong influence on the packaging, pricing, and advertising for a product Changes in Population Size a rise in population will increase demand for houses, food, and many other goods and services. Consumer Tastes and Advertising Prices of Related Goods:   Complements are two goods that are bought and used together. Substitutes are goods that are used in place of one another.

The Non-Price Determinants of Demand The influence of social media has exploded in the 2000s. Analyze Data What evidence can you find that advertisers expect the influence of social media to continue growing?

[ 3.3 ] Elasticity of Demand

Elasticity Defined The Concept of Elasticity The way that consumers respond to price changes is elasticity of demand Inelastic: describes demand that is not very sensitive to price changes Elastic: describes demand that is very sensitive to a change in price

Elasticity Defined How Elasticity Is Calculated

Elasticity Defined Price Range Demand for a good can be highly elastic at one price and inelastic at a different price. Elasticity Values unitary elastic: describes demand whose elasticity is exactly equal to one

Factors Affecting Elasticity

Factors Affecting Elasticity Elasticity of demand varies from situation to situation. Analyze Charts Why do you think demand is inelastic for the two items on the left side of the continuum?

Factors Affecting Elasticity For a football fan, there is no substitute for tickets to your favorite team’s game. Draw Conclusions Would you expect a Dallas Cowboys fan to pay more or less to watch two other teams?

Factors Affecting Elasticity When home prices fell when recession hit in 2007, demand did not rise immediately. Generate Explanations Why might demand for housing stay flat at first even when prices fall sharply?

How Elasticity Affects Revenue Elasticity is important to the study of economics because elasticity helps us measure how consumers respond to price changes for different products. The elasticity of demand determines how a change in prices will affect a firm’s total revenue, or income. Total Revenue defined as the amount of money the company receives by selling its goods Determined by two factors: the price of the goods and the quantity sold How Elasticity Affects Pricing Policies  If demand for a product is elastic at the current price, you know that an increase in price might reduce total revenues.  If demand for a product is inelastic at its current price you may safely conclude that an increase in price will increase total revenue.

How Elasticity Affects Revenue Achieving higher revenue means finding the best combination of price and quantity demanded. Analyze Charts Why does revenue for this restaurant fall when price increases from $4 to $5?

How Elasticity Affects Revenue Total Revenue and Elastic Demand Raising the price of each unit sold by X percent will decrease the quantity sold by a larger % Total Revenue and Inelastic Demand When demand is inelastic, price and total revenue move in the same direction