Demand

Do you agree with the store manager or would you suggest an alternative action?

Why do stores put items on sale?

What would lead to an increase in sales of this card?

Demand How much of a good or service someone is willing and able to buy at a given price. Disclaimer If you can’t afford it you cannot demand it. If you don’t want it you wouldn’t want to demand it.

Law of Demand Consumers buy more of something when it is cheaper and less when it is expensive.

Demand Schedule This table lists the quantity of goods that an individual person or household would purchase at different prices.

Cans of Pop Price Quantity Free .25 .50 .75 1.00 1.25 1.50

Cans of Poop Price Quantity Free .50 1.00 1.50 2.00 2.50 3.00

Market Demand Schedule This table lists the quantity of goods that all consumers combined would purchase at different prices.

Bag of M&Ms Price Quantity Free .25 .50 .75 1.00 1.25 1.50

Demand Curve Lowest to Highest Y axis = Price Lowest to Highest X axis = Quantity Demanded

Things that impact demand Price of the Product The Consumer's Income The Prices of related Goods The Tastes and Preferences of the Consumer The Consumer's Expectations The Number of Consumer's in the Market

Substitution Effect When a consumer chooses an alternative product because of a price change.

The Income Effect When consumers buy less because of a change in real income. Real income = actual buying power

Limits of the DC Only works if everything else stays the same. Ceteris Paribus – All things constant. In reality it is never this simple. People make decision based on more than just price.

Discuss with a partner What does the law of demand state? What's a demand schedule? What's the difference between a market demand schedule and a demand schedule? How does the income effect impact demand for goods?

Shifting Curves AKA a Change in Demand

Other than price, what are some reasons you would choose one product over another?

3.50 3.00 2.50 2.00 1.50 1.00 .50 1 2 3 4 5 6 7 8

3.50 3.00 2.50 2.00 1.50 1.00 .50 1 2 3 4 5 6 7 8

3.50 3.00 2.50 2.00 1.50 1.00 .50 1 2 3 4 5 6 7 8

3.50 3.00 2.50 2.00 1.50 1.00 .50 1 2 3 4 5 6 7 8

3.50 3.00 2.50 2.00 1.50 1.00 .50 1 2 3 4 5 6 7 8

Demand Curve Shift Happens as a result of a change in demand. Due to the factors other than price of the good in question.

Change in Demand Income Expectations Population Consumer tastes Advertising Prices in related goods Substitutes or Complementary

Income 600 500 400 300 200 100 1 2 3 4 5 6 7 8 9

Income 600 500 400 300 200 100 1 2 3 4 5 6 7 8

“The price of this item may go up after Christmas” Expectation “The price of this item may go up after Christmas” 600 500 400 300 200 100 1 2 3 4 5 6 7 8

Expectation “I read in the paper that there will be a promotion next week on I phones” 600 500 400 300 200 100 1 2 3 4 5 6 7 8

Normal vs. Inferior Goods Write out inferior goods for the following normal goods: Charmin Ultra soft toilet paper Kellogg's Frosted Flakes Premium gas

Demand vs. Quantity Demanded Demand = How much people want at different prices. The entire Demand Curve. (Many points) Quantity Demanded = How much of a product is demanded at one particular price. Just one point on the demand curve.

600 500 400 300 200 100 1 2 3 4 5 6 7 8

A Change in price of a good leads to a change in quantity demanded (Movement along the curve)

A change in income, preferences, or changes regarding alternative goods leads to a change in demand. Shift of the Curve

Discuss with a partner A shifting curve shows a ________ in demand. What is an inferior good? Would you expect customers to respond greater to a change in price for cereal or for electricity?

How did they do?

While you watch… Write out three things discussed about the economy that you agreed with (on green) and three you disagreed with (on pink)during the debate. Indicate who said it on the back of the post it.

Elasticity of Demand (Ed)

Which one is more elastic?

Price Elasticity of Demand How MUCH will consumers change their demand for a good given a price change. Sensitivity to price changes

Calculating Elasticity Ed = % change in quantity demanded % change in price

Calculating Elasticity First pick two points on the demand curve. Then figure out the percentage change of quantity Q1 – Q2 Q 1 X 100

Calculating Elasticity Then figure out the percentage change of Price for the same two points. P1 – P2 X 100 P 1

Calculating Elasticity Lastly, divide the two numbers together, which gives you the elasticity. Δ Q = Elasticity Δ P

Figure out Change (Δ ) in Q Q1 – Q2 Q 1 X 100 Q1 Q2 14 12 10 8 6 4 2 40 – 70 X 100 40 10 20 30 50 60 70 80 Figure out Change (Δ ) in Q 40 Δ Q = 75%

Figure out Change (Δ ) in P P1 – P2 P 1 X 100 Q1 Q2 14 12 10 8 6 4 2 10 – 5 X 100 10 10 20 30 50 60 70 80 Figure out Change (Δ ) in P 40 Δ P = 50%

Calculating Elasticity Δ Q = Ed Δ P 75% 50% Elasticity = 1.5

What does the number mean? Inelastic: Elasticity is < 1 Elastic: Elasticity is > 1 Unitary Elastic: Elasticity = 1

Why would an economist care about Elasticity of demand?

Elastic 14 12 10 8 6 4 2 10 20 30 50 60 70 80 40

Inelastic Salt 0.1 Matches Gasoline 0.2 Natural gas Coffee 0.25 Goods Estimated Elasticity of Demand Salt 0.1 Matches Gasoline 0.2 Natural gas Coffee 0.25 Tobacco products 0.45 Automobiles, long-run

Inelastic 14 12 10 8 6 4 2 10 20 30 50 60 70 80 40

Unitary Elastic Movies 0.9 Housing 1.2 Private education 1.1 Goods Estimated Elasticity of Demand Movies 0.9 Housing 1.2 Private education 1.1 Tires, short-run

Elastic Restaurant meals 2.3 Foreign travel 4.0 Fresh green peas 2.8 Goods Estimated Elasticity of Demand Restaurant meals 2.3 Foreign travel 4.0 Fresh green peas 2.8 Chevrolet automobiles Fresh tomatoes 4.6

Elastic or Inelastic 14 12 10 8 6 4 2 10 20 30 50 60 70 80 40

Let’s see it in action… Scenarios 1 - 4 Complete the demand schedules on the worksheet individually for each scenario.

Do ALL 4 scenarios Individual Quantities Market Quantities   Individual Quantities Market Quantities Can of Coke =$1 Snickers Bar =$1 Twinkie =$1 Carton of Milk =$1

Create a Market Demand Curve As an Economist, you are interested in how these various factors impact the Market Demand for these products. Therefore, you need to develop a market demand curve. Determine the "Market Quantities" for situation 1 and situation 2 only… This means add up the quantities from everyone in the group and put it in the Market Demand Schedules.

For situations 1 and 2 Individual Quantities Market Quantities   Individual Quantities Market Quantities Can of Coke =$1 Snickers Bar =$1 Twinkie =$1 Carton of Milk =$1

What is the Elasticity of snickers?

What factors effect Elasticity?

Relative Importance Price of the good % of your budget Expensive = Elastic Inexpensive = Inelastic

Loyalty to a brand If you like a certain brand you will likely purchase it even at the higher price. High Loyalty = Inelastic

Availability of Substitutes If there are a large amount of other brands = elastic. If there aren’t many substitutes = inelastic.

Necessity vs. Luxury Luxury = Elastic Necessity = inelastic

Time Horizon It takes people time to adjust to price changes. (Finding another alternative to your previous buying habits) Short term = inelastic Long term = elastic Computer example

Total Revenue The amount of money a company receives by selling its goods. (Not to be confused with profit) Equation can be written as: TR = P· Q

TR = P· Q TR = 10· 40 TR = $400 Price Quantity 14 12 8 6 4 2 10 20 30 50 60 70 80 40 Quantity

Revenue Table 14 12 10 8 6 4 2 Price of Quantity Demanded Total Revenue 14 12 10 8 6 4 2

14 12 10 8 6 4 2 Price 10 20 30 50 60 70 80 40 Quantity

Revenue Table Price of Quantity Demanded Total Revenue 14 17 238 12 28 336 10 40 400 8 51 408 6 62 372 4 74 296 2 86 172

Revenue Table Price of Quantity Demanded Total Revenue Δ Total Revenue 14 17 238 (98) 12 28 336 (64) 10 40 400 8 51 408 36 6 62 372 76 4 74 296 124 2 86 172