Warm-Up What factors do you consider most when deciding whether or not to purchase something? Why?

Goals: Chap. 4 Sect. 1 Demand 1. Explain the “Law of Demand”. 2. Explain the role of the “income effect” and the substitution effect” in making economic choices. 3. Create a demand schedule. 4. Interpret a demand curve.

They agree on a price and quantity and a deal is made. Demand In a market based system: Buyers demand G & S Sellers produce G & S Demand – the desire to own something AND the ability to pay for it. Demand implies both desire and ability- if you want a Benz but can’t afford it, no true demand exists They agree on a price and quantity and a deal is made.

Law of Demand -when the price of G & S is lower- consumers will buy more, when price goes up consumers will buy less. Price then Demand This is true because of Substitution Effect, Income Effect, and the Law of Marginal Utility.

Substitution and Income Law of Demand =Substitution Effect + Income Effect Substitution Effect – When a consumer chooses a lower priced good as a substitute for a preferred good whose price has risen I prefer pizza but if the pizza price gets too high, I will buy more burgers. Burgers are the substitute for pizza. If the pizza price comes back down, I will begin to buy more pizza again, and less burgers.

4 slices of $1.00 pizza but only 2 slices of $2.00 pizza Income Effect Income Effect – Consumers change the quantity of a good they buy based on their income and the price of goods. Rising prices = we feel poorer because our money doesn’t go as far as it did when the prices were lower. When prices go up, we make up for our loss in purchasing power by buying less. Falling prices= we feel wealthier because we can now buy more goods for the same amount of money- so we buy more. 4 slices of $1.00 pizza but only 2 slices of $2.00 pizza

Law of Marginal Utility -states that as you consume more units of any good, the additional satisfaction from each additional unit will eventually start to decrease 1st burrito, 2nd burrito, 3rd burrito, etc. 1st time watching a movie, 2nd time, 3rd time, etc.

Individual Demand Curve Market Demand Schedule - A table that lists the quantity of a good or service that a person will buy at a given price. Can be individuals or markets (large groups of people) Individual Demand Curve Price of a slice of pizza Quantity demanded per day $0.50 5 $1.00 4 $1.50 3 $2.00 2 $2.50 1 $3.00 Market Demand Schedule Price of a slice of pizza Quantity demanded per day $0.50 300 $1.00 250 $1.50 200 $2.00 150 $2.50 100 $3.00 50

Individual Demand Curve a graph that shows the # of buyers willing to buy a good at given prices Prices on the vertical Quantity on the horizontal Individual Demand Curve Price of a slice of pizza Quantity demanded per day $0.50 5 $1.00 4 $1.50 3 $2.00 2 $2.50 1 $3.00 Price of Pizza slice Quantity Demanded

Limits of Demand Curves A demand curve can be used to predict buyers behavior in response to a change in prices BUT Only good for one specific situation at a time What would happen if the factory next door to the pizzeria closed down?

Chap. 4 Sect. 2 Shifts in Demand Goals: Differentiate between change in qty demanded and a demand shift. Identify the factors that can create changes in demand. Explain how the change in the price of one good can affect demand for a related good.

Ceteris Paribus “all other things the same” the assumption that only the price of a good changes in relation to the demand curve. Increases in the quantity bought are only in response to the change in price. if something other than a price change happens the whole curve shifts.

Change in Qty Demanded This is a Demand Curve for bubble bath… Increase or decrease in Qty demanded is movement along the curve. The only factor changing is the price of the good. (Ceteris Paribus) What would happen if they determine that taking bubble baths lowers your blood pressure?

Changes in Demand If something other than a price change happens the whole curve will move = Change in Demand Shift to the right = increase in Demand Shift to the left = decrease in Demand D 2 D D 1

4 Factors that can cause Shifts in Demand Income Expectations Population Consumer Tastes & Advertising Income Effect – A change in a person’s income will affect their demand. normal goods – goods that a consumer will buy more of when income rises. i.e. clothes, electronics, cd’s, etc. inferior goods – goods that a consumer will buy less of when their income rises. i.e. generic food, used cars Lower incomes increase demand for inferior goods.

Direct relationship - rise in one factor causes a rise in the other 4 Factors cont. Expectations – If the consumer is expecting prices to change in the future – their demand for the object today will change. If the buyer thinks the price will next week, his demand today will_______ If the buyer thinks the price will next week, Direct relationship - rise in one factor causes a rise in the other

Successful advertising can create a demand 4 Factors cont. Population – Changes in population will affect demand in a direct relationship. in population = in demand Consumer Tastes and Advertising – Advertising and Fashion trends can affect demand quickly and for short or long periods of time. i.e. bell bottoms, and ponchos Successful advertising can create a demand

Prices and Related Goods Demand Curve for one good can be affected by the demand for another. 2 types of related goods. Complements – two goods that are bought and used together examples? A rise in the demand for one will cause a rise in the demand for the other as well, and vice-versa They are directly related

They are inversely related Related Goods cont. Substitutes – two goods that are used in place of one another examples? A rise in the demand for one will cause a fall in the demand for another, and vice-versa They are inversely related

Goals: Differentiate between change in qty demanded and a demand shift. Identify the factors that can create changes in demand. Explain how the change in the price of one good can affect demand for a related good.