Chapters 4, 5, 6-Understanding Supply and Demand or Why they sell more surfboards in California than Nebraska ….. Students will define and/or identify the following: Demand Law of Demand Diminishing Marginal Utility Substitution Effect Real Income Effect Demand Schedule, Market Demand Schedule Demand Graph

How do we decide what to buy? What factors go into your decision to buy something? Demand is the desire or willingness to own something-AND the ability to pay for it. Dang…what a sweet ride! Maserati, 2 door sports coupe… GRAMMY would look great driving those wheels! DESIRE-WILLING! WHAT A STICKER PRICE, starting at $100,000. Maybe if I sell a kidney On Ebay…ABILITY.

Why do we purchase more when stores have a BIG Sale?

Look at this demand curve. What happens to quantity demanded as prices rise?

The Law of Demand The law of demand states that consumers buy more of a good when its price decreases. Conversely, consumers buy less of a good when its price increases. Demand and price have an opposite or inverse relationship. $ D

3 Factors that influence how much of an item people will buy at a particular price, thus impacting the law of demand: Diminishing marginal utility B. Real Income Effect C. Substitution Effect Diminishing marginal utility-utility is the power that a good or service has to satisfy a want. The law of diminishing marginal utility is an economic rule stating: the additional satisfaction people get from consuming one more unit of a product will lessen with each additional unit they consume. Consuming one candy bar may satisfy a person’s sweet tooth.  If a second candy bar is consumed, the satisfaction of eating that second bar will be less than the satisfaction gained from eating the first. If a third is eaten, the satisfaction will be even less.

B. Real Income Effect is the inability to buy the same quantity of goods when the prices rise but income does not. It is the change in consumption(DEMAND) resulting from a change in income. In other words, when prices rise, your money buys less. Higher prices reduce your purchasing power. Real income effect can also happen in reverse-if you receive an increase in income, and the prices of goods and services remains the same, you have an increase in purchasing power Real income effect affects quantity demanded.

C. Substitution Effect-the ability of similar items to satisfy the same need. If two items can satisfy the same need, and the price of one of the items goes up relative to the price of the other, people will substitute the lower priced item. This is known as the substitution effect. When the price of Dr. Pepper rises, consumers may substitute cheaper Dr. Thunder.

A demand schedule can easily be converted to a demand curve. Demand Schedule is a table that list the quantity of a good a person will buy at various prices in a market. Demand Curve-a graphic representation of a graph schedule A demand schedule can easily be converted to a demand curve.

A market demand schedule is a table that lists the quantity of a good all consumers in a market will buy at various prices. Market demand-all consumers in a market.

A demand curve shows the quantity demanded of a good or service at each possible price.

Questions for Reflection: Define demand. State the law of demand. What kind of relationship exists between price and demand? Explain your answer. List and explain the three factors that influence the Law of Demand. Provide your own examples of each. How have lower petroleum prices impacted purchasing power? What if the prices of petroleum go up, but your income stays the same? What is a demand schedule? Differentiate between a demand schedule and a market demand schedule. What is a demand curve? Create a demand curve and a market demand curve using the table on slide 10. How could a business owner use this information?

Shifts of the Demand Curve Ceteris Paribus Shifts in the Demand Curve Factors that Cause a Demand Curve to Shift Complements

LeBron James XIII $199.00 Foot Locker While the price of a good influences a consumer’s decision to purchase a good, it is not the only factor.

Ceteris Paribus Ceteris Paribus is a Latin phrase meaning that all other things are held constant. A demand curve assumes Ceteris Paribus or that only price is changing while all other things are held constant. In other words, a demand curve only looks at price. It does not consider other factors that influence demand. It is important that when plotting a demand curve, the time period and quality of the goods remain constant. Sometimes, something happens that causes demand to increase for certain items. For example, if medical research proved that taking certain vitamins eliminated your risk of developing cancer, the demand for that item would increase substantially.

Shifts in the Demand Curve When a demand curve shifts, it moves. Price can never shift a demand curve because price is in the demand curve. To shift a demand curve, there must be a factor other than price.

D is the original demand curve D1 is the demand curve after it has shifted. Notice that by shifting to the left, demand has decreased at every price level.

Here is a simple rule to remember: If the curve shifts left, left means less. Demand has decreased at every price level. If the curve shifts right, right means more. Demand has increased at every price level.

An outbreak of Mad Cow’s Disease would decrease demand for beef at every price level.

Factors that Can Shift a Demand Curve: Advertising Population Consumer Taste and Preferences Consumer Expectations about Future Prices The Price of Complements The Price of Substitutes Change in Income

Advertising can increase demand at A 30-second advertisement during the 2015 Super Bowl game costs $4.5 million. That's an average of $150,000 per second. This year the ads are $5 million for 30 seconds. Advertising can increase demand at all price levels.

Changes in population-the demographics-not just the numbers, but changes within the age of the population, ethnicity & gender can also play a factor…the aging “baby boomers” The Baby Boom generation increased demand for goods at all price levels.

Consumer Taste and Preferences-Fads and Fashions These are items that may be short lived, or that stay around a long time…

If we think the price of a popular good will drop, we will buy less at all price levels today and wait for the future lower price.

Complements are goods purchased together. If the price of one of the goods goes down, the demand for the other goes up.

Questions for Reflection: What is the relationship between the law of demand and Ceteris Paribus? Why can price not shift a demand curve? What factors can shift a demand curve? Provide an example of a complementary good. How can the anticipated decrease in the price of a good impact the demand for that product? Give an example. What happens when a demand curve shifts left? Right?

Factors Affecting Elasticity of Demand In this lesson, students will identify characteristic of elastic and inelastic demand. Students will be able to define and/or identify the following terms: Elasticity Elastic Demand Inelastic Demand Factors Affecting Elasticity of Demand

The law of demand states that consumers buy less at higher prices? So, why do we continue to buy gas when the price is high?

Elasticity of Demand Elasticity of demand is a measure of how consumers react to a change in price. Inelastic demand is demand that is not very sensitive to a change in price. Elastic demand is demand that is very sensitive to a change in price.

Economists call consumer price responsiveness-elasticity Economists call consumer price responsiveness-elasticity. Price elasticity of demand is how much consumers respond to a given change in price. For some goods a rise or fall in price greatly affects the amount people are willing to buy. Elastic demand occurs when the change in the price of a product greatly affects the amount of that product people are willing to buy. Examples of goods with elastic demand are: Coffee, colas, shampoo-goods in which there are substitutes available.

Inelastic demand-If a price change does not result in a substantial change in the quantity demanded, that demand is inelastic. Examples of goods with inelastic demand are: Salt, pepper, electricity, prescription medicines, gasoline-goods for which there may be no substitute.

Factors Affecting Elasticity of Demand The following factors affect the elasticity of demand: The existence and similarity of substitutes. The more substitutes that are available, the greater the elasticity of demand. The percentage of a person’s total budget devoted to the purchase of the good. If a person spends a large amount of their budget on the item, the demand for the good becomes more elastic-example, a new car. How much time we allow for the consumer to adjust to the change in price. Do people have a lot of time to adjust to the change in price? If they have a lot of time to adjust it changes the elasticity of demand.

Therefore, we deal with a price increase It’s obvious, isn’t it? We can substitute orange juice for apple juice. Therefore, we deal with a price increase by substituting one product for another product.

However, we cannot substitute milk for gasoline.

Price per pound Quantity Demanded Ground beef per 1,000 pounds/mth 2.49---------------------------------------------------100 2.39---------------------------------------------------200 2.29---------------------------------------------------300 2.19---------------------------------------------------400 2.09---------------------------------------------------500 1.99---------------------------------------------------600 1.89---------------------------------------------------700 1.79---------------------------------------------------800 1.69---------------------------------------------------900 1.59--------------------------------------------------1000

2.49 2.39 2.29 2.19 2.09 1.99 1.89 1.79 1.69 1.59 DEMAND CURVE FOR BEEF PER MONTH P R I C E O U N D F B DEMAND CURVE D 100 200 300 400 500 600 700 800 900 1000 QTY DEMANDED/PER 1,000 POUNDS/MONTH

Questions for Reflection: State the Law of Demand. Why is the law of demand not always true? Define elasticity. Provide one example of a good with inelastic demand and explain why demand for that good is inelastic. Provide one example of a good with elastic demand and explain why demand for that good is elastic.