How much would you be willing to pay for the following items? Bell Ringer How much would you be willing to pay for the following items? A gallon of gas Big Mac Apple iPhone X Car

Bell Ringer A gallon of gas - $2.20 Big Mac - $3.99 How much would you be willing to pay for the following items? A gallon of gas - $2.20 Big Mac - $3.99 Apple iPhone X - $999 Honda Accord - $24,000

Explain the law of demand. Define determinants of demand. Objectives Explain the law of demand. Define determinants of demand. Give an example of how a change in demand for one good can affect demand for a related good.

Demand is the desire to own something and the ability to pay for it. The Law of Demand Demand is the desire to own something and the ability to pay for it. The law of demand states that when a good’s price is lower, consumers will buy more of it. When the price is higher, consumers will buy less.

The Law of Demand Law of Demand P D RELATIONSHIP INVERSE

What happens to the demand… Determinants of Demand for ice cream when the price of ice cream drops? for cars when people get a tax refund? for umbrellas after the first monsoon? for hot dogs when the price of hot dog buns rises? for gasoline today when people expect prices to fall tomorrow? What happens to the demand…

Consumer expectations Substitution Effect Income Effect Determinants of Demand Consumer expectations Substitution Effect Income Effect Normal goods vs. Inferior goods

Consumer Expectations The current demand for a good is directly related to its expected future price. If you expect the price to rise, your current demand will rise, which means you will buy the good sooner. If you expect the price to drop, your current demand will fall, and you will wait for the lower price. 8

The Substitution Effect The substitution effect takes place when a consumer reacts to a rise in the price of one good by consuming less of that good and more of a substitute good. 9

Complements and Substitutes The demand for one good can also shift in response to a change in demand for another good. Complements are two goods that are bought and used together. Substitutes are goods that are used in place of one another. 10

Income Effect Normal goods  goods/services for which demand increases when real income increases Inferior goods  goods/services for which demand increases when real income decreases VS. 11

We will be discussing the answers together as a class. Closure/Summary Working by yourself or with a partner, answer questions 2 & 8 on page 90 in your notes. Substitution Effect vs. Income Effect  pg. 87 We will be discussing the answers together as a class.

Bell Ringer How many advertisements do you think the average American sees in a day? Have you seen an ad so far today? What was it for? Where did you see it?

Bell Ringer How many advertisements do you think the average American sees in a day? Answer: 2,000 – 5,000 Source

Demographics Demographics are the characteristics of populations, such as age, race, gender, income, and education level. Businesses use this data to classify potential customers. Demographics also have a strong influence on packaging, pricing, and advertising. What would be your demographic information? 15

Advertising Advertising is a factor that influences consumer demand because it plays an important role in many fads and trends. Companies spend much of their overall budget on advertising in the hope that it will increase the demand for the goods they sell.

In 2015, Coca-Cola spent approximately $3 In 2015, Coca-Cola spent approximately $3.5 billion on advertising worldwide. What did this buy them? 3.1% of all beverages consumed around the world (not including water) are Coca-Cola products  Best selling product in the world The Coca-Cola logo is recognized by 94% of the world's population Coca-Cola is the second-most understood term in the world, behind “okay.” Source

“Examining Ads” Work by yourself or with a partner to complete the “Examining Ads” assignment. Choose three ads in the packet + one full-page ad from a magazine. Answer the four questions for each of the four ads you choose, then complete the paragraph response to the prompt.

Bell Ringer The Law of Demand states that as price goes up, demand goes down. How much will demand decrease in the following circumstances? Why? The price of gas increases from $2.50/gallon to $5.00/gallon The price of a haircut increases from $20 to $40 The price of cell phone service increases from $60/month to $120/month The price of milk increases from $3/gallon to $8/gallon

Describe the difference between elastic and inelastic demand. Objectives Describe the difference between elastic and inelastic demand. Identify factors that affect elasticity. Explain how firms use elasticity and revenue to make decisions.

Elasticity of Demand Elasticity of demand is the way that consumers respond to price changes; it measures how drastically buyers will cut back or increase their demand for a good when the price rises or falls. If you will keep buying a good despite a price increase, your demand for that good is inelastic. If you buy much less of a good after a small price increase, your demand for that good is elastic.

Elasticity of Demand What are some goods/services with elastic demand? What are some goods/services with inelastic demand? Can you think of a good/service with perfectly elastic or inelastic demand? Elastic or Inelastic? 

Elasticity of Demand Food is a necessity. So why is there elastic demand for Little Caesar’s Pizza? Clothing accessories are not a necessity. So why is there inelastic demand for Louis Vuitton purses?

Elasticity of demand is determined by one or more of these factors: Factors Affecting Elasticity Elasticity of demand is determined by one or more of these factors: The availability of substitute goods A limited budget that does not allow for price changes The perception of a good as a luxury item.

Factors Affecting Elasticity Availability of Substitutes If there are a few substitutes for a good, then even when its price rises greatly, you might still buy it. A lack of substitutes can make demand inelastic; a wide choice of substitute goods can make demand elastic. Other examples? 25

Other Factors Relative Importance Necessities vs. Luxuries A second factor in determining a good’s elasticity of demand is how much of your budget you spend on a good. Necessities vs. Luxuries Whether a person considers a good to be a necessity or a luxury has a great impact on a person’s elasticity of demand for that good.

How do businesses use demand elasticity? The law of demand states that an increase in price will decrease the quantity demanded. When a good has elastic demand, raising the price by a small percentage will decrease the quantity sold by a large percentage. The quantity sold will drop enough to reduce the firm’s total revenue. $6+ $10.99/month

How do businesses use demand elasticity? If demand is inelastic, consumers’ demand is not very responsive to price changes. Therefore, raising the price of each unit will not significantly decrease the quantity sold. This will result in higher total revenues. $69,900 $499.99 28

Key Terms elasticity of demand: a measure of how consumers respond to price changes inelastic: describes demand that is not sensitive to price changes elastic: describes demand that is very sensitive to a change in price