Lecture #11: Demand Part 1 & 2

Student Objectives Students will understand the Law of Demand.

State Standards 12e.2 Students analyze the elements of America's market economy in a global setting 12e.2.1 Understand the relationship of the concept of incentives to the law of supply and the relationship of the concept of incentives and substitutes to the law of demand. 12e.2.2 Discuss the effects of changes in supply and/or demand on the relative scarcity, price, and quantity of particular products.

What is Demand? Market A place where people come together to buy & sell goods or services. 2 sides: a buying side--demand selling side--supply Remember when taking Cornell Notes you need to come up with at least 3 questions per page!

What is Demand? cont. Demand the willingness and ability of buyers to purchase different quantities of a good at different prices during a specific period. Willingness = a person’s want or desire for a good Ability = having the money to pay for a good

What is Demand? cont. Example: Betty doesn’t have the $60,000 to buy a Porsche. If she did have the money, though, she says that she would buy it. Betty has the willingness but not the ability. Under these circumstances she does not have a demand for the Porsche!

SPECIAL HOMEWORK TONIGHT!!! Many people believe that the more money a person has, the more expensive version of a product that person will buy. People are assuming that someone who has the ability to buy something also has the willingness to buy it. Economists don’t think this way—they know most people try to find the best deal!

Thinking like an Economist! Survey 5 people whether they buy the most expensive items available when they can afford them, or look for best buys even when they have more than enough money for the most expensive items. Create the following chart on a separate piece of paper Name of Person Most expensive Item Best Buy EX: Betty YES NO EX: Sally EX: Fred TOTALS 2—YES 1—NO 2—NO 1—YES

The Law of Demand The law of demand Tells us what happens to the quantity demanded when the price changes. If P then Qd (Where P = price and Qd = Quantity demanded) When price goes up—the quantity demanded goes down When price goes down—the quantity demanded goes up

Importance of the law of demand It shows us that consumers are willing to purchase fewer goods as prices go up. And it shows that consumers are willing to purchase more goods as the prices go down!

Quantity Demanded Different from demand It is the number of units of a good purchased at a specific price. It is always a number

The Law of Diminishing Marginal Utility Diminishing = Decreasing Marginal = Additional Utility = Satisfaction States that as a person consumes additional units of a good, eventually, the utility gained from each additional unit of the good decreases.

The Law of Diminishing Marginal Utility Experiment: We need 2 volunteers (a boy and a girl) First Taste Second Taste Third Taste Fourth Taste Fifth Taste Enjoyment level 1 (low) – 10 (high)

The Law of Diminishing Marginal Utility

The Law of Demand in Numbers & Pictures We can show how the law of demand works by: listing prices and quantities demanded, and by plotting those numbers in a graph.

The Law of Demand in Numbers & Pictures Schedule In Economics, the table is called a schedule. Demand Schedules Individual Demand Schedule Price of a slice of pizza Quantity demanded per day Market Demand Schedule Price of a slice of pizza Quantity demanded per day $.50 $1.00 $1.50 $2.00 $2.50 $3.00 5 4 3 2 1 $.50 $1.00 $1.50 $2.00 $2.50 $3.00 300 250 200 150 100 50

The Law of Demand in Numbers & Pictures Schedule cont. We can look at individual or market demand curves. Individual = one person’s demand for a good Market demand = the sum of all the individual demand curves for a good Demand Schedules Individual Demand Schedule Price of a slice of pizza Quantity demanded per day Market Demand Schedule Price of a slice of pizza Quantity demanded per day $.50 $1.00 $1.50 $2.00 $2.50 $3.00 5 4 3 2 1 $.50 $1.00 $1.50 $2.00 $2.50 $3.00 300 250 200 150 100 50

The Law of Demand in Numbers & Pictures Market Demand Curve 3.00 2.50 2.00 1.50 1.00 .50 50 100 150 200 250 300 350 Slices of pizza per day Price per slice (in dollars) Demand Curve The graph is called a curve. The curve always slopes downward from left to right!

The Law of Demand in Numbers & Pictures Practice Copy the following in your notebook and plot the demand curve:

The Law of Demand in Numbers & Pictures Practice Copy the following in your notebook and plot the demand curve:

Review—True or False Both willingness and ability to purchase must be present for demand to exist. As price decreases, the quantity demanded decreases. The more utility you receive from a good, the higher the price you are willing to pay for that good.

Review—True or False Both willingness and ability to purchase must be present for demand to exist. TRUE As price decreases, the quantity demanded decreases. FALSE The more utility you receive from a good, the higher the price you are willing to pay for that good.

Summary When completing your notes you need to write a 3-5 sentence summary of the lecture. This is a part of your notes grade!

Lecture #12: Demand Part 2

Student Objectives Students will understand why a demand curve shifts and will be able to determine the elasticity of demand.

State Standards 12e.2 Students analyze the elements of America's market economy in a global setting 12e.2.1 Understand the relationship of the concept of incentives to the law of supply and the relationship of the concept of incentives and substitutes to the law of demand. 12e.2.2 Discuss the effects of changes in supply and/or demand on the relative scarcity, price, and quantity of particular products.

When Demand Changes, the Curve Shifts Demand Curve Shifts Demand can change When Demand goes up—the curve shifts to the right When Demand goes down—the curve shifts to the left Remember when taking Cornell Notes you need to come up with at least 3 questions per page! D2 D3

Answer the following questions in your notebook: In the graph, the demand curve in the middle, the one labeled D1, is the starting point. On this curve, what is the quantity demanded at a price of $1? C A B $1 D2 D1 D3 400 quarts of Orange Juice 200 400 600 Quantity demanded of orange juice (quarts)

Answer the following questions in your notebook: Suppose the demand for Orange Juice increases to 600 quarts. People still want to pay $1 per quart, but now they want to buy more at that price. What happened to the demand curve? C A B $1 D2 D1 D3 It shifts to the right and becomes D2. When demand goes up, the demand curve shifts to the right! 200 400 600 Quantity demanded of orange juice (quarts)

Answer the following questions in your notebook: Now suppose that the demand for Orange Juice decreases to 200 quarts. What happens to the demand curve? C A B $1 D2 It shifts to the left and becomes D3. When demand goes down, the demand curve shifts to the left. D1 D3 200 400 600 Quantity demanded of orange juice (quarts)

In your notebook brainstorm a list answering the following question: Make a list of the most popular holiday gifts from last year. What are some of the reasons that the demand for these items was so high? Do you think the demand will be as high again this year? Why or why not?

What factors cause demand curves to shift? Income: As a person’s income changes they may buy more or less of a certain good. Normal Good— if a person’s income & demand change in the same direction. Ex: Now that Robert is making twice as much, he buys more CDs. Inferior Good— if income & demand go in opposite directions. Ex: Now Robert doesn’t have to eat SPAM anymore he can afford steak. That makes SPAM an inferior good to steak. Neutral Good— if demand does not change even though income does. Ex: Robert still needs the same amount of toilet paper, toothpaste, & deodorant. These goods are neutral goods.

What factors cause demand curves to shift? 2. Preferences—changes in preferences cause changes in demand. As gas prices soar, fewer SUVs are being purchased while more hybrids are being sold every day!

What factors cause demand curves to shift? Prices of related goods: When 2 goods are substitutes (a similar good), the demand for one moves in the direction as the price of the other. Ex: If the price of Coke goes you will probably buy Pepsi instead. If the price of Coffee goes up you may substitute a lower priced tea. When 2 goods are complements (goods used together), the demand for one moves in the opposite direction of the price of the other. Ex: Tennis balls and Tennis rackets are complements. If the price of tennis rackets increase—fewer people will buy the rackets and this will cause the demand for tennis balls to drop.

In your notebook recreate the following chart In your notebook recreate the following chart. Fill out the chart as a class. Brainstorm a list of goods that you demand: What would be a substitute good for each of these items: What would be a complement good for each of these items:

What factors cause demand curves to shift? 4. Number of Buyers-- An increase or decrease in the # of buyers can change demand The more buyers the higher the demand Ex: High birthrate, increased immigration Fewer buyers lower the demand Ex: Natural disaster, high death rate

What factors cause demand curves to shift? Future Price— Buyers’ expectations of future prices can cause them to buy now or wait to buy. Ex: waiting to buy a house because you think the prices are going to continue to go down!

What is Elasticity of Demand? It measures how a price change affects the quantity of a particular good that people want to buy. Elastic= the price change has a significant impact on the quantity demanded. Inelastic= there is a minor change in quantity demanded when the price changes. Unit-elastic= the impact of a price change is neutral—it is neither major nor minor.

What is Elasticity of Demand? Copy the formula! Elasticity is determined using the following formula: Elasticity = Percentage change in quantity demanded Percentage change in price To find the percentage change in quantity demanded or price, use the following formula: subtract the new number from the original number, and divide the result by the original number. Ignore any negative signs, and multiply by 100 to convert this number to a percentage: Percentage change = Original number – New number Original number x 100

What is Elasticity of Demand? If the answer is: = Elastic Demand (greater than 1) = Inelastic Demand (less than 1) = Unit-elastic demand (equal to 1) Copy the formula! Elasticity = Percentage change in quantity demanded Percentage change in price

What is Elasticity of Demand? Practice If Qd 15% and P 10%, then 15/10 = 1.5 = If Qd 5% and P 10%, then 5/10 = 0.5 = If Qd 10% and P 10%, then 10/10 = 1 = Elastic demand Inelastic demand Unit-elastic demand

What is Elasticity of Demand? If demand is elastic, a small change in price leads to a relatively large change in the quantity demanded. Follow this demand curve from left to right. Price Quantity $7 $6 $5 $4 $3 $2 $1 Elastic Demand 5 10 15 20 25 30 Demand The price decreases from $4 to $3, a decrease of 25 percent. $4 – $3 $4 x 100 = 25 The quantity demanded increases from 10 to 20. This is an increase of 100 percent. 10 – 20 10 x 100 = 100 Elasticity of demand is equal to 4.0. Elasticity is greater than 1, so demand is elastic. In this example, a small decrease in price caused a large increase in the quantity demanded. 100% 25% = 4.0

What is Elasticity of Demand? Price Quantity $7 $6 $5 $4 $3 $2 $1 Inelastic Demand 5 10 15 20 25 30 Demand If demand is inelastic, consumers are not very responsive to changes in price. A decrease in price will lead to only a small change in quantity demanded, or perhaps no change at all. Follow this demand curve from left to right as the price decreases sharply from $6 to $2. The price decreases from $6 to $2, a decrease of about 67 percent. $6 – $2 $6 x 100 = 67 The quantity demanded increases from 10 to 15, an increase of 50 percent. 10 – 15 10 x 100 = 50 Elasticity of demand is about 0.75. The elasticity is less than 1, so demand for this good is inelastic. The increase in quantity demanded is small compared to the decrease in price. 50% 67% = 0.75

What determines Elasticity of Demand? 4 factors Number of substitutes: When there are few substitutes for a good, the quantity demanded in unlikely to change. The good will likely be inelastic. Ex: Heart medicine—few substitutes—so even if the price doubles the people who need it are going to buy it. When there are many substitutes for a good, the opposite is true. The good tend to be elastic. Ex: Soda—if Coke triples in price—you are more likely to buy a cheaper brand.

What determines Elasticity of Demand? 4 factors Luxuries vs. Necessities: Demand for necessities tend to be inelastic b/c people need them even if prices rise. Ex: necessities are goods that you need to survive—Food, medicine, etc. Demand for luxuries tend to be elastic b/c people will often do without those goods if the price rises. Ex: Sports Car, bling-bling, etc.

What determines Elasticity of Demand? 4 factors Percentage of income spent on the good. If a good requires a large % of a person’s income, demand for it tends to be elastic. Inelastic goods tend to require a small % of a person’s income. Ex: Claire has a monthly income of $2000. She spends $10 (or ½% of her monthly income) on magazines and $400 (or 20% of her monthly income) on dinners at restaurants. If the price of magazines & going out to restaurants double, what will Claire be more likely to cut back on?

What determines Elasticity of Demand? 4 factors Time: When consumers has little time to respond to price change, demand is usually inelastic Ex: If the price of gas went up 50 cents today and your tank was empty, you would probably still buy gas. When they have more time to respond, demand is usually elastic Ex: If the price of gas continued to rise over the next 3 months, you may begin to carpool, or purchase a fuel efficient car.

Relationship between Elasticity & Revenue Elastic Demand & an increase in price lead to a decrease in Total Revenue Elastic Demand & a decrease in price lead to a increase in Total Revenue Inelastic Demand & an increase in price lead to a increase in Total Revenue Inelastic Demand & a decrease in price lead to a decrease in Total Revenue

Review—True or False When a demand curve shifts to the right, demand has decreased. Demand has increased when the demand curve shifts to the right. The prices of related goods affect the demand curve. A change in the number of buyers creates a change in the quantity demanded.

Review—True or False When a demand curve shifts to the right, demand has decreased. FALSE Demand has increased when the demand curve shifts to the right. TRUE The prices of related goods affect the demand curve. A change in the number of buyers creates a change in the quantity demanded.

Review—True or False Demand is always inelastic. Unit-elastic demand exists when the quantity demanded is less than the percentage change in price. Time affects the elasticity of demand. The demand for necessities is likely to be inelastic. It doesn’t matter if demand is elastic, inelastic, or unit-elastic.

Review—True or False Demand is always inelastic. Unit-elastic demand exists when the quantity demanded is less than the percentage change in price. Time affects the elasticity of demand. TRUE The demand for necessities is likely to be inelastic. It doesn’t matter if demand is elastic, inelastic, or unit-elastic.

Summary When completing your notes you need to write a 3-5 sentence summary of the lecture. This is a part of your notes grade!