…and YOUR powers as a consumer. The Law of Demand …and YOUR powers as a consumer.

Essential Standards The student will explain how the Law of Demand works to determine production and distribution in a market economy. The student will define the Law of Demand. The student will identify and illustrate on a graph the factors that cause changes in market demand. The student will define price elasticity of demand.

Demand Demand—the desire to own something and the ability to pay for it. Quantity Demanded—The amount of a good or service people will buy at a given price, in a given time period.

Between Price and Quantity Demanded The Law of Demand An INCREASE in the price of a good or service causes a DECREASE in the quantity demanded, and a DECREASE in the price of a good or a service causes an INCREASE in the quantity demanded… There is an INVERSE RELATIONSHIP Between Price and Quantity Demanded

The price of french fries in the McEachern lunch room decreases from $1.25 to $.50. What should happen to the QUANTITY DEMANDED? iRespond Question F Multiple Choice A.) The Quantity Demanded should fall. B.) The Quantity Demanded should rise. C.) The Quantity Demanded will remain the same. D.) I am not paying attention and expect Mrs. Roma to pass me anyway. E.)

Demand vs. Quantity Demanded The way you determine whether or not you are referring to DEMAND or QUANTITY DEMANDED is asking yourself if you are responding specifically to price. If the answer is YES then it is a change in Quantity Demanded. Example: 1. I start car pooling and buy less gas because prices are $4 a gallon. This is a change in QUANTITY DEMANDED. 2. I start car pooling because I believe burning fossil fuels causes global warming. This is a change in DEMAND. In example #2 my decision had nothing to do with price.

Demand Schedule for Stereos Price per Car Stereo $500 $400 $300 $200 $100 Quantity Demanded 500 1,000 1,500 2,500 5,000

Demand Curve P R I C E Quantity Demanded $500 $400 $300 $200 $100 500 1000 1500 2500 5000 P R I C E Quantity Demanded

Changes in Demand What can cause demand to change? Price? NO. A change in price just causes a change in the Quantity Demanded. To cause a change in demand, other things must happen:

1. Diminishing Marginal Utility The marginal utility of each unit LESSENS with each unit. For example… $3 for an ice cream cone (your first) might seem well worth the money… Maybe even a second cone would seem worth another three bucks… But for your third? Maybe $1.50? Your fourth? What? 75 cents? A fifth? Would you even take it for nothing? The ADDITIONAL USEFULLNESS diminishes with each unit consumed.

Examples of Demand-Changes Causes 2. Consumer Tastes—the demand for poofy haircuts is very low because they are UNFASHIONABLE… …Not because they are EXPENSIVE. 3. Population Size—when people begin crowding an area, the demand for… …Housing, parking, tables at restaurants, etc., INCREASES. 4. The income effect—as people become more wealthy, they buy more stuff... …Their demand for luxury cars might INCREASE, regardless of high prices.

When Mrs. Roma was born in 1971 bell bottoms were all the rage When Mrs. Roma was born in 1971 bell bottoms were all the rage. However, if you wore them today you should expect to be laughed at. This is an example of a change in ______________________. iRespond Question F Multiple Choice A.) Population Size B.) Consumer Taste C.) The Income Effect D.) I am still not paying attention and will place my graduation in the hands of the benevolent Mrs. Roma. E.)

More Examples of Demand Change 5. The Complementary Effect—if the price of milk goes up… …The QUANTITY of milk DEMANDED will decrease… …And the DEMAND for cereal will also decrease. 6.The Substitute Effect—if the price of hotdogs rises… …The QUANTITY of hotdogs DEMANDED will decrease… …And the DEMAND for hamburgers will increase.

The price of peanut butter increases The price of peanut butter increases. As a result, the demand for Jelly goes down. This is an example of the the ______________effect. iRespond Question F Multiple Choice A.) Substitute B.) Complementary C.) Trade Off D.) Maybe I should actually start paying attention. Mrs. Roma might not be that benevolent. E.)

Demand Change: Consumer Expectations 7. If consumers expect that prices will FALL in future… …current demand will …DECREASE. 8. If consumers expect that prices will RISE in the future… …current demand will… …INCREASE.

Elasticity of Demand Elastic demand occurs when a small change in the price of a good causes a major, opposite change in the quantity demanded… For example… If movie tickets went up by three dollars (a small change)… It could possibly cause an enormous change in the quantity of movie tickets demanded. Elastic demand usually applies to WANTS, rather than NEEDS.

Inelastic Demand Inelastic demand exists when the price of a good has little impact on the quantity demanded… The demand for bread, milk…what else?...tends to be inelastic. And inelastic demand usually applies to NEEDS, rather than…?

Which of the following is the most elastic product? iRespond Question F Multiple Choice A.) Water B.) Bread C.) Bubble Gum D.) I need to start paying attention or Mrs. Roma will fail me. E.)

Factors Affecting Elasticity Availability of Substitutes— Demand for movie tickets is ELASTIC… Demand for prescription medicine is INELASTIC.

Factors Affecting Elasticity 2. Necessities vs. Luxuries—Demand for necessities (diapers) is… …INELASTIC… …Demand for luxuries (earrings) is… ELASTIC. 3. Change Over Time—it often takes time for demand to become elastic… …When gas prices shot up in 1970’s, small cars didn’t become widespread until the 1980’s.