WHAT IS DEMAND? Demand: 1)The desire to own something AND 2) the ability to pay for it When we talk about demand, we are referring to the activities of the consumer!

THE LAW OF DEMAND When a good’s price is higher, consumers will buy less of it and vice versa

DEMAND SCHEDULES Demand Schedule: a table that lists the quantity of a good a person will buy at each different price. The quantity of a good a person will buy at each different price is the quantity demanded.

DEMAND CURVES Demand Curve: a graphic representation of the information presented on a demand schedule Vertical Axis = price Horizontal Axis = quantity demanded * Market demand curve/schedule: shows quantities demanded by all consumers in a market.

DEMAND CURVES Two characteristics of a demand curve Only relationship between price and quantity demanded is shown Curve always slopes downward * As the law of demand suggests it will!!

CHANGES IN QUANTITY DEMANDED A demand curve is accurate as long as price is the only thing that changes and all else is held constant (ceteris paribus) When only price changes, we move along the curve and there is a change in the quantity demanded

QUANTITY DEMANDED VS. DEMAND Quantity demanded refers to a single price and is represented by a single point on the demand curve Demand refers to all prices and is represented by the entire curve

SHIFTS IN THE DEMAND CURVE In the real world, many factors besides price can influence consumers. When other factors change, the entire curve shifts and there is a change in demand If consumers buy more at every price, demand increases (shifts to the right) If consumers buy less at every price, demand decreases (shifts to the left)

FACTORS (DETERMINANTS) CAUSING A SHIFT IN DEMAND #1 Income If the average income for a market increases, demand will increase and vice versa We can use newspaper headlines to provide us with examples: (Product = Skippy Peanut Butter) “Recession over, more people going back to work as unemployment rate drops”

FACTORS CAUSING A SHIFT IN DEMAND #2 Consumer Expectations If consumers expect the price of a good to rise in the near future, their current demand will increase and vice versa Example (Product = Snowboards, Month = Dec.): “Snowboard Clearance Sale After New Year!”

FACTORS CAUSING A SHIFT IN DEMAND #3 Population If a market’s population increases, demand will increase and vice versa Example: “Thousands Leaving State Each Week Due To High Home Costs”

FACTORS CAUSING A SHIFT IN DEMAND #4 Consumer Tastes/Advertising If consumers suddenly desire a good due to shifting tastes, demand will increase for that good and vice versa Example (Product = Skippy Peanut Butter): “Skippy Peanut Butter Recalled Due To Salmonella Scare!”

FACTORS CAUSING A SHIFT IN DEMAND #5 Price of Complementary Goods If goods A and B are usually bought together and the price of good A rises, demand for good B will decrease and vice versa Example (Product = salsa): “Price of Tortilla Chips Going Through The Roof!

FACTORS CAUSING A SHIFT IN DEMAND #6 Price of Substitute Goods If the price of Good A, which Good B can be substituted for, increases, demand for Good B, will increase and vice versa Example (product = chicken): “Price of Beef Has Increased 20% in Three Months”

ACTIVITY 2: Shifts in Demand Draw Graph From Board Here Beef Consumption in May (start at curve C) 1. Price of Beef to Rise in June Factor: _________________ Demand: _________ Curve: ____ * Move one curve at a time ** Base your curve on the previous answer (don’t go back to C every time) *** Use each factor once (one will be used twice)

ACTIVITY 2: Shifts in Demand 2. Millions of Immigrants Swell U.S. Population 3. Pork Prices Drop 4. Government Says Beef Is Bad For Your Health 5. BEEF PRICES FALL 6. Americans’ Monthly Income Drops Again 7. Shortage Increases Cost of Charcoal 8. Beef Industry Begins Campaign Promoting Beefy Benefits * There is one with no factor, and therefore, no change in demand and you will stay at the same curve (consult Activity 1, part C, #5 for a hint)!

ACTIVITY 2: Shifts in Demand Sunscreen In June (begin at curve C again) 9. FDA Warns of Dangers of Skin Cancer as Summer Returns 10. Beach Towels on Sale at Rite-On-Aid 11. Government Raises Income Taxes To Pay For Bank Bailout 12. Vacationers Pour Into Region For Summer Fun 13. Hats and Long-Sleeve T-Shirts on Sale at Rite-On-Aid 14. Cost of Sunscreen Decreases As Weather Turns Hot 15. Sunscreen To Go On Sale Over 4th of July Weekend

ELASTICITY OF DEMAND Elasticity of demand: a measure of how consumers react to a change in price If you generally keep buying a good when price increases, and vice versa, your demand is inelastic (limited reaction to price change) If you buy much less of a good because of a price increase, and vice versa, your demand is elastic (strong reaction to price change)

ELASTICITY OF DEMAND An elastic demand curve will be more horizontal An inelastic demand curve will be more vertical (totally vertical is perfectly inelastic)

FACTORS AFFECTING ELASTICITY #1 Availability of Substitutes Few substitutes = inelastic demand Examples: concert tickets, medicines Many substitutes = elastic demand Examples: apples, apple juice

FACTORS AFFECTING ELASTICITY #2 % of Budget Spent on Good If large % of budget is spent on good = elastic Example: eating in restaurants If small % of budget is spent on good = inelastic Example: dry beans, comet cleanser

FACTORS AFFECTING ELASTICITY #3 Necessities versus luxuries Necessities = inelastic Example: milk, toilet paper Luxuries = elastic Example: overseas vacations, filet mignon

FACTORS AFFECTING ELASTICITY #4 Change Over Time Consumers sometimes need time to adjust to price changes, so demand can be inelastic in short-term and elastic in long-term Example: gasoline

ELASTICITY AND TOTAL REVENUE Total revenue = price multiplied by quantity demanded If a business raises its prices and total revenue decreases, demand is elastic If a business raises its prices and total revenue increases, demand is inelastic * Elasticity of demand for a good varies at every price level

PRODUCT: PEANUT BUTTER 1. Jelly price increases 2. Schools back in session; vacationers return home ready to shop 3. Almond butter price decreases 4. Unemployment rate drops 5. Peanut butter price to drop 6. Peanut butter price drops 7. Someone influential stars in new peanut butter commercial

PRODUCT: STRAWBERRY JELLY 1. New Mall opens; over 1,000 jobs filled 2. Strawberry Fields Forever hits number 1 on charts over 40 years later! 3. Strawberry jelly price increase expected soon 4. Grape jelly price decrease 5. Strawberry price increase 6. New census data shows migration out of state 7. Peanut butter price increase

PRODUCT: PEANUT BUTTER * Start at C. Arrange the headlines so that the final curve is C. Write the # of the headline, increase/decrease/no change, and the new curve for each. 1. Jelly price increases 2. Schools back in session; vacationers return home 3. Almond butter price decreases 4. Unemployment rate drops 5. Peanut butter price to drop 6. Peanut butter price drops 7. Psy stars in new peanut butter commercial