How does Demand affect business? 1.What is demand? Demand is the willingness and the ability to buy a good or service It’s not just “wanting” something. You must have the money and be willing to spend it for that item.

Demand causes Inflation. Why? Businesses know they can charge a little more if demand is great. But they have to be careful because of the Law of Demand. What is the Law of Demand? As prices go up, demand will go down As prices go down, demand will go up

What affects Demand? Price is one Determinate of Demand Substitution Effect “If the price of one is high, people will buy the other” (similar item) if it’s less expensive (similar quality) Popularity Complementary Factor “Certain items are purchased at the same time as another” Time of Year / Weather Changes in income (or perception of future income) Changes in population

More determinants of demand Taste Population changes Advertising Peers? Holidays (ex: Mother’s Day)

Diminishing Marginal Utility DMU Additional satisfaction diminishes with each additional purchase That’s why they will have deals like: Buy one, get the 2 nd at half price. DMU says you had demand for the item but probably are unwilling to buy a 2 nd (unless tempted) There are exceptions to every rule. Economists try to predict consumers’ behavior. It’s difficult because behavior is not always logical

What is the Elasticity of Demand? For some goods, a rise or fall in price greatly affects the amount people are willing to buy. Those goods (or products) are said to be ELASTIC.

Goods that are ELASTIC are usually products that have competing similar brands (substitutes) So, we will buy more of one if the price drops. We’ll buy fewer if the prices rises. People realize they can live without these goods when the price goes up. These items are “elastic” Examples: TVsSteak ComputersHamburgers SodaLottery Tickets Coffee, Tea Jewelry Restaurant Meals

There are certain goods that a price change (up or down) does not result in a substantial change in the quantity demanded. This is called INELASTIC Examples: MedicineKidney replacements GasolineConcert Tickets Tickets to the World Series or Playoffs SaltPepper (small % of your income) Cell PhonesI Pads

Wed. April 18 th Law of Supply Consumers demand products at the lowest possible prices Suppliers exist to make PROFITS – hopefully big profits. That’s why they take the RISK in the first place. Suppliers will produce more of an item if they are making a big profit. They will produce less of it if they are not making a lot of money

Law of Supply If price is low, the quantity supplied will be low. As price rises, the quantity supplied will also rise. Remember: this is from the point of view of the manufacturer – not the consumer. They will “supply” more if the price is high. If the price is low, they won’t bother – they’ll produce or “supply” something else.

Sometimes the Government gets involvement in Setting Prices Why? Market Forces had caused unfairness: Government wants to Protect Consumers; they want to help consumers

How can the government help? They can set: Price Ceiling: maximum price that can be charged for goods and services Example: Gas Prices Too high? Order them not to charge above $3 a gallon Or Rent Control Too expensive? Forbid landlords from raising rent Consequence: Shortages Shortages often lead to RATIONING – limiting items to only certain people under certain conditions

Shortages can also lead to an UNDERGROUND MARKET (or Black Market) Items sold above the price ceiling If prices are low, it might be due to -Counterfeits, “Knock-offs” or fakes (violation of copyright or trademark) - Stolen merchandise -“Seconds”

Price Floors: government can forbid a price from falling below a certain point Minimum Wages Agricultural Prices (because of bumper crops – surplus would normally forces prices down but that may result in farmers not making enough to pay their bills )

Raising the Minimum Wage may have an unintended consequence. When employers are forced to do this, their profits go down Higher Wages = Greater Expenses = Less Profit To maintain the same level of profits, they can Raise Prices – but that might lower demand (fewer sales) Or Lay off workers or cut back on their hours. If that happens, the last hired become the first fired. That’s usually young workers. Have a job at $7.15 per hour or risk not having a job at all if the minimum wage goes up to $8 or $9 per hour. Which would you prefer?

Review for test tomorrow: Friday 1.Amount of a good that consumers are able and willing to pay: DEMAND 2.Amount of a good that producers are able and willing to sell: SUPPLY 3.As price goes down, quantity demanded goes up: LAW OF DEMAND 4.With each additional purchase, satisfaction lessens: LAW OF DIMINISHING MARGINAL UTILITY 5. Two items are similar, price of one goes up; demand for the other goes up: SUBSTITUTION EFFECT

7. Economic term dealing with consumer responsiveness to price: ELASTICITY 8. Change in price greatly affects demand: ELASTIC 9. Change in price has little affect on demand: INELASTIC 10. Decrease in population: DEMAND DECREASES 11. Increase in income: DEMAND INCREASES 12. As prices go up, supply will go up: LAW OF SUPPLY 13. All transactions in a free market economy: VOLUNTARY EXCHANGE end

14.Government order forbidding high prices Price Ceiling 15.Consequence of Price Ceilings Shortages 16.Consequence of Shortages Rationing 17.A product sold that claims to be a brand product but is not Knock-off or counterfeit 18.Examples of Price Floors Minimum Wage Laws 19.Consequence of Minimum Wage laws Possible increase in unemployment