 US has free enterprise economy –  To make profit –  consumers serve own interest by purchasing best product at lowest possible price  forces of supply and demand establish price that serves both

 demand –  may want different things (cruise, house) – but may not be able to afford  then have no actual demand  may want newest CD at $12-$15 – you can afford  then you have a demand for them  price is one major factor that influences demand

 Law of demand –  Quantity demanded and price have an inverse, or opposite relationship

 Cheryl likes DVD movies, has a job – some extra money to spend  wants a $69.95 Star Wars movie Trilogy – has money but out of stock  decides to buy others, but number will depend on price – wants to save half of for the trilogy to purchase next week  Law of demand is a description of how consumers behave

 Demand schedule –  shows law of demand in chart form  Market demand schedule –

 2 column table that follows a predictable format  left hand column list various prices of goods or services  right hand column shows the quantity demanded of the goods or services at each price  Figure 4.2 shows Cheryl’s demand for DVD’s Price per DVDQuantity Demanded

 Figure 4.2 shows how many DVD’s Cheryl is willing and able to buy at each price in the market  Shows that quantity of DVD’s that Cheryl demands rises and falls according to price Price per DVDQuantity Demanded

 Business owners need more information than about 1 consumer  Need a market demand schedule –  similar to individual demand schedule except quantities are much larger  also shows market demand depends on price Price per DVDQuantity Demanded

 Survey customers asking how many DVD’s they would buy at different prices  review sales figures to see how many DVD’s sold at each price  these techniques –

 Demand curve –  displays data from an individual demand schedule  Market demand curve –  shows the quantity that all consumers or market as a whole are willing and able to buy at each price  shows the sum of the information on the individual demand curve of all consumers in a market

 When prices go up, the quantity demanded goes down  When prices go down, the quantity demanded goes up  Created using the assumption that all other economic factors except price remain the same

 Figure 4.5 shows the quantity demanded at different prices  shows inverse relationship between price and quantity demanded  price goes down, quantity demanded goes up  price goes up, quantity demanded goes down  Curve constructed on the assumption that all other economic factors remain constant – only price changes

 B. – June 27, 1949  In fashion industry 15 years when planning her own weddingcould not find a dress fashionable enough for herself  Year following her wedding – decided to fill this need – make designer wedding dresses  Celebrities were choosing her dresses – and demand grew  other designers began to create similar dresses  Her style then spread to other products – ready to wear dresses, perfume, accessories

 Shape of demand curve – why?  Law of diminishing marginal utility –  Utility is the satisfaction gained from the use of a good or service  glass of lemonade – 2 nd and 3 rd glass less satisfying then the 1 st  Consumers do not want to pay as much for additional purchases –  consumers will buy more glasses of lemonade if the price is lower for each addition

 Income effect –  if you buy a $7 book rather than a $15 book – you feel $8 richer – so may buy another book – also works vice versa  Substitution effect – is the pattern of behavior that occurs when consumers react to a change in the price of a good or service by buying a substitute product – one whose price has not changed and that offers a better relative value  if paperback books go above $10, consumers might buy fewer book and more $4 mags

 Change in quantity demanded –  each change in quantity demanded is shown by a new point of the demand curve  a change in quantity demanded does not shift the demand curve itself

 Figure 4.7 – follow changes on the demand curve  shows the change for one person  a market demand curve provides similar info for an entire market  have larger quantities demanded and larger changes to quantity demanded

 If people lose job – people more likely to spend limited funds on food and housing than on entertainment – market demand then drops  Change in demand –  also called a shift in demand – shifts the position of the demand curve  6 factors can cause a change in demand: income, market size, consumer expectations, consumer taste, substitute goods, and complementary goods

 If income changes – person’s ability to buy goods and services changes  market demand curve affected as well  income of consumers rise or fall – total demand in the market usually rise or fall  market demand curve will shift to the left or the right  normal goods –  inferior goods –

 Tyler and baseball cards – works at garden center  In fall, works less hours – smaller paycheck – less money to spend – demands fewer bb cards at every price  Promoted – raise of $2 an hour – more money to spend – demand for bb cards increases – demand curve shifts to the right  Tyler bought clothes at a discount store before his raise – now he spends more  discount clothing – inferior goods (used books, generic food products)

 Number of consumers ↑or ↓, then market size changes  Tourists come to Montclair (beach town) in summer, population ↑, demand for pizza will increase  population shifts change the size of markets  ex. – Northeast US – lost population in the last 30 years  why shift – better climate, high-tech jobs, less congested area  shift to the West and South – increase in those market sizes  Has altered demand from essentials to nonessentials

 Today’s hot trends become tomorrow’s castoffs  good with high popularity –  product loses popularity –  Advertising has a strong influence on consumer tastes  sellers advertise to create a demand for a product  some will give up perfectly good clothes because they are convinced the style has changed

 Your expectations for the future can affect your buying habits today  if you think the price of a good or service will change – can affect if you buy now or later  ex. – people usually wait until end of summer to buy a car – expect sales  demand is higher in Aug., expect sales and people wait until then

 Substitutes –  Products are interchangeable – if price of a substitute drops, people will choose to buy it instead of the original  demand for substitute ↑, demand for original ↓  People turn to substitutes if price for original becomes too high  demand for substitute ↑, demand for original ↓  Substitutes can be used in place of each other  ex. – car, bus, train – if price on one to high, use another

 Complements –  increase in demand of one will increase the demand for the other & vice versa  products work in tandem with each other  ex. – CD & CD players  if price for one product changes, demand for both will change the exact same way  if prices rises - demand will drop  if price drops – demand will rise

 Consumer demand is dependent on price – but price is seldom fixed  If prices rise consumers buy less & if prices drop consumers buy more – not always the case  Changes in consumer buying habits are tied to type of goods and services being produced and how important the good or service is to the consumer  not all increases in price result in a decrease in demand  Elasticity of demand –

 Elastic –  the more responsive to change – the more likely the demand is elastic  elastic goods are price sensitive  Inelastic –  case of inelastic demand – changes in price have little impact on the quantity demanded  A rubber band  when quantity demanded increases – demand is elastic and rubber band stretches  if quantity barely changes, demand is inelastic and rubber band stretches very little

 PDA’s go on sale  price down 20%, quantity demanded goes up 30% - demand is elastic  % change in quantity demanded is greater than the % change in price  goods that have a large # of subs fall into the elastic category, since if prices changes, consumers can get another product

 Insulin – required by diabetics  if price rose – they still need the same amount as before  if price fell –  result –

 Elasticity of demand for certain products may change – can happen vice versa  if there are more subs – demand may become more elastic  ex. –  ex. – vice versa –

 Figures 4.13 & 4.14  Inelastic curve more steep – changes along the vertical axis are proportionally greater than the changes along the horizontal axis  Unit elastic –  demand is said to be this when % change in price and quantity are the same  10% increase in price= a 10% drop in quantity demanded

The factors that determine elasticity are: availability of substitute goods or services, the proportion of income that is spent on the good or service, and whether the good or service is a necessity or a luxury

 Generally - if there are no substitutes for a good or service, demand for it tends to be inelastic  ex. –  if there are many substitutes available – demands tends to be elastic  ex. –

 The % you spend on a good or service affects elasticity  hobby – photography –  Demand for products that cost little of your income tend to be inelastic  ex. –If level of income increases – you are likely to increase your demand for some goods or services

 Necessity is something you need: food or water – demand tends to be inelastic  even if prices rise –  consumers may not buy the same quantity no matter what the price  price of milk rises – sub with cheaper milk or powdered milk  Quantity demand will change as the law of demand predicts –  demand for luxuries tends to be elastic  something you desire, but not essential  the change in quantity demanded is much greater than the change in price

 Businesses figure the elasticity of demand to help them decide whether to make price cuts  if demand is elastic –  if demand is inelastic –  To determine elasticity  look at whether the % change in quantity demanded is greater than the % change in price

 Step 1: Calculate % change in quantity demanded.  Step 2: Calculate % change in price.  Step 3: Calculate elasticity  Step 4: If final # is greater than 1, demand is elastic, if less than 1, is inelastic

 Total revenue –  can measure elasticity by comparing the total revenue a business would receive when offering its products at various prices  if total revenue ↑after the price ↓, then demand is elastic  why? Seller makes less, but still sells enough to make up for lower price  if total revenue ↓after the price ↓, demand is inelastic  a price decrease showed modest increase in quantity sold, but not enough to compensate for lower revenue  Formula  P=  Q=  Total Revenue=P x Q

 Figure 4.17 – figure out whether demand is elastic or inelastic  Answer: Price of Tickets Quantity Demanded per month Total Revenue($) 121,00012, ,00020,000 86,00048, ,00072, ,00080,000