CHAPTER 3 The great mystery of demand……muuuuuahahahahaha

Questions I know you asked yourself today 1. What is demand? 2. What is the most important thing I consider when I buy something? 3. How does the law of demand explain my behavior? 4. How will I be able to buy more than one piece of pizza today? 5. Is Shaler going to beat North Hills tomorrow? 6. Does Miss Benson really think I care about this as much as she does?

Demand  Demand is simply put the desire to own something AND the ability to pay for it (You want the good AND you can afford it.)

Example of Demand  Which car can I accurately say I have demand for?  How did you come to this conclusion?

Law of Demand  What was the last thing you bought?  Why did you buy this item?  How much of it did you buy?

In other words…  People will buy more of a good when its price decreases and less of a product when its price increases  In symbol form: P ↑ Qd↓ P↓ Qd↑

 Don’t stress over this concept. Think of it like this: if you go to the store and notice that Red Bull is.50 a can how many would you buy? What if Red Bull was $4.00 a can?

The Effect Thingy  The law of demand is the result of two different behaviors acting separately, but together.  Substitution Effect: when the price of a good rises people will buy less of that good and more of a substitute  Income Effect: when prices rise people will buy less of that good because of the effect on their income

Example: Substitution Effect PRICE OF CHILI CHEESE DOGS INCREASES, SO YOU BUY FEWER CHILI CHEESE DOGS AND MORE OF A SUBSTITUTE…CHEESEBURGERS

Example: Income Effect

A Little Class Activity  C is for Cookie and the Old Cookie Monster was WAY cooler than this healthy imposter they now have on Sesame Street, therefore our activity will revolve around COOKIES!!!!!! ARGHHHHHHH!!!!!! COOKIE COOKIE COOKIE!!!!!!

Consider This  How many cookies would you buy in a week?  List 3-4 things that would determine your answer.  On the next slide, please replicate this chart in your notebook and fill the empty spots in with your own answers.

Awesome Chart

Part Duex  Did you notice any pattern between responses?  What substitutes could you buy if the price of cookies became too high?  Homework: Chart the following information in a graph.  X-Axis is the Quantity (# of cookies)  Y-Axis is the Price (of each cookie)  Now graph your individual cookie demand, and the total cookie demand

To review from yesterday…  TO SUMMARIZE: A CHANGE IN PRICE = A CHANGE IN QUANTITY DEMANDED (QD)  This is movement along the demand curve.  Example: If the price of pizza ↑, the quantity of pizza that people will buy ↓.  What is the ONLY reason why you wanted more burgers at $.50? - b/c price was lower!  But that assumes ceteris paribus: all other things held constant

Now to really confuse you…  There are other factors that can cause the demand itself for a good to change. When this happens, people will demand all different quantities at every single price.  This is shown by a shift of the entire demand curve

WHAT SHIFTS THE DEMAND CURVE? (AKA: Determinants of Demand)

#1: Income Changes in income will change how much people are able to buy  Normal goods ( ↑ income causes ↑ demand)  When we make more money, we can afford new things, like cars and meals out  Inferior goods ( ↑ income causes ↓ demand)  When we make more money, we buy fewer generic cereals and opt for the name brand!

#2: Consumer Expectations  If we expect the price or availability of a good to change in the future, we will change our buying habits today  If we expect price of gas to go up tomorrow, we will fill up on the way home from work today

#3: Population  If # of buyers ↑, demand ↑ (immigration)  If # buyers ↓, demand ↓ (deaths)

#4: Consumer Tastes and Advertising  New fads ↑ demand for those popular items  Negative news reports ↓ demand for goods

#5: Prices of Related Goods  Complements (hot dogs and hot dog buns)  If price of hot dogs ↑, demand for hot dog buns ↓  Substitutes (sugar and Splenda)  If price of sugar ↑, demand for Splenda ↑

Elasticity of Demand  the way that consumers respond to price changes  How much buyers will cut back or increase their demand for a good when the price rises or falls  Inelastic demand – you will keep buying even when the price increases (you DO NOT change your mind)  Elastic demand – you buy much less of a good after a small price increase (you DO change your mind)

Factors Affecting Elasticity  Availability of Substitutes  More substitutes = More elastic  Relative Importance  More important to you = More inelastic  Necessities versus Luxuries  Necessities = Inelastic  Change over Time  More time to adjust = More elastic  Expense (% of your budget/income)  Greater % of your income = More elastic

Calculating Elasticity Elasticity of Demand for a good = Percentage change in quantity demanded Percentage change in price *Remember to find any Percentage change = Original number – New numberx 100  Original number

Review…  What two conditions must be met in order to say someone has DEMAND for a good?

Review…  What is the law of demand?

Review…  When the price of a good changes, what do we say happens?  Is it a change in demand?  Is it a change in quantity demanded?

Review…  What is the substitution effect? (For example, what will people do when the price of ground beef goes up?)

Review…  What is the income effect?

Review…  What does it mean to say that there has been a change in demand?

Review…  Give an example of complements.

Review…  Give an example of substitutes.

Review…  What does elasticity measure? (What is it all about?)

Review…  If you keep buying a good even when the price increases, what type of demand do you have for the good?

Review…  If you cut back a lot on how much you buy of something when the price increases, what type of demand do you have for the good?  Give an example!

Review…  If elasticity is less than 1, then your demand for the good is…  If elasticity is greater than 1, then your demand for the good is…

Review…  If you were a company, would you want demand for your product to be elastic or inelastic? Why?

Review…  The less expensive the good, the more ___________ demand tends to be (elastic or inelastic).

Review…  The more substitutes a good has, the more __________ demand tends to be (elastic or inelastic).