Chapter 4.1: Demand

Bell ringer – Law of Demand Write down the maximum you would pay for the following items: Is your max above? Cold 12 oz. can of soda Sneakers 6” Hoagie Large bag of Doritos Pack of gum $1 $3 $100 $150 $5 $9.50 $4.50 $6 $1.50 $3 Is their maximum ABOVE what the $ amt is? Count how many students would buy it at the first price amount and write on board, count how many would at 2nd price amount and explain that as price increases, demand decreases

“The most famous law in economics, and the one that economists are most sure of, is the law of demand. On this law is built almost the whole edifice of economics” -David Henderson The Concise Encyclopedia of Economics

Objectives Explain the law of demand. Describe how the substitution effect and the income effect influence decisions. Create a demand schedule for an individual and a market. Interpret a demand graph using demand schedules.

Understanding Demand Have you ever gone shopping before? Has the price been too high to pay for it? In order to understand, take the viewpoint: Demand = Markets (us) Supply = Sellers Demand The desire to own something and the ability to pay for it

Understanding Demand Have you ever spent money before? Then you get the law of demand. Whether your income is $10 or $10 million, the price of a good will strongly influence your decision to buy. Law of Demand Consumers will buy more of a good when its price is lower and less when its price is higher. Common sense, right?

P D Inverse Relationship Inverse relationship – as one goes up, the other goes down. P D

Law of Demand How does the law of demand affect the quantity demanded? Price changes always affect the quantity demanded because people buy less of a good when the price goes up.

Pizza - Yummy Who would pay n for a slice?? $2.25 $4 $2.50 $2 $4.50 $5 $1 Explain law of demand is in effect because as the price increases, less students will pay for a slice at that price. $3.25 $3.50 $3 $4.25

Substitution Effect/Income Effect The law of demand is the result of two separate patterns of behavior we all experience. Substitution Effect Income Effect They both describe two different ways a consumer can change his or her spending patterns

Remember the pizza? At what price do you throw in the towel and get a 6 incher at Subway? That’s the substitution effect!

Understanding Demand Substitution effect Page 88 Substitution effect When consumers react to an increase in a good’s price by consuming less of that good and more of a substitute good.

The Income Effect College professor requires you to have a thumb drive for class: 1 Gb thumb drive = $10 At that price, why not buy two! Explain that income effect is a feeling of how much you can purchase AND IS NOT RELATED TO HOW MUCH MONEY YOU ARE ACTUALLY MAKING. 4 Gb thumb drive = $10

The Income Effect 1 Gb thumb drive = $30 4 Gb thumb drive = $40 Later in the semester, you lose one and have to buy another one: 1 Gb thumb drive = $30 Explain that you feel “poorer” now because your money doesn’t go as far and you have to spend more money on the same product. 4 Gb thumb drive = $40

Income Effect Income effect The change in consumption that results when a price increase causes your feelings to change about the product

The Law of Demand in Action Checkpoint: What happens to demand for a good when the price increases/decreases? Because you feel poorer and then will spend less elsewhere ? Checkpoint Answer: The demand for that good goes down.

The Income Effect The income effect is the change in consumption that results when a price increase causes spending to change. Economists measure consumption in the amount of a good that is bought, not the amount of money spent on it. The income effect also operates when the price is lowered. If the price of something drops, you feel wealthier. If you buy more of a good as a result of a lower price, that’s the income effect at work.

Demand Schedules To have demand for a good, you must be willing and able to buy it at a specified price. A demand schedule is a table that lists the quantity of a good that a person will purchase at various prices in the market. Market demand schedule show the quantities demanded at various prices by ALL consumers in the market.

Demand Schedules Demand schedules show that demand for a good falls as the price rises. How does market demand change when the price falls from $3 to $2 a slice? Answer: Market demand increases.

Reminder Demand is not what we WANT, it’s what we can afford to BUY at the specified price.

The Demand Graph A demand curve is a graphic representation of a demand schedule. The vertical axis is always labeled with the lowest possible prices at the bottom and the highest prices at the top. The horizontal axis should be labeled with the lowest possible quantity demanded at the left and the highest possible quantity demanded on the right.

Demand Curves Answer: They both have a negative slope.

Demand Curves Ashley’s demand curve shows the number of slices she is willing and able to buy at each price, while the market demand curve shows demand for pizza in an entire market. How are the demand curves similar? Answer: They both have a negative slope.

Demand Curve Survey Directions on my Wiki

Review Now that you have learned how the law of demand affects the quantity demanded, go back and answer the Chapter Essential Question. How do we decide what to buy?