After studying the facts from the Unit 2 Warm-up, how does the following statement effect your understanding of who benefits from a free market economy? “The richest 2 percent of adults in the world own more than 50 percent of the world's wealth”, according to a new study released by the Helsinki-based World Institute for Development Economics Research of the United Nations University.

Chapter 4: Demand

What is Demand? Desire + Willingness and Ability to Pay = DEMAND

Demand is a Microeconomic Concept M + +

Microeconomics Area of Economics Explains behavior and decision making by small units: –Individuals –Firms Determine prices Explain individual economic decisions

Measuring Demand Informally Visit competitors Poll consumers Collect historical data from years past

DEMAND SCHEDULE FOR COMPACT DISCS (pg. 90) PRICE QUANTITY DEMANDED $

The Demand Curve $35 0

LAW OF DEMAND The quantity demanded of a good or service varies inversely with its price When the price goes up the quantity demanded goes down.

Individual and Market Demand Curves Price $ Larry + Curly = Market =

Market Demand Curve

Diminishing Marginal Utility/Benefit and Thinking at the margin The extra usefulness from one more unit of product. $1.00 $1.00 $1.00 $1.00 Cost Benefit $2.00 $1.50$1.00 Benefit Benefit - $.50

$1.00

FACTORS AFFECTING DEMAND Changes in ‘Quantity Demanded’ Movement along the demand curve Response to a change in price –The Income Effect A decrease in price makes one feel ‘richer’ –Real income increases An increase in price makes one feel ‘poorer’ –Real income decreases

Changes in Quantity Demanded (cont’d) The Substitution Effect –Change in price relative to other products –Decrease in price of concert tickets Cubs tickets (substitute) in ‘real’ dollars increases

Change in Demand Increase in Demand Decrease in Demand $4 5

Change in Demand People are willing to buy more at each and every price Decrease in demand –Curve shifts down and to the left Increase in demand –Curve shifts up and to the right

Reasons for Change in Demand Change in Consumer Income Change in Consumer Taste –Advertising –Bad Press –Fashion trends and Health trends –New Products –Seasonal

More Shifts in Demand A Change in the price of a subsitute. –Price of butter increases Demand for margarine increases –Price of rice decreases Demand for potatoes decreases –Price of Thanksgiving Turkey increases Demand for Ham increases

More Shifts in Demand A change in the price of a complement –The price of contac lense solution goes down Demand for contact lenses increases –The price of paper increases Demand for pens, pencils, white-out, decreases –The price of coffee goes down Demand for coffee filters goes up

More Shifts in Demand Change in Expectations –Hurricane Ike is expected to hit the Gulf of Mexico at Level 4 tomorrow Increase in the demand for gasoline –A blizzard is forecasted to dump 12 inches of snow over night Increase in the demand for milk, water, canned food

Population changes Change in the number of consumers –Immigration –Wartime –A cure for cancer –Better health care for the elderly –The Plague

Change in Demographics Ethnicity