Microeconomics – Unit 2 part 2

Price P Quantity Demanded Qd $ Let’s assume Lindsey would see the quantity demanded at the following prices: 5 of 29

Price P Quantity Demanded Qd $ P Q D Qd just a point on the curve. is the entire curve. To be on the demand curve a person must be WILLING and ABLE to purchase the product or service. We can graph that demand schedule of 31

Q D Qd--it is the amount that will be purchased at a specific P. Definitions: D--it is a schedule of quantities of goods and services that will be purchased at various prices at a specified time, all other things held constant. P

Q D Qd just a point on the curve. is the entire curve. Price changes Quantity Demanded Price DOES NOT CHANGE DEMAND! 8 of 29

Law of Demand Quantity demanded rises as price falls, & quantity demanded falls as price rises, other things constant.

2 exceptions: (1) Giffen goods quantity demanded increases when price increases – in the case of inferior goods; product would have to be one that formed a large part of the total expenditure. IB extension con’t …

(1) Giffen goods 19 th century economist Giffen claimed that in England the rise in English bread prices reduced real income so much (because that’s what people were spending most of their money on) that consumers bought more bread – bread being an inferior good. IB extension (con’t) 11 of 29

(2) Veblen goods Early 1900’s economist Thornstein Veblen argued that for some ostentatious goods (yachts, Rolls Royce, Tiffany heart necklaces) as price rises on the good, quantity demanded rises. He argued that humans consumed to strut around & show that they could “afford it.” IB extension

What happens if P changes from $7 to $8? Q $ D The ___________ ___________ changes, not ____________. P at $7 people would demand _____ rather than _____ Quantity Demanded demand 5 8 at $9 people would demand _____ rather than _____ 2 4 D1D1 this is a shift in demand But you can shift demand....meaning that

What can shift demand? Let’s say that with all the new homes, there are 100 additional students (consumers) at CHS. What will happen to demand for Lindsey’s lanyards at the same prices? P Q S D P Q D1D1 P1P1 Q1Q1 AFTER shifting demand, then tell us, what happens to P & Q? P  & Q  hold off on note-taking 14 of 29

P Q S D P Q D1D1 P1P1 Q1Q1 This is why supply & demand are important. The curves themselves don’t matter – it’s where they ____________. So from this graph when D shifted P ____ & Q ____ Their intersection is called ______________ and it tells us the market-clearing __________ & __________ at which all products will be bought & sold. intersect equilibrium pricequantity  

What can shift demand? Harkins opens 2 new theaters in Chandler and employs even more CHS students at a higher wage of $7.25/hour. What happens to demand? P Q S D P Q D1D1 P1P1 Q1Q1 What happens to P & Q? P  & Q 

What can shift demand? Lindsey has been selling for $4.00 and decides to raise the price to $6.00. What happens to demand? P Q S D P Q P1P1 Demand does NOT shift.  P does not shift demand.  P is movement along the demand curve. Q1Q1

P Q S D P Q D1D1 P1P1 Q1Q1 What can shift demand? Lindsey wouldn’t let the 3 most popular cheerleaders copy her math homework. Now they refuse to wear the lanyards and make fun of people wearing them. What happens to demand? What happens to P & Q? P  & Q 

P Q S D P Q D1D1 P1P1 Q1Q1 What can shift demand? Lindsey has been selling lots of lanyards that the market-clearing price of $4.00. Then the CHS administration decided to permit students to wear their ID’s on clips as well as lanyards. Business-minded Ben started selling metal clips at $1.00 each during lunch. What happens to the demand for Lindsey’s lanyards? What happens to P & Q? P  & Q  19 of 29

What can shift demand? Lots of students like to also buy plastic pockets for $1.50 from the book store to hold their ID’s to wear along with Lindsey’s lanyards. Suddenly Lindsey saw the price of her lanyards drop from $4 to $2. What happens to the demand for plastic pockets? P Q S D P Q D1D1 P1P1 Q1Q1 What happens to P & Q of plastic pockets? P  & Q  Plastic Pockets

What can shift demand? The CHS administration feels guilty for making students wear their ID’s and the high cost involved. So the Administration decides to subsidize the cost of lanyards and gives students $1.00 to help them pay for each lanyard. What happens to demand? P Q S D P Q D1D1 P1P1 Q1Q1 What happens to P & Q? P  & Q 

P Q S D P Q D1D1 P1P1 Q1Q1 What can shift demand? A lot of gossipy students got wind of Lindsey’s plans to drop her price in half starting next week since it’s near the end of the school year. What happens to the demand for Lindsey’s lanyards this week? What happens to P & Q? P  & Q 

Variables that Shift Demand: Number of consumers Income (Y) Normal Goods Preferences / Tastes Related products price of Complements Expected future P by consumers Subsidies / Taxes N I E P R S Inferior Goods future Y by consumers price of Substitutes resume note-taking

Income--Normal Goods Income--Inferior Goods As consumers’ income (Y) goes up demand for normal goods increases. As consumers’ Y goes down, demand for normal goods decreases. As consumers’ income goes up demand for inferior goods decreases. As consumers’ Y goes down, demand for inferior goods increases. Income Normal Goods I Inferior Goods 24 of 29

Make sure you can correctly draw the graphs illustrating a shift in demand. P Q S D P Q D1D1 P1P1 Q1Q1 lanyards P Q S D P Q D1D1 P1P1 Q1Q1

Note the elements of an acceptable IB / AP graph: P Q S D P Q D1 High-Definition TV’s title of graph dotted line to show where point is on y & x axis x axis labeled y axis labeled P1P1 Q1Q1

Note the elements of an acceptable IB / AP graph: P Q S D P Q D1 High-Definition TV’s equilibrium P & Q labeled shifts in curves noted with arrows & new color ink P1P1 Q1Q1

Note the elements of an acceptable IB / AP graph: P Q S D P Q D1 P1P1 Q1Q1 High-Definition TV’s changes in P & Q noted with arrows & new color ink new numbers for P & Q labeled P 1 & Q 1 28 of 29

In English pubs, ale is ordered by pints and quarts. So in old England, when customers got unruly, the bartender would yell at them to mind their own pints and quarts and settle down. It's where we get the phrase... “Mind your P's and Q's."