Ch. 7 Market Structures Ch. 4: Demand Ch. 5: Supply Ch. 6: Prices Unit 2: How Markets Work Essential question: Who benefits from the free market economy? Ch. 7 Market Structures Ch. 4: Demand Ch. 5: Supply Ch. 6: Prices

Chapter 4: Demand Essential Question: How do we decide what to buy?

What is demand? Demand is BOTH The desire to _________________ __ 2. The willingness (and ability) ____________________ _________________ The LAW OF DEMAND says that as _________increases, _________ Demanded decreases OR, in other words, consumers will buy more of a good when its price is lower and less when its price is higher This is the single most famous law in all of economics!

The Demand curve We are ONLY looking at changes in ________ here! Everything else is held constant ceteris paribis: Latin phrase for ______________________ ______________________

Graphing demand Practice Time! Refer to “Market Forces of Supply & Demand (ch 4) PowerPoint) This is a separate PowerPoint found on the blog It’s the one with the ice cream example

The substitution and Income Effects We know as economists that people respond to incentives in predictable ways… If something (pizza?) gets too expensive, people will buy less of it and buy more of something else , thus making a substitution. How does this affect the demand curve? If prices rise, the law of demand tells us…. Why? Because we feel poorer! So we buy less overall.

Section 2: Shifts in the demand curve To move the ENTIRE curve takes something MORE than just a change in price because the quantity demanded AT EVERY PRICE is changing! In other words, ΔQD ≠ΔD!!!!! Remember that a change (Δ) in price (P)means a change in quantity demanded (QD) This is a movement ALONG THE CURVE, not a movement of the whole curve itself! This is a really big deal!

What could cause this? __________ ________________ _______________ What makes the demand curve shift to the left or right? __________ ________________ _______________ ______& _________ 6. A ________in the price of ____________ goods a. ___________________ b. ___________________ Remember that it’s shifting left or right (not up and down), and this indicates an increase or decrease.

What are related goods? Substitutes Goods that are used in place of one another Hamburger instead of _________ ________instead of red meat Pop Tarts instead of _______ ______ and ___________

Related goods continued Complements Are goods that are bought and used together Snowboard and ________ Hot dogs and _________ Spaghetti sauce and ____ Bathing suits and _______ Smart phones and ______

Section 3: elasticity of demand One of the things economists can measure and predict is how responsive consumers will be to changes in price. This is known as the ______ of_______ Being able to measure this will tell us how _____or ____consumers will change how much they buy if the price is increased or decreased. Goods can be ______ or ____________.

Elasticity continued How can you tell if a good is elastic or inelastic? Consider the following: Can the purchase be ________________? Are there adequate ___________________________________? Does the purchase use a large _______________________________? The more “yes” answers you get, the more ELASTIC demand is for the good/service. The more “no” answers you get, then demand for the good/service is inelastic Let’s think through some examples: Fresh tomatoes A House Gasoline when your tank is on E trip to the beach Gasoline from a particular gas station toilet paper Going to the doctor flowers for your yard Insulin flowers on Valentine’s Day Going to your uncle’s funeral in California Butter A college degree table salt

Elasticity continued Other factors affecting elasticity: 1. Relative _____________________ Clothing in a teenager’s budget Clothing in a stay-at-home-mom’s budget Shoelaces 2. Necessities vs. _______________________ Consumption of necessities doesn’t change much, even if prices change a lot Will vary from person to person 3. Change _______________________ Some items take a while to change (cars, housing)

Elasticity and revenue Does a company always make more money if they raise their prices on the good or service they sell? How do businesses use the Elasticity of Demand How much can they afford to raise or lower their prices? At what point will they actually start to lose money? See the charts on p.103 and p. 104