Unit 4 Demand Where do “prices” come from?

How are prices determined in economic systems?

“ Demand is the combination of the willingness (have motivation) and ability (have money) among consumers to purchase at a particular price.” “Demand” defined: Basic Terms in Economics: Demand

The Law of Demand Law of Demand: There is an inverse relationship between the price of a good and the quantity consumers are willing to purchase. Law of Demand: There is an inverse (opposite) relationship between the price of a good and the quantity consumers are willing to purchase. What helps explain this relationship???  The availability of substitutes - goods that do similar functions - explains this negative relationship $ Q What does the graph show? Inverse relationship!

As consumption increases, additional benefit decreases. –When benefits > costs: consumption continues –When benefits < costs: consumption ends Simply put, too much of something is a bad thing. This law also happens explain why the curve slopes downward. The first bottle of water satisfied your thirst. The second bottle made you feel totally full. The third bottle made you sick. What else does the graph show? Law of Diminishing Utility EXAMPLE:

Utility (happiness) Quantity Consumed The Law of Diminishing Utility

A market demand schedule is a table that shows the quantity of a good people will demand at different prices. CELL PHONE EXAMPLE  Consider the market for cell phones (Verizon).  A market demand schedule lays out the amount of cell phones that are demanded in the market for a spectrum of prices.  We can graph these points (price and the demand for them) to make a demand curve for cell phones. Where do we get the data for our Demand Curve? From a “Market Demand Schedule”

Market Demand Schedule Cell Phone Price (monthly bill) Millions of Cell Phone Subscribers $ $ $ $ $ $ $ Price (monthly bill) Quantity (of Cell Phone Subscribers) Assume this is for a unlimited minute & data package. Notice that the demand/price relationship is more responsive at certain price points.

Price (monthly bill) Quantity (of Cell Phone Subscribers) law of demandNotice how the law of demand is reflected by the shape of the demand curve. As the price of a good rises …... consumers buy less. Demand Curve Market Demand Schedule

 The slope of the demand curve at any quantity shows the maximum price that consumers are WILLING and ABLE to pay for that additional unit. Q: What happens as prices ↑ & Q ↓ ? A: utility diminishes Demand Curve & Utility Law of Diminishing Utility Price (monthly bill) Quantity (of Cell Phone Subscribers)

Demand Review What is quantity demanded? What does the law of diminishing utility state? What is the law of demand?

ELASTICAND INELASTIC DEMAND

The Demand & Price relationship is not the same for every product. LAW OF DEMAND: INVERSE RELATIONSHIP BETWEEN PRICE AND QUANTITY. …but sometimes the relationship between PRICE and a change in DEMAND is not as strong for some goods. : PRICE STRONGER LAW RELATIONSHIP : PRICE WEAKER LAW RELATIONSHIP MORE SUBSITITUTES LESS SUBSITITUTES

Elasticity of Demand Elasticity is a measure of responsiveness between change in demand and a change in the price.  It tells how much demand changes when you change the price.  2 Types of Elasticity:  Inelastic  Elastic

Elastic Demand Elastic Demand: quantity demanded is sensitive to small price changes.  Easy to substitute a good that has elastic demand. HAS MANY SUBSTITUTES  When price increases, demand decreases (business revenue decreases)  Example: price of a good with many substitutes, such as bottle water or soda.

Inelastic Demand Inelastic Demand: quantity demanded is NOT sensitive to price changes.  Hard to find substitutes for the good. HAS FEW OR NO SUBSTITUTES  When price increases, business revenue increases  Example: needed medication for an illness, such as Chemo-Therapy & gas.

Elastic and Inelastic Demand Curves Gasoline Tacos (from 8 to 7 units).  If the market price for gasoline was to rise from $1.00 to $5.00, the quantity demanded in the market decreases insignificantly (from 8 to 7 units). (from 8 to 1 unit).  If the market price for tacos rises from $1.00 to $5.00, the quantity demanded in the market decreases significantly (from 8 to 1 unit). sensitive elastic  Taco demand is highly sensitive to price changes and can be described as elastic; gasoline demand is relatively insensitive to price changes and can be described as inelastic. ELASTIC INELASTIC

Elasticity Over Time Short-Run - Consumers don’t have enough time to adjust to the price change in a short period of time (ex: stuck with the current product with no substitutes).  Demand tends to be inelastic in the short-run Long-Run - Consumers have enough time to adjust in a longer period of time (ex: we will find a substitute to gas if the price remains high).  Demand tends to be much more elastic in the long-run

Review What does elasticity measure? What is elastic demand? What is inelastic demand? What is demand in short run? What is demand in long run?

“Changes in Quantity Demanded” “Changes in Demand” Versus What will cause the demand curve to shift?

Changes in the Demand Curve versus Quantity Demanded  Change in Demand Curve - shift OF the entire demand curve.  Change in Quantity Demanded - movement ON the same demand curve due to a PRICE change. 15 $ Price Quantity A shift to the left = decrease in demand A shift to the right = increase in demand 15 $ Price Quantity

THE DETERMINANTS OF DEMAND THE ONLY FACTORS THAT CAN CAUSE A DEMAND CURVE TO SHIFT TO THE LEFT (decrease) OR RIGHT (increase). 15 $ Price Quantity

What specific things determine the position of the demand curve? “P.O.I.N.T.” Position of the Demand Curve? 1. Price of Related Products 2. Outlook (Consumer Expectations) 3. Income 4. Number of consumers 5. Tastes

Substitute Goods: –As price of one rises the demand for the other rises –As price of one falls demand for the other falls 1. PRICE OF RELATED GOODS Example: Dr. Thunder and Dr. Pepper. (assuming they taste the same) = $D THE DETERMINANTS OF DEMAND “POINT”

“POINT” Complementary Goods: (they go well together) –As the price of one rises the demand for the other falls –As the price of one falls the demand for the other rises. Example: Gas, SUVs, and tires. += $ Which way will the Demand curve for Tires shift? A: Shift to the left DEMAND 1. PRICE OF RELATED GOODS THE DETERMINANTS OF DEMAND

3. INCOME 1. PRICE OF RELATED GOODS 2. OUTLOOK OF THE FUTURE Substitutes vs Complements This could work in numerous ways. For example: You hear there is going to be a recession so you stop spending today –OR– you hear that a sale on some clothing is ending soon so you run to make a purchase today. “POINT” INCOME effects S SS Superior and Inferior Goods in different ways. THE DETERMINANTS OF DEMAND

Superior Goods: –As income rises, demand will increase (shift right) –As income falls, demand will decrease (shift left) –Example: Expensive versus cheap cars Vs. Income Effects on Superior and Inferior Goods

Inferior Goods: risesfalls –As income rises demand falls fallsrises –As income falls demand rises Example: Compact cars, MP3 Players, etc. Income Effects on Superior and Inferior Goods

5. TASTES (Affected by attitudes, quality, advertising, etc.) 4. NUMBER OF BUYERS 3. INCOME 1. PRICE OF RELATED GOODS 2. OUTLOOK OF THE FUTURE Substitutes vs Complements Superior vs Inferior Goods This could work in numerous ways. For example: You hear there is going to be a recession so you stop spending today –OR– you hear that a sale on some clothing is ending soon so you run to make a purchase today. THE DETERMINANTS OF DEMAND “POINT”

JOHN STOSSEL VIDEO Link to Video Link to Video DETERMINANTS OF DEMAND Customer are getting even with help from the Internet. Focus on.. 1.How are customers getting back? 2.How has the Internet affected Elasticity of Demand? 3.How has the Internet affected any (or all) of the Determinates of Demand?

CHAPTER 4 DEMAND STUDY FOR THE TEST THE END