Do Now Please answer the following question: In your own words define the following two terms: Demand Supply

Demand How the consumer influences how I make money

Law of Demand Part One: As PRICE increases, DEMAND decreases Part Two: As PRICE decreases, DEMAND increases

Demand Curve A graph that illustrates the demand for a product It shows how much consumer desire for a product changes as the price changes

Elasticity of Demand The degree to which changes in price cause changes in demand – OR If we change the price, will demand change a lot or a little

Elastic Demand If Demand for a good is very sensitive to changes in price, the demand is ELASTIC – OR If prices change a little bit, demand will change a lot

Example of Elastic Demand Price of pizza goes up even a little bit, demand goes down a lot. The Demand Curve is FLAT

Inelastic Demand Demand for a good that consumers will continue to buy despite a price increase is INELASTIC – OR Even if a price changes a lot, demand changes very little

Example of Inelastic Demand The price of soap goes up a lot, the demand stays almost the same. The curve is very steep

Factors Affecting Elasticity Several different factors can affect the elasticity of demand for a certain good. 1- Availability of Substitutes – If there are a few substitutes for a good, the demand will not likely decrease as price increases (inelastic), the opposite (lots of substitutes) is also usually true (elastic) Ex. Gasoline has no substitutes- inelastic Ex. McDonalds has many substitutes (Burger King, etc)- elastic

Factors Affecting Elasticity (Cont) 2. Relative Importance – Another factor determining elasticity of demand is how much of your budget you spend on the good Ex. Mortgage payment must be paid (inelastic) where as entertainment (movies, etc.) are not necessary (elastic)

Factors Affecting Elasticity (Cont) 3. Necessities vs. Luxuries – Whether a person considers a good to be a necessity or luxury has great impact on the good’s elasticity of demand for that person Ex. Food (inelastic); Jewelry (elastic)

Factors Affecting Elasticity (Cont.) 4. Changes Over Time – Demand sometimes becomes more elastic over time because people can eventually find substitutes Ex. Blockbuster used to be the only place to rent videos (inelastic) Netflix, Video on Demand, Pay Per View– all of these are now substitutes for Blockbuster (elastic)

Classwork Guided Reading 4-1 Define vocabulary words on pages 91-95

Change in Demand A demand curve is only accurate as long as there are no changes other than price that could affect a consumer’s decision When factors other than price (non-price factors) affect the demand curve, the entire curve shifts to the left or to the right

Non-Price Factors that Affect Demand These factors will cause the demand curve to shift to the left (less quantity demanded) or to the right (more quantity demanded) Ex. Recently, Farley High School changed boy’s hockey from a varsity sport to an intramural sport. As a result, they needed to buy fewer hockey pucks. The decrease in demand is shown by a shifting demand curve.

1. Change in Income As people earn more money, the demand for luxury goods will increase As people earn less money, the demand for luxury goods will decrease. Ex. If I win the lottery, I’ll buy a Jaguar. If I get laid off, I’ll take the bus.

2. Substitution Effect If there is a substitute product, demand for an item may be influenced by the price of the substitute. Ex. If the price of butter goes up, people will substitute with margarine.

3. Complimentary Products The demand for an item will increase or decrease if the price of a complimentary product (something that goes with it) increases or decreases. Ex. If the price of hot dogs goes up, the demand for hot dogs goes down. This decreases the demand for hot dog buns.

4. Changes in Attitude's As people’s attitudes about products change, so does the demand. Ex. Fashion, music, food

How does Scarcity Affect Demand? If there is a scarcity of an item, the demand goes up Ex. Gasoline

How Does A Boycott Affect Demand? If an item is being boycotted, there is little to no demand for the item. Ex. During the Montgomery bus boycott, there was little or no demand for the Montgomery bus system

How Does the War In Iraq Affect Demand? Increases demand for war-related resources. Ex. Metal (bullets, vehicles), cloth (uniforms), gas masks Increases demand for news Ex. News interruptions during television shows, new news stations, internet sites.