1. DEMAND QUANTITY DEMANDED SHIFTS IN DEMAND ELASTICITY OF DEMAND

2. MICROECONOMICS  THE STUDY OF THE BEHAVIOR & DECISION MAKING OF SMALL UNITS SUCH AS INDIVIDUALS & FIRMS DEMAND

3. Demand  Demand = desire, ability and willingness to own something.  The law of demand = when a good’s price is lower, consumers will buy more of it. When the price is higher, consumers will buy less of it.

4. THE LAW OF DEMAND As the price of a good or service rises, the quantity that is demanded falls and vice versa, assuming ceteris paribus.

5. Ceteris paribus (# 10 on your worksheet) In the law of demand, we do not include outside factors beyond price.

6. THE LAW OF DEMAND THE SUBSTITUTION EFFECT THE INCOME EFFECT

7. Demand Schedule – table showing combinations of price and quantity demanded of a good or service.

8. The Demand Curve  A demand curve is a graphical representation of a demand schedule. (#6)  The demand curve is downward sloping showing the inverse relationship between price (on the y-axis) and quantity demanded (on the x-axis) (#9)  When reading a demand curve, assume all outside factors, such as income, are held constant. (This is called ceteris paribus) Let’s draw a new demand curve for milk… 8 Copyright ACDC Leadership 2015

9. GRAPHING DEMAND Q $5 4 3 2 1 Price of Milk Quantity of Milk Demand Schedule 10 20 30 40 50 60 70 80 Draw this large in your notes 9 Price Quantity Demanded $510 $420 $330 $250 $180 Copyright ACDC Leadership 2015

10. Why does the Law of Demand occur? ( Take notes at bottom of guided reading) The law of demand is the result of three separate behavior patterns that overlap: 1. The Substitution effect 2. The Income effect 3. The Law of Diminishing Marginal Utility We will define and explain each… 10 Copyright ACDC Leadership 2015

11.  If the price goes up for a product, consumer buy less of that product and more of another substitute product (and vice versa) 1. The Substitution Effect  If the price goes down for a product, the purchasing power increases for consumers -allowing them to purchase more. 2. The Income Effect Why does the Law of Demand occur? 11 Copyright ACDC Leadership 2015

12.  Utility = Satisfaction  We buy goods because we get utility from them  The law of diminishing marginal utility states that as you consume anything, the additional satisfaction that you will receive will eventually start to decrease  In other words, the more you buy of ANY GOOD the less satisfaction you get from each new unit consumed. 3. Law of Diminishing Marginal Utility Why does the Law of Demand occur? 12 Copyright ACDC Leadership 2015

13. Change in Quantity Demanded A change in the quantity of the product purchased in response to a change in price – DEMAND CURVE DOES NOT SHIFT

14. Movement along the demand curve is a change in QUANTITY DEMANDED.

15. Change in Demand A change in the quantity of the product purchased at all possible prices - DEMAND CURVE SHIFTS

16. Shifts in Demand  Ceteris paribus-“all other things held constant.”  When the ceteris paribus assumption is dropped, movement no longer occurs along the demand curve. Rather, the entire demand curve shifts.  A shift means that at the same prices, more people are willing and able to purchase that good. This is a change in demand, not a change in quantity demanded PRICE DOESN’T SHIFT THE CURVE 16 Copyright ACDC Leadership 2015

17. Determinants of Demand  B - Change in Number of Buyers  R- Change in Price of Related Goods (complements and substitutes)  I - Change in the Consumer Income  T – Change in Consumer Tastes and Preferences  E- Change in consumers’ price expectations

18. Shifts in Demand Demand price Quantity of pecans per day

19. DEMAND SHIFT DETERMINANTS OF DEMAND-REASONS FOR CHANGES IN DEMAND CHANGES IN INCOME OR WEALTH CHANGES IN NUMBERS OF CONSUMERS CHANGES IN TASTES AND PREFERENCES CHANGES IN THE PRICE OF RELATED GOODS SUBSTITUTES COMPLEMENTS CHANGES IN CONSUMER EXPECTATIONS D D2 S S D P Q P1 P2 Q1Q2 SHIFT RIGHT-INCREASED DEMAND SHIFT LEFT-DECREASED DEMAND P Q P1 P2 Q1Q2

20. MEMORY AID – “BRITE” Tastes and Preferences - EX. People prefer the Nike shoe to other brands because it uses newer technology. Demand increases, curve shifts right. Related Goods and Services - Complements and Substitutes – EX. The price of shoe laces quadruples. People start to wear more sandals, demand decreases, curve shifts left Income - EX. NBA gives all players a huge raise, they can now buy more shoes. Demand increases-Curve shifts right Buyers, Number of, and Consumer Information - EX. Sports arena is closed for renovations and all games are moved to a different county. Fewer Sports fans visit the Nike store next to the arena. Fewer buyers demanding goods, Demand decreases-curve shifts left Expectations - EX. People hear that price of Nikes will go up in the future. They stock up now. Demand increases-curve shifts right

21. SUMMARY – DEMAND RELATIONSHIP EQUATION Demand=consumer=buyer=utility=lower price=higher quantity demanded=Law of Demand=spending=inverse relationship=negative slope=downward curve=revenue curve P Q D

22. NOW YOU PRACTICE COMPLETE Activities 1 and 3 on Demand..\Music\Cupid - Cupid Shuffle (Music Video).mp4..\Music\Cupid - Cupid Shuffle (Music Video).mp4

23. Review – The Law of Demand  Consumers will be motivated to buy more goods and services at lower prices than at higher prices. In short hand, as price increases, the quantity demanded decreases.  Therefore, there is an inverse relationship between price and quantity demanded on the demand curve in a market.  Remember that demand starts with the letter D for Downward-sloping. On the sample demand curve below, you can see how the quantity demanded decreases as the price increases. P Q D

24.  DEMAND refers to all of the prices and quantities of consumers in the market for a good.  A change in the price of a good, service, or factor of production causes “a movement along the demand curve” also known as a “change in quantity demanded”. The price change causes a movement along the demand curve showing a different quantity consumers will purchase at the new price. This is DIFFERENT from a change in demand which SHIFTS the entire curve. Change in Quantity Demanded vs. Change in Demand

25. Movement along the curve The graph below shows a change in quantity demanded and is caused by a price change NOT a determinant of demand: Ceteris paribus

26. Change in Demand Shift in Demand  The curve will move left (decrease) or right (increase)  This is the result of a change in something (a determinant) OTHER than price.  What are the non price determinants?  B – number of buyers  R – price of related goods (substitutes or complements)  I – Income  T – tastes and preferences  E – buyer expectations

27. The entire demand curve shifts Shift to the left = decrease

28. The entire demand curve shifts Shift to the right = increase

29. ELASTICITY OF DEMAND

30. Key Terms  elasticity of demand: a measure of how consumers respond to price changes  Elastic demand: describes demand that is very sensitive to a change in price  Inelastic demand: describes demand that is not very sensitive to price changes  unitary elastic: describes demand whose elasticity is exactly equal to 1  total revenue: the total amount of money a company receives by selling goods or services

31. Consumer Response  Elasticity of demand – how consumers respond to price changes; it measures how drastically buyers will cut back or increase their demand for a good when the price rises or falls.  Your demand for a good that you will keep buying despite a price change is inelastic.  If you buy much less of a good after a small price increase, your demand for that good is elastic.

32. Elastic Demand Comes from one or more of these factors: 1. The availability of substitute goods (S) 2. Percentage of your income that a good or service requires (I) 3. If the good or service is a necessity or a luxury (N)

33. Measuring Elasticity  What is the homeowner’s elasticity of demand for gasoline?  What factor affected elasticity?

34. Factors Affecting Elasticity Is there a Substitute?  If there are a few substitutes for a good, then even when its price rises greatly, you might still buy it.  If the lack of substitutes can make demand inelastic, a wide choice of substitute goods can make demand elastic.

35. What percentage of income is the good or service?  how much of your budget you spend on a good.  Spend alot = Elastic  Spend a little = Inelastic

36. Is the good a necessities or a luxury?  Is the good necessary for survival?

37. Total Revenue Elasticity is important to the study of economics because elasticity helps us measure how consumers respond to price changes for different products. The elasticity of demand determines how a change in price will affect a firm’s total revenue or income.

38. Checkpoint: Why does a firm need to know whether demand for its product is elastic or inelastic?  Knowledge of how the elasticity of demand can affect a firm’s total revenues helps the firm make pricing decisions that lead to the greatest revenue. If a firm knows that the demand for its product is elastic at the current price, it knows that an increase in price would reduce total revenue. If a firm knows that the demand for its product is inelastic at its current price, it knows that an increase in price will increase total revenue.