1. Bell Ringer A gallon of gas Big Mac Apple iPhone 7 Car
How much would you be willing to pay for the following items?
A gallon of gas
Big Mac
Apple iPhone 7
Car

2. Bell Ringer
How much would you be willing to pay for the following items?
A gallon of gas - $2.10
Big Mac - $3.99
Apple iPhone 7 - $600
Honda Accord - $24,000

3. Explain the law of demand. Interpret and create a demand curve.
Objectives
Explain the law of demand.
Interpret and create a demand curve.

4. The Law of Demand
Demand is the desire to own something and the ability to pay for it.
The law of demand states that when a good’s price is lower, consumers will buy more of it.
When the price is higher, consumers will buy less.

5. The Law of Demand
Law of Demand
P D
RELATIONSHIP
INVERSE

6. The Law of Demand
How does the law of demand affect the quantity demanded?
Price changes always affect the quantity demanded because people buy less of a good when the price goes up.
By analyzing demand schedules and demand curves, you can see how consumers react to changes in price.

7. The Demand Curve
A demand curve is a graphic representation of the Law of Demand.
The vertical axis is always price (P).
Lowest prices at the bottom and the highest prices at the top.
The horizontal axis is quantity demanded (Qd).
Lowest quantity at the left and the highest quantity demanded on the right.

8. Answer: They both have a negative slope.

9. Quantity Demanded/Day Price of “Supplements”
Price of Energy Drink
Quantity Demanded/Day
Price of “Supplements”
$1.00 35
$10.00 70
$4.00 5
$40.00 10
Mr. Lange’s One Stop Nutrition Shop $ $ $ $ $ $ $ $ $ $
EXTREME

10. Closure
Working by yourself or with a partner, answer questions 2, 9, and 11 on page 90 in your notes.
We will be discussing the answers together as a class.

11. What happens to the demand…
Bell Ringer
for ice cream when the price of ice cream drops?
for cars when people get a tax refund?
for umbrellas after the first monsoon?
for hot dogs when the price of hot dog buns rises?
for gasoline today when people expect prices to fall tomorrow?
What happens to the demand…

12. Objectives Define determinants of demand.
Explain how these determinants affect demand.
Give an example of how a change in demand for one good can affect demand for a related good.

13. Introduction
Predicting demand is accurate only as long as the ceteris paribus assumption—that all other things are held constant—is true.
However, hardly anything stays constant in the market (or in life!).
When we drop the ceteris paribus rule and allow other factors to change, the entire demand curve shifts. 13

14. Determinants of Demand
Consumer expectations
Substitution Effect
Income Effect
Normal goods vs. Inferior goods

15. Consumer Expectations
The current demand for a good is directly related to its expected future price.
If you expect the price to rise, your current demand will rise, which means you will buy the good sooner.
If you expect the price to drop, your current demand will fall, and you will wait for the lower price.
Checkpoint Answer: It causes the demand for a good to increase. 15

16. The Substitution Effect
The substitution effect takes place when a consumer reacts to a rise in the price of one good by consuming less of that good and more of a substitute good. 16

18. Complements and Substitutes
The demand curve for one good can also shift in response to a change in demand for another good.
Complements are two goods that are bought and used together.
Substitutes are goods that are used in place of one another.
NOTE TO TEACHERS: The snowboard and boots are two goods that are complements because they are bought and used together. 18

20. The Income Effect
When the price of something goes up, you feel poorer.
When the price of something goes down, you feel wealthier. 20

21. VS. Normal vs. Inferior Goods
Normal goods  goods/services for which demand increases when real income increases
Inferior goods  goods/services for which demand increases when real income decreases
VS. 21

23. 1. What does it mean when you have demand for a good or service?
Pop Quiz
1. What does it mean when you have demand for a good or service?

24. Pop Quiz
2. The Law of Demand states that consumers will buy less of a good when its price goes up/down, and vice versa.
(choose one)

25. Pop Quiz
3. The Law of Demand expresses an __________ relationship between price and demand.

26. Pop Quiz
4. True or False: When the price of a good/service changes, so does the demand for that item.

27. Pop Quiz
5. a. When the price of gasoline goes up, the demand for new automobiles goes up/down. b. This is because gasoline and automobiles are ____________ of each other.

28. Pop Quiz
6. a. When the price of Nutella goes up, the demand for peanut butter goes up/down. b. This is because Nutella and peanut butter are _____________ for each other.

29. Closure
5 COMPLEMENTS
Good or Service
5 SUBSTITUTES

30. Bell Ringer
How many advertisements do you think the average American sees in a day?
Have you seen an ad so far today? What was it for? Where did you see it?

31. Bell Ringer
How many advertisements do you think the average American sees in a day?
Answer:
5,000 – 10,000
Source

32. Demographics
Demographics are the characteristics of populations, such as age, race, gender, income, and education level.
Businesses use this data to classify potential customers.
Demographics also have a strong influence on packaging, pricing, and advertising.
What would be your demographic information? 32

33. Demographics Mr. Lange’s demographic information: 34 years old
White
Master’s degree
Male
Heterosexual
Divorced
Political independent
Father
Rents home
Teacher
Religion - Unaffiliated 33

34. Advertising
Advertising is a factor that shifts the demand curve because it plays an important role in many trends.
Companies spend much of their overall budget on advertising in the hope that it will increase the demand for the goods they sell.

35. In 2014, Coca-Cola spent approximately $3
In 2014, Coca-Cola spent approximately $3.5 billion on advertising worldwide.
What did this buy them?
3.1% of all beverages consumed around the world (not including water) are Coca-Cola products  Best selling product in the world
The Coca-Cola logo is recognized by 94% of the world's population
Coca-Cola is the second-most understood term in the world, behind “okay.”
Source

36. “If Soda Commercials Were Honest”

37. Advertising
Why is the effect of advertising on overall demand unpredictable?

38. Advertising Dodge Ram Trucks commercial (2013): “Farmer”
Who is the target population/demographic?
What symbols/imagery help show this?

39. Create a list of images and emotions conveyed in the advertisement.
Who is the target demographic?

40. “Mad Men” Project Objective:
Each design team will work together to create a print advertisement that will attract the most customers from their target population.

41. “Mad Men” Project
1. Your design team (3-4 members) will create the packaging and advertising for a random product and random target population.
2. First, discuss the target buyers with the other members of your group. What is a member of this population looking for in your product? What kinds of images and words are going to make such a buyer want to buy the product?
Brainstorm together and make a list of words and images that you think would appeal to your target population.

42. “Mad Men” Project
3. Create an advertisement for your original product. Work with your team to decide on the product’s shape, pictures, colors, and layout. Your advertisement must include copy (a slogan or description), a distinct packaging design for your product, and lots of color.
4. When your product/ad is finished, you will present it to the class.

43. Bell Ringer
Predict how people’s buying habits would change under the following circumstances (ceteris paribus):
The price of gas increases from $2.00/gallon to $5.00/gallon
The price of a haircut increases from $15 to $40
The price of cell phone service increases from $50/month to $100/month
The price of milk increases from $3/gallon to $8/gallon

44. Objectives
Describe the difference between elastic and inelastic demand.
Identify factors that affect elasticity.
Explain how firms use elasticity and revenue to make decisions.

45. Elasticity of Demand
Elasticity of demand is the way that 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.
If you will keep buying a good despite a price increase, your demand for that good is inelastic.
If you buy much less of a good after a small price increase, your demand for that good is elastic.

46. Elasticity of Demand
In your notes, generate a list of five goods/services with elastic and inelastic demand.
Try to come up with at least one good/service with perfectly elastic and inelastic demand.
Elastic or Inelastic? 

47. Bell Ringer
Food is a necessity. So why is there elastic demand for Little Caesar’s Pizza?
Clothing accessories are not a necessity. So why is there inelastic demand for Louis Vuitton purses?

48. Introduction
Elasticity of demand is determined by one or more of these factors:
The availability of substitute goods
A limited budget that does not allow for price changes
The perception of a good as a luxury item.

49. Factors Affecting Elasticity
Availability of Substitutes
If there are a few substitutes for a good, then even when its price rises greatly, you might still buy it.
A lack of substitutes can make demand inelastic; a wide choice of substitute goods can make demand elastic.
Other examples? 49

50. Other Factors Relative Importance Necessities vs. Luxuries
A second factor in determining a good’s elasticity of demand is how much of your budget you spend on a good.
Think of this as the income effect on a case-by-case basis
Necessities vs. Luxuries
Whether a person considers a good to be a necessity or a luxury has a great impact on a person’s elasticity of demand for that good.

51. Total Revenue and Elastic Demand
The law of demand states that an increase in price will decrease the quantity demanded.
When a good has elastic demand, raising the price by a small percentage will decrease the quantity sold by a large percentage.
The quantity sold will drop enough to reduce the firm’s total revenue.
$8.99/
month $6

52. Total Revenue and Inelastic Demand
If demand is inelastic, consumers’ demand is not very responsive to price changes.
Therefore, raising the price of each unit will not significantly decrease the quantity sold.
This will result in higher total revenues.
$399.99
$69,900 52

53. Answers: 1. Because people will not pay the higher prices for that good. 2. Total revenue decreases as well. 53

54. Elastic/Inelastic Review

55. Analyzing Elasticity of Demand
Some of the goods and services people consume have no adequate or available substitutes; others have many.
Some are daily expenses, while others are things people spend money on only occasionally.
Some are necessities—things people must have—and others are luxuries that meet wants, not needs.
All these factors can have an effect on whether the price of a good or service is elastic or inelastic for a consumer.

56. Analyzing Elasticity of Demand
Good or Service
Substitutes
Necessity or Luxury?
Elastic or Inelastic?
 Explanation 1.
Starbucks coffee 2.
Bottled water 3.
Gasoline 4.
Nutella 5.
Professional hair cut 6.
Milk 7.
Netflix 8.
Braces (orthodontics) 9.
Beats headphones
10.
Playstation 4

57. Key Terms
elasticity of demand: a measure of how consumers respond to price changes
inelastic: describes demand that is not sensitive to price changes
elastic: describes demand that is very sensitive to a change in price