1. Unit 3 – Supply and Demand Chapter 4
The interaction of supply and demand creates the market price

2. Section 1 standards
SSEMI2a: Define the law of demand

3. Section 1: Understanding Demand
Demand is the desire, ability and willingness to pay for something.
Demand represents the buyers in a market

4. The Law of Demand When a good’s price is low, consumers will buy more
When a good’s price is high, consumers will buy less
This is very obvious, point that out. But sometimes even obvious statements need to be explained and studied. Why do we buy less if the price of something is higher? Ask the students and they will probably in their own words mention the answer – which is on the next slide

5. Explanation for the law of demand:
Substitution Effect: When people react to a price change by buying less of that good and more of other goods
The Income Effect - The change in consumption from a change in real income.
At high prices, we substitute other goods. If the price of oranges is high, we might buy apples. If the price of bricks is high, we will build houses out of lumber and siding. Of course, preference matters also, and sometimes we are willing to pay more for some things….
The other explanation for the law of demand is the income effect. Prices are relative to income. Such as the minimum wage when I was a teen was $4.25/hour. But a movie ticket was less than $5. That’s the income effect – when the price of an item or many items) is high, we buy less because our real income is less – buying at high prices uses up our income faster. When prices are low, we have more money to spend. The low gas prices these last 4 years (and by low I mean well below $3/gallon) has in a sense been a pay raise for millions of Americans.

6. Income and Preferences
Normal Good – people buy more if their income increases
example -
Inferior Good – people buy more if their income decreases
Related to the income effect, is our preference for certain goods based on our income. While the Law of Demand always applies (at high prices we buy less and at low prices we buy more) sometimes we buy more or less of something if our income changes
Normal Goods – eating out at a restaurant, a new car, vacation, designer clothing
Inferior Goods – cheaper foods, used car
Be careful here – sometimes people might feel slighted – what is an inferior good to higher income earners may be a normal good to lower earners. Example – steak is a normal good and ground beef is an inferior good. But to a very low earner or people in a poor country, ground beef is a normal good and cheaper proteins like beans or eggs are inferior goods. Another example might be Disney v. Six Flags.
Play the John Stossel Video from “Food Myths” – name brands v. store brands, also the coffee segment if you have time. Very similar.
Good to teach but a note – neither term are in the standards, but normal goods are in the teacher note. Inferior goods are not mentioned. I still recommend teaching both.

7. Funny meme – very appropriate actually.
Beer sales increase during economic slowdowns. Ask students for explanationis and they will probably ay “if you’re out of work you want to drink” or “people want to drink their troubles away”
Maybe there is some truth to that, but that’s not it. When people have less income during a recession they buy more beer at a store and drink at home, rather than pay more for drinks at rtestaurants, clubs, sporting events.

8. Demand Schedule Demand for 20 oz. drinks Price Qty .75 1.00 1.25
A table that lists the quantities that will be purchased at various prices
Schedules can be for an individual or a given population
I draw this table on my board or copy it to the smart board. Have students do the same in their notes
Survey the class – ask each student to think of how many vending machine drinks they would buy in a week at each price listed. Add up each total, walk around with a calculator, maybe have a student help you. Discuss the results. Point out that the quantity demand increases or decreases based on price. Important point – do not say “Demand goes up if price goes down” Instead, say “Quantity demand goes up if price goes down.” Why the importance? First, the demand curve When we get to graphing demand curves, an increase in d
A demand schedule for a population is the summation or combination of all the individual demands in that population – what you just did by adding up

9. Demand Curve A graph representation of a demand schedule
Can be used to predict the effect of price changes
Demand curves change if conditions change
The demand curve is created by plotting a demand schedule. Have students draw a demand curve based on their class vending machine demand schedule. Price always goes on the vertical axis and quantity on the horizontal axis.
Demand curves can used to extrapolate other prices – ask students to predict how many drinks they would buy at $1.50 or .50 based on the curve. Businesses do the same to predict the effect lowering or raising prices would have on their sales. Must be careful – it only applies to close prices changes or in-between prices rather than extreme outlying price changes.
Demand curves change if conditions change – for example, if more students were added to the class, how would that affect the chart you produced? It should produce higher numbers, which would shift the curve to the right. And that would be a true demand increase – a shift to the right, not a decrease in prices. Much more on that later.
Do the worksheet on graphing demand now. Also, ask students to bring in a magazine or some other publication with advertisements (catalog, sale paper) that there are OK with cutting up. This will be tomorrow’s activity. Everybody doesn’t need to bring one in, but the more that people bring and share, they’ll have a better number of choices

10. Change in Quantity Demand
A change in price only causes a change in quantity demand, not a change in demand
If the price changes from P1 to P2, the quantity increases from Q1 to Q2. That is NOT a change in demand. Has the demand curve moved? No, we’ve just moved from one point on the demand curve (A) to another point (B). That is not a demand change, it is a change in quantity demand.

11. Section 2: Shifts in the Demand Curve
Standards SSEMI3
Identify and illustrate on a graph the factors that cause changes in supply and demand

12. Change in Demand
A change in demand occurs if the quantity changes at each and every price because of a change in market conditions

13. A shift to the right is an increase
To the left is a decrease

16. What causes a change in demand?
There are at least six reasons why demand can change
1. Income – when income changes, people demand more or different types of goods

17. 2. Consumer Expectations
If people expect the price of something to increase in the future, demand will increase now
Opposite is also true

18. 3. Change in Population
More people want more stuff!
Opposite is also true

19. 4. Changes in Taste, Preferences Fads can increase demand temporarily
Bandwagon effect – “everybody else…”
Preferences can also show long term changes
Ex: More low fat food

20. 5. Change in price of complement
- If the price of a good increases, demand for its complement decreases
- opposite is also true

21. (what causes…cont) 6. Change in price of a substitute
If the price of a good increases, demand for its substitute increases
Opposite is also true
After this set of notes, I do a poster/chart assignment.
Materials: Magazines, Chart paper (enough for the class, divided into groups of about 3), scissors, glue and markers
Assignment: Students are to find examples of
- Complementary goods (1 pair)
- Substitute goods (1 pair)
- Normal goods (1-2 examples)
- inferior goods (1-2 examples)
- a good whose demand is decreasing (their best judgement)
- a good whose demand is increasing (their best judgement)
You can increase the number of examples for a larger group. Divide the paper into sections, label.

22. Section 3: Elasticity of Demand
Elasticity is how much a price change affects the quantity demanded
Elastic: a change in price will cause a relatively large change in quantity demanded
Inelastic: a change in price will cause a relatively small change in quantity demanded
Elasticity is on the GPS standards but not the GSE. I am not sure whether to cut this out entirely or not. Possibly the math on the last two slides, but it couldn’t hurt to define elasticity and the factors that affect elasticity.

23. Factors Affecting Elasticity
1. Availability of Substitutes – the fewer substitutes an item has, the greater its inelasticity
2. Necessity v. Luxury – if its considered a necessity, then the greater its inelasticity
3. Percentage of income- if an item uses a large portion of your income, it is more likely to be elastic.
4. Change over Time - a good is more elastic if the purchase can be delayed. In emergencies, people are more likely to pay higher prices
Examples of goods with elastic demands?
Examples of goods with inelastic demands?

24. 3. Percentage of income- if an item uses a large portion of your income, it is more likely to be elastic.
4. Change over Time - a good is more elastic if the purchase can be delayed. In emergencies, people are more likely to pay higher prices

25. The top chart shows inelastic demand – because the line is more vertical than horizontal, the quantity shows less change as the price changes
The bottom chart show elastic demand – because the line is more horizontal, the quantity shows a great change as price changes

26. Elasticity and Pricing
Total Revenue = Price x Qty
A rise in price means less qty demand
If an item is elastic, and prices rise, total revenue will decrease
If an item is inelastic, and prices rise, total revenue will increase
Why?

27. Change in Price
Total Revenue Up
Inelastic
Down
Elastic
Up/Down =
Unit Elastic