1. Unit 2: Demand 1

2. Connection to Circular Flow Model 1.Do individuals supply or demand? 2.Do business supply or demand? 3.Who demands in the product market? 4.Who supplies in the product market? 2

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6. DEMAND 6

7. LAW OF DEMAND As Price Falls… …Quantity Demanded Rises As Price Rises… …Quantity Demanded Falls Price Quantity Demanded 7 There is an INVERSE relationship between PRICE and QUANTITY DEMANDED

8. Example of Demand I am willing to sell several A’s in AP Economics. How much will you pay? PriceQuantity Demanded Demand Schedule 8

9. Demand worksheet 9 If the price of CDs is $10, how many will people buy? ____________ If the price of CDs is $20, how many will people buy? ____________ If the quantity of CDs sold is 200, what is the price? ____________ If the quantity of CDs sold is 100, what is the price? ____________ Demand Schedule for CDs at School Quantity Demanded (monthly) Price (dollars) 300 250 200 150 100 50 5 10 15 20 25 30

10. How many apples will students buy at 30 cents? How many apples will students buy at 80 cents? What effect does the price seem to have on the quantity of CDs and apples sold? Calculate total revenue (price X quantity): If the price of apples is 30 cents, If 100 apples are sold, If the price of CDs is $15.00, 10 Demand Schedule for Apples at School Quantity Demanded (weekly) Price (cents) 400 350 250 150 100 50 10 20 30 50 80 100 Demand worksheet

11. Why does the Law of Demand occur? 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… 11

12. 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 12 Why does the Law of Demand occur?

13. If the price goes down for a product, the purchasing power increases for consumers  allowing them to purchase more. 2. The Income Effect 13 Why does the Law of Demand occur?

14.  We buy goods because we get utility from them  The law of diminishing marginal utility states that as you consume more units of any good, the additional satisfaction from each additional unit will eventually start to decrease  In other words, the more you buy of any good the less satisfaction you get from each new unit. Discussion Questions: 1.What does this have to do with the Law of Demand? 2.How does this affect the pricing of businesses? 14 Why does the Law of Demand occur?

15. Change N/A $54 $33 $15 $10 $5 Can you see the Law of Diminishing Marginal Utility in Disneyland’s pricing strategy?

16. The Law of Diminishing Marginal Utility 16

17. Graphing Demand 17

18. The Demand Curve A demand curve is a graphical representation of a demand schedule. The demand curve is downward sloping showing the inverse relationship between price (on the y-axis) and quantity demanded (on the x-axis) 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 cereal… 18

19. GRAPHING DEMAND Q o $5 4 3 2 1 Price of Cereal Quantity of Cereal Demand Schedule 10 20 30 40 50 60 70 80 Draw this large in your notes 19 Price Quantity Demanded $510 $420 $330 $250 $180

20. GRAPHING DEMAND Q o $5 4 3 2 1 Price of Cereal Quantity of Cereal Demand Schedule 10 20 30 40 50 60 70 80 20 Price Quantity Demanded $510 $420 $330 $250 $180 Demand

21. Where do you get the Market Demand? Q Billy PriceQ Demd $51 $42 $33 $25 $17 JeanOther Individuals PriceQ Demd $50 $41 $32 $23 $15 PriceQ Demd $59 $417 $325 $242 $168 PriceQ Demd $510 $420 $330 $250 $180 Market 3 P Q 2 P Q 25 P Q 30 P $3 DDDD

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