1. A gallon of gas 3. Apple iPhone XSbglange.weebly.com/uploads/5/3/7/9/5379945/03_supply...Chapter 4, Section 1 How much would you be willing to pay for the following items? 1.A gallon

Chapter 4, Section 1

Bell RingerHow much would you be willing

to pay for the following items?

1. A gallon of gas

2. Big Mac

3. Apple iPhone XS

4. Car


How much would you be willing to pay for the following items?

1.A gallon of gas - $2.35

2.Big Mac - $3.99

3.Apple iPhone XS - $699

4.Honda Accord - $25,000

Bell Ringer


Objectives

1. Explain the law of demand.

2. Define determinants of demand.

3. Give an example of how a change in

demand for one good can affect demand

for a related good.


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.


The Law of Demand

Law of Demand

P D

P D

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What

happens

to the

demand…

1. for ice cream when the price of ice

cream drops?

2. for cars when people get a tax

refund?

3. for umbrellas after the first

monsoon?

4. for hot dogs when the price of hot

dog buns rises?

5. for gasoline today when people

expect prices to fall tomorrow?

Determinants of Demand


Consumer expectations

Substitution Effect

Income Effect

Normal goods vs. Inferior goods

Determinants of Demand


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 drop, and you will wait for the lower price.


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.


Complements and Substitutes

The demand 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.


Income Effect

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.


Closure/Summary

Working by yourself or with a partner,

answer questions 2 & 8 on page 90

in your notes.

Substitution Effect vs. Income Effect pg. 87

We will be discussing the answers

together as a class.


Bell RingerThe Law of Demand states that as price goes up, demand goes down...

How much will demand decrease in the following

circumstances? Why?

The price of gas increases

from $2.50/gallon to

$5.00/gallon

The price of cell phone

service increases from

$70/month to $140/month

The price of a haircut

increases from $20 to $40

The price of milk increases

from $2/gallon to $8/gallon


Objectives

1. Describe the difference between elastic

and inelastic demand.

2. Identify factors that affect elasticity.

3. Explain how firms use elasticity and

revenue to make decisions.


Elasticity of Demand

Elasticity of demand measures how consumers

respond to price changes; it is the degree to which

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.


• What are some goods/services with elastic

demand?

• What are some goods/services with inelastic

demand?

• Can you think of a good/service with perfectly

inelastic demand?

Elastic or Inelastic?



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?



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?


Factors Affecting Elasticity

Necessities vs. Luxuries

A good’s demand elasticity can also depend on how much of your budget you spend on a good/service.

Whether a person considers a good/service to be a necessity or a luxury has a great impact on a person’s elasticity of demand for that good.

How?


How do businesses use demand elasticity?

When a good has elastic demand, raising the price

by a small percentage will decrease the quantity sold

by a large percentage.

If a good has elastic demand, an increase in price

will result in fewer products sold. This will reduce

overall revenue.$12.99/month

$6+


When demand is inelastic, consumers’ demand is not very responsive to price changes.

If a good has inelastic demand, an increase in price will not greatly impact the amount of products sold. This will increase overall revenue.

$70,000

How do businesses use demand elasticity?

$30+

per pill


Review - Getting the Gist

Summarize the concept of Elasticity of

Demand using exactly 20 words.


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


Oil is a nonrenewable resource.

Humanity consumes 96 million barrels of oil per day, and

this number continues to climb.

However, the world reserves of oil have increased over

the past 35 years.

(Today’s oil reserves stand at over 1.5 trillion barrels.)

In other words, we have more oil than ever.

How can this be??

Bell Ringer


In your notes, list the top three countriesyou think the U.S. imports its oil from.


Objectives

1. Define the law of supply.

2. Explain how prices encourage new

businesses to join the market.


The Law of Supply

Supply is the amount of goods available.

The law of supply states that as prices rise, so

will the quantity supplied.

As the price of a good increases, producers will

offer more of it.

As the price decreases, they will offer less.

The law of supply includes two movements:1. Firms changing their level of production

2. Firms entering or exiting the market


The Law of Supply

Law of Supply

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Supply Thought Experiment

How many hours would you be willing to work in

a week if you were paid…


The Law of Supply, cont.

How does the law of

supply affect the quantity

supplied?

As prices rise, producers will

offer more of a good and

new suppliers will enter the

market… why?

Answer: In the hopes of

making a profit.


Market Entry

Rising prices encourage new firms to join the market and will add to the quantity supplied of the good.

Take, for example, the music market:

When a particular type of music becomes popular, such as disco, grunge, or dubstep, more bands will play that type of music in order to profit from such music’s popularity.

This action reflects the law of supply.


Market Entry Exercise

Working by yourself or with a partner, come up with at least three other examples of products where firms have increased production or entered the market when the price/popularity of a product goes up.


Key Terms

supply: the amount of goods available

law of supply: producers offer more of a good as its price increases and less as its price falls


Bell Ringer

A carton of cigarettes can cost as much

as $70!

Why do you think cigarettes cost so

much?


Objectives

1. Identify the ways that the government can

influence the supply of goods.

2. Define “subsidies” and how their use directly

influences food and other commodity production

in the U.S.


Government Influences

Excise taxes are taxes on the production or

sale of certain goods

They are collected by the producer and not

paid directly by the consumer. This makes

them "hidden" in the price of a good/service.

Examples?

Cigarettes, Alcohol, Gambling, Gas, Marijuana


Government Influences

Excise taxes are often called “sin taxes”

because the government uses them to

control or limit certain behaviors (smoking,

excessive drinking, gambling, etc.).

Do you think “sin taxes” are

appropriate?


Government Influences, cont.

Subsidies

A government payment that supports a business or

market

Subsidies generally lower cost, which allows a firm

to produce more goods.

Reasons for subsidizing products include:

To prevent food shortages

To protect domestic industries from foreign competition.

Examples: Soybeans, wheat, oil, and CORN


Diminishing Returns

Has there been a time in your life where you’ve

put so much effort into doing something that you

eventually feel like you’re not getting as much

out of it as you’re putting into it?

What was it? How did it make you feel?


Law of Diminishing Returns

The law of diminishing returns refers to a

point in time where the level of benefits

gained is less than the amount of money or

energy invested.

In plain English… it simply means the juice

isn’t worth the squeeze.

Documents

1. A gallon of gas 3. Apple iPhone XSbglange.weebly.com/uploads/5/3/7/9/5379945/03_supply...Chapter 4, Section 1 How much would you be willing to pay for the following items? 1.A gallon