Chapter 4:1 Understanding Demand

Objectives o WHAT: Explain the law of

demand.

o WHAT: Explain how the substitution effect and the income effect influence decisions.

o WHY: (12.2 (2) Discuss the effects of changes in supply and/ or demand on the relative scarcity, price, and quantity of particular products.

Pro_12:12 The wicked desireth the

net of evil men: but the root of the

righteous yieldeth fruit.

Scarcity: • People’s needs and wants are unlimited. • When one want is satisfied, others arise. • Goods and services are limited. • No one can have an endless supply of anything. • Sooner or later a limit is always reached. • The fact that limited amounts for goods and

services are available to meet unlimited wants is scarcity.

• Economics is the study of how people seek to satisfy their needs and wants by making choices.

What is demand?

• Demand is the desire

to own something and

the ability to pay for it.

• To have demand for a

good or service, both

of these conditions

must be present.

The Law of Demand: • That when a goods price

is lower, consumers will buy more of it.

• When the price is higher, consumers will buy less of it.

• All of us act out this law of demand in our everyday purchasing decisions.

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.

• The Substitution effect can also apply to a drop of prices.

• An example is someone loves pizza but the price increases, so that person instead buys a cheaper alternative such as tacos.

Discussion Question

• What are some items that you are willing

to substitute should the price goes up?

List five and explain why.

The income effect: • The change in consumption that results

when a price increases causes real income to decline.

• You no longer can afford to buy the same combination of goods, and you must cut back on your purchases of some goods.

• Rising prices have another effect that we have all felt.

• When you don’t substitute the good that buy but purchase less of it (income effect)

• If you buy fewer slices of pizza without increasing your purchases of other foods, that is the income effect.

Income Effect • One important fact to remember is that

economists measure consumption in the amount (quantity) of a good that is bought, not the amount of money spent to buy it.

• When the price goes up, consumers spend more of their money on a good but they may demand less of it.

• Thus, the income effect has led to a decrease in the quantity demanded.

Activity

• Get in your groups and produce a skit on

either the law of demand, substitution

effect, or income effect.

o Jer_17:9 The heart is deceitful above all things, and desperately wicked: who can know it?

o Pro_23:26 My son, give me thine heart, and let thine eyes observe my ways.

o Eze_36:26 A new heart also will I give you, and a new spirit will I put within you: and I will take away the stony heart out of your flesh, and I will give you an heart of flesh.

Chapter 4:2: SECTION 2 SHIFTS IN DEMAND CURVE:

Objectives: • WHAT: Explain the factors

that create changes in demand that can cause a shift in the demand curve.

• WHAT: Explain of how a change in demand for one good can affect for a related good.

• WHY: (12.2 (2) Discuss the effects of changes in supply and/ or demand on the relative scarcity, price, and quantity of particular products.

Psa_37:4 Delight thyself also in the

LORD; and he shall give thee the

desires of thine heart.

Ceteris Paribus: • The assumption that nothing

beside the price in the demand curve would change.

• A Latin phrase for “all other things held constant.”

• The demand schedule took into account only changes in price.

• It did not consider the effects of news reports or any one of thousands of other factors that change from day to day.

INCOME: • A consumer’s income affects

his or her demand for most goods.

• Most items that we purchase are normal goods, goods that consumers demand more of when their incomes increase.

• If an individual’s income increases in every level, it will cause her to buy a normal good at every price.

• What are examples of normal goods that

consumers would demand more of when

they increase their income? Get in groups

and list five.

Inferior goods • There are also other goods called

inferior goods.

• They are called inferior goods because an increase in income causes demand for those goods to fall.

• Inferior goods are goods that you would buy in smaller quantities, or not at all, if your income were to rise and you could afford something better.

Inferior Goods?

Inferior Goods?

Inferior Goods?

Inferior Goods?

Inferior Goods?

Inferior Goods?

Inferior goods

• Used Cars

• Generic brand food or

medication

• Generic brand clothes

• Thrift Store goods

• Big Lots

Consumer Expectations:

• Our expectation about the

future can affect our demand

for certain goods today.

Discussion Question

• Hypothetical: Suppose that you have had your eye on a new I-Phone for several months. One day you walk into the store to look at the I-Phone, and the sales person mentions that the store will be raising the price in one week. You are not able to pay for it currently and will need to charge it in your credit card. What would you do?

CONSUMER TASTES and ADVERTISING:

• Advertising and publicity often

play an important role of trends

and fads.

• Are the statistical

characteristics of population

such as age, race, gender,

occupation, and income level.

Advertising • Companies spend monies

on advertising because they hope it will increase the demand for the goods they sell.

• Considering the growing sum of money spent on advertising in the U.S. each year, companies must believe that investment is paying off.

Discussion Question

o Describe what type of advertising draws

your attention?

o Describe if you have been influenced to

buy a particular product and what

advertisement caused you to buy that

product?

Complements and Substitutes: • Complements are two goods

that are bought and used together.

• Boots and Skis. (Complements)

• Cars and tires (complements)

• Cell phones and cell phone cases.

• I pads and I pad cases (complements).

Complements and Substitutes:

• Substitutes are goods that

are used in place of one for

another.

• For example: Butter versus

margarine

• Galaxy versus I-Phone

• Lakers versus Celtics (j/k)

Assignments

• Go online on your I-pad and copy and

paste pictures of two examples of an

inferior good, two examples of substitutes,

two examples of compliments. Please

create a PDF document turn it in Showbie.

POP QUIZ!!!!!!!!!!

B – Inferior goods A – Superior goods

C – Efficient goods D – junk

B – Inferior A – Substitutes

C – Superior D – None of the above

B – Compliments A – Substitutes

C – Superior D – None of the above

B – Compliments A – Substitutes

C – Superior D – None of the above

You can no longer afford to buy the same

combination of goods, and you must cut back your purchases of some goods. If you buy fewer slices of Pizza without increasing your purchases of other foods, that is the?

B – Substitution effect A – Income effect

C – Shays Rebellion D – None of the above

Chapter 4:3: DEFINING DEMAND:

Objectives: • EXPLAIN: The concepts of the law of

demand.

• EXPLAIN: How the substitution effect and income effect affect decisions.

• WHY: (12.2 (2) Discuss the effects of changes in supply and/ or demand on the relative scarcity, price, and quantity of particular products.

• WHY: 12.2 (8). Explain the role of profit as the incentive to entrepreneurs in a market economy.

Gen_32:26 And he said, Let me go,

for the day breaketh. And he said, I

will not let thee go, except thou bless

me.

Elasticity of Demand • Consumers response to price

changes is elasticity of demand.

• This measures how drastically buyers will cut back or increase their demand for a good.

• When the price rises or falls, respectively.

• If you buy the same amount or just a little less of a good after a large price increase, your demand is inelastic.

• Or relatively unresponsive to price changes.

Elasticity of Demand

• If you buy less of a good

after a small price increase,

your demand is elastic.

• A consumer with highly

elastic demand for a good is

very responsive to price

changes.

Factors Affecting Elasticity:

• Availability of Substitutes.

• Relative Importance

• Necessities versus Luxuries

• Changes over time of what

demand is for the good.

Factors Affecting Elasticity:

• HYPOTHETICAL: If you

bought a ticket for a concert

for your favorite group and

they cancel and the venue

gives you a ticket for another

group, is that elastic or

inelastic?

Elasticity and Revenue: • Elasticity is important to the study

of economics.

• Because elasticity helps us

measure how consumers respond

to price changes for different

products.

• Elasticity of demand determines

how a change in prices will affect a

firm’s total revenue, or income.

Computing a Firm’s Total Revenue: • A company’s total revenue is

defined as the amount of money the company receives by selling its good.

• This is determined by two factors: The price of the goods, and the quantity sold.

• Companies observe if the demands of their goods are elastic or inelastic.

The elasticity of demand has these following factors:

o The availability of substitute

goods.

o A limited budget that does not

allow for price changes.

o The perception of the good as a

luxury item.

The elasticity of demand has these following factors:

• If these conditions are present,

the demand for the good is

elastic.

• A firm may find that a price

increase reduces its total

revenue.

Total Revenue and Inelastic Demand:

• If demand is inelastic, consumers demand is not very responsive to price changes.

• When demand is inelastic, price and total revenue move in the same direction.

• An increase in price raises the total revenue and a decrease in price reduces total revenue.

Total Revenue and Inelastic Demand:

• A decrease in price will lead to an increase in quantity demanded even if demand is inelastic.

• However the percentage of increase in the quantity demanded will be less than the percentage of increase in price.

• The firm’s total revenue will decrease.

• Much might be said to the young people regarding their privilege to help the cause of God by learning lessons of economy and self-denial. Many think that they must indulge in this pleasure and that, and in order to do this they accustom themselves to live up to the full extent of their income. God wants us to do better in this respect. {MYP 299.1}

• Waste not your pennies and your shillings in purchasing unnecessary things. You may think these little sums do not amount to much, but these many littles will prove a great whole. If we could, we would plead for the means that is spent in needless things, in dress and selfish indulgence. Poverty in every shape is on every hand. And God has made it our duty to relieve suffering humanity in every way possible. {AH 383.2}

• The Lord would have His people thoughtful and caretaking. He would have them study economy in everything, and waste nothing. {AH 383.3}

• The amount daily spent in needless things, with the thought, "It is only a nickel," "It is only a dime," seems very little; but multiply these littles by the days of the year, and as the years go by, the array of figures will seem almost incredible. {AH 384.1}

• Every week you should lay by in some secure place five or ten dollars not to be used up unless in case of sickness. With economy you may place something at interest. With wise management you can save something after paying your debts. {AH 396.2}

• I have known a family receiving twenty dollars a week to spend every penny of this amount, while another family of the same size, receiving but twelve dollars a week, laid aside one or two dollars a week, managing to do this by refraining from purchasing things which seemed to be necessary but which could be dispensed with. {AH 396.3}

Discussion Question

• Try to find ways to save money by listing

five things that you feel is unnecessary

that you normally buy and explain the

reason why it is unnecessary.