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DEMAND. Definition: The various quantities of a good or service that someone is WILLING and ABLE to buy at DIFFERENT PRICES at a PARTICULAR TIME WILLING and ABLE Does Mr. Bull have demand for…?:. YES!. NO!!!. NO!. Individual Demand vs. Market Demand. - PowerPoint PPT Presentation
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DEMAND• Definition: The various quantities of a good or service that
someone is WILLING and ABLE to buy at DIFFERENT PRICES at a PARTICULAR TIME
• WILLING and ABLE
•Does Mr. Bull have demand for…?:
YES!
NO!!!
NO!
Individual Demand vs. Market Demand• I may not have demand for a porsche, but
others do…•Market Demand – Sum of all individual’s
demand
Demand Schedule
Grade Upgrade Certificates
Graphing Demand
Demand Schedule Demand Curve
Law of Demand
•As Price increases, Quantity Demanded decreases•As Price decreases, Quantity
Demanded increases
As P↑, Qd↓As P↓, Qd↑
Why does the Law of Demand occur?
The law of demand is the result of three separate behavior patterns that overlap:
1.The Income effect2.The Substitution effect 3.The Law of Diminishing Marginal
Utility We will define and explain each… 10
Copyright ACDC Leadership 2015
Change in Quantity Demanded
• Income Effect• If price goes down,
purchasing power goes up and vice versa
• Substitution Effect• Pepsi vs. Coke
Nature of Demand Curve
• Diminishing marginal utility•What would compel you to buy
additional JBCs?
Can you see the Law of Diminishing Marginal Utility in Disneyland’s pricing strategy?
Copyright ACDC Leadership 2015
Change in Quantity Demanded
Individual Demand
6
5
4
3
2
1
0
Quantity Demanded (bushels per week)
Pri
ce (
per
bu
shel
)
P Qd
$5
4
3
2
1
10
20
35
55
80
IndividualDemand
P
Q
D1
2 4 6 8 10 12 14 16 18
Demand Can Increase or Decrease
Increase in Demand
Decrease in Demand
D2
D3
3-15
Individual Demand
6
5
4
3
2
1
0
Quantity Demanded (bushels per week)
Pri
ce (
per
bu
shel
)
P Qd
$5
4
3
2
1
10
20
35
55
80
IndividualDemand
P
Q
D1
2 4 6 8 10 12 14 16 18
Demand Can Increase or Decrease
Decrease in Demand
D2
D3
Change in Demand
Change in Quantity Demanded
3-16
Change in Demand1. Change in Income
mo’ money = mo’ problems purchases normal vs. inferior
2. Change in Prices and Availability of Substitutesex: Pens and Pencils
3. Change in Prices and Availability of Complementsex: Paper and Pencils
4. Change in Weather or Seasonsex: Shorts in winter, Sleds in summer, Gas?
5. Change in Number of Buyersex: larger/smaller market, population change, technology
6. Change in Styles, Tastes, Habits, Preferencesfashion, coolness, trends – ex:
7. Change in Expectationsfuture oriented – ex: harvest, technology
Elasticity•Measurement of a good’s
responsiveness to a change in price• The price effect is greater for some
goods than for others• Examples:
Elasticity• Large Price Effect → Elastic
Ex:
• Small Price Effect → InelasticEx:
Other Examples?
Factors Affecting Elasticity•Wants = more elastic, needs = more inelastic• Time:• Can purchase be delayed?• Time to adjust…• Longer price change persists = more elastic• Immediately after price change = more inelastic
• Availability, Suitability, Price of Substitutes• More/better/cheaper substitutes = more elastic• Ex: Ibuprofen vs. Insulin
• Percentage of Budget• Larger % = more elastic• Ex: New Car for me vs. LeBron James
Testing for Elasticity of Demand• Graphical Comparison
The flatter the curve, the more Elastic the good.The steeper the curve, the more Inelastic the good.***ONLY APPLICABLE WHEN COMPARING 2 CURVES
Inelastic
Elastic
Testing for Elasticity• Total Revenue Test --- TR = P x Q• Example:• If P and TR move in the same
direction, demand isinelastic
• If P and TR move in oppositedirections, demand iselastic
• If TR remains the same when P changes, demand is unit elastic
• Grade Upgrade Certificates?• Gas?
Practice
•Total Revenue Test Worksheet
Problem 1: Yesterday, the price of envelopes was $3 a box, and Julie was willing to buy 10 boxes. Today, the price has gone up to $3.75 a box, and Julie is now willing to buy 8 boxes. Is Julie's demand for envelopes elastic or inelastic?
Problem 2: Katherine advertises to sell cookies for $4 a dozen. She sells 50 dozen, and decides that she can charge more. She raises the price to $6 a dozen and sells 40 dozen. Is demand for her cookies elastic or inelastic?
Problem 3: Classify demand for each of the following goods and services as elastic or inelastic:Eggo waffles ElectricityHouse paint Ground beefKidney transplants College textbooks
Extreme Cases• Perfectly Inelastic Demand• Consumers will purchase the same quantity of a good
or service regardless of the price• Examples?• Insulin, Antivenin
• Perfectly Elastic Demand• Consumers will purchase infinitely more or less of a
good or service with any price change• Examples?• No true examples…• Partial Examples: • Luxury Goods, Black Friday
Extending Elasticity
• How does elasticity of demand affect us?• What do these have in common?
• Government taxes inelastic goods… Why?• Why doesn’t govt. tend to tax elastic goods?
“Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”
-Ronald Reagan