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Who are the two main actors in our economy?
Consumers – Buy stuff
Producers – Make stuff
Now we are going to discuss Supply and Demand. This concept is the essence of our economic system
Producers – Create supply
Consumers – Create demand
– CAPITALI$M.
Understanding Demand• What is the law of demand?
• How do the substitution effect and income effect influence decisions?
• What is a demand schedule?
• What is a demand curve?
$
Q
Increasing amounts
Increasing amounts
DS
DRAW THIS IN YOUR NOTES
If you get a big raise, and you’re a good American, what would you do?
Your store is selling a sweatshirt and it appears in a very popular movie. What do you think will happen to demand?
If you own a company and many companies are making a similar item so a consumer doesn’t have
to buy your product. What could you do to increase interest (or demand) for your product?
Nature of Demand
Demand – In economics it is the amount of a good or service that a consumer is willing and able to buy at various possible prices during a given time period.
Quantity demanded - In economics it is the amount of a good or service that a consumer is willing and able to buy at each particular price during a given time period.
DONT COPY THIS DOWN!!!
The law of demand states that an increase in a good’s price causes a decrease in the quantity demanded and that a decrease in price causes an increase in the quantity demanded, if price
is the only determining factor.
What Is the Law of Demand?
Simplify it:
The law of demand states that consumers buy more of a good when its price decreases and
less when its price increases.
P D P D
What Is the Law of Demand?
Simplify it even more:
Law of Demand
P D P D
3 economic concepts that can help explain the inverse effect that changes in price have on the quantity demanded.
Income Effect
Substitution Effect
Diminishing Marginal Utility
(Don’t write these down now we will cover each)
The law of demand states that consumers buy more of a good when its price decreases and less
when its price increases.
What Is the Law of Demand?
• The law of demand is the result of three separate behavior patterns that overlap, the substitution effect , the income effect, and diminishing marginal utility.
• These three effects describe different ways that a consumer can change his or her spending patterns for other goods.
The Substitution Effect
The substitution effect occurs when consumers react to an increase in a
good’s price by consuming less of that good and more of other goods.
Substitution Effect
If the price of something you like goes up you change to a lower priced substitute.
$10.00 a pound – What are some alternatives?
Chicken
Fish
Substitution Effect
If the price of something you like goes up you change to a lower priced substitute.
Chicken
Noodle
Soup
Late 1970s popular – 1982 highest – late 1980s less popular – 1990 store brands
Income Effect
Purchasing power The amount of an item that a dollar will buy
How can your purchasing power increase?
You get more money
The price of what you want comes down
Income Effect
Purchasing power The amount of an item that a dollar will buy
How can your purchasing power decrease?
You have less money
The price of what you want goes up
Diminishing Marginal Utility
Utility – the usefulness of a product, or the amount of satisfaction that an individual receives
from consuming a product.
The more you consume or use a product you will reach a point where you enjoy that product less
Simplify:
(Diminishing means lessening or getting smaller)
Diminishing Marginal Utility
A product’s overall utility typically increases as more of the product is consumed.
But you will eventually reach a point when it starts to diminish or lessen
Simplify:
Demand Schedules
Individual Demand SchedulePrice of a slice of pizza
Quantity demanded per day
Market Demand SchedulePrice of a slice of pizza
Quantity demanded per day
$.50
$1.00
$1.50
$2.00
$2.50
$3.00
5
4
3
2
1
0
$.50
$1.00
$1.50
$2.00
$2.50
$3.00
300
250
200
150
100
50
The Demand ScheduleA demand schedule is a table that lists the quantity of a good a person will buy at each different price.
Demand Schedules
Individual Demand SchedulePrice of a slice of pizza
Quantity demanded per day
Market Demand SchedulePrice of a slice of pizza
Quantity demanded per day
$.50
$1.00
$1.50
$2.00
$2.50
$3.00
5
4
3
2
1
0
$.50
$1.00
$1.50
$2.00
$2.50
$3.00
300
250
200
150
100
50
A market demand schedule is a table that lists the quantity of a good all consumers in a market will buy at each different price.
A Market Demand Schedule For Car Stereos
Price Per Car Stereo Quantity Demanded
$500
1,000$400
$300
$200
$100
500
2,500
1,500
5,000
+100%
+50%
+66%
+100%
Market Demand Curve
3.00
2.50
2.00
1.50
1.00
.50
0
0 50 100 150 200 250 300 350Slices of pizza per day
Pri
ce p
er s
lic
e (i
n d
oll
ars)
Demand
The Demand Curve• A demand curve is a graphical representation of a demand schedule.
• When reading a demand curve, assume all outside factors, such as income, are held constant.
PRICEDEMAND
PRICEDEMAND
Section 1 Assessment1. The law of demand states that
(a) consumers will buy more when a price increases.
(b) price will not influence demand.
(c) consumers will buy less when a price decreases.
(d) consumers will buy more when a price decreases.
2. If the price of a good rises and income stays the same, what is the effect on demand?
(a) the prices of other goods drop
(b) fewer goods are bought
(c) more goods are bought
(d) demand stays the same
Section 1 Assessment1. The law of demand states that
(a) consumers will buy more when a price increases.
(b) price will not influence demand.
(c) consumers will buy less when a price decreases.
(d) consumers will buy more when a price decreases.
2. If the price of a good rises and income stays the same, what is the effect on demand?
(a) the prices of other goods drop
(b) fewer goods are bought
(c) more goods are bought
(d) demand stays the same
Shifts of the Demand Curve
• What is the difference between a change in quantity demanded and a shift in the demand curve?
• What factors can cause shifts in the demand curve?
• How does the change in the price of one good affect the demand for a related good?
Shifts in Demand
• Ceteris paribus is a Latin phrase economists use meaning “all other things held constant.”
• A demand curve is accurate only as long as the ceteris paribus assumption is true.
• When the ceteris paribus assumption is dropped, movement no longer occurs along the demand curve. Rather, the entire demand curve shifts.
Nature of Demand
Quantity demanded - In economics it is the amount of a good or service that a consumer is willing and able to buy at each particular price during a given time period.
A
B
A move along the curve is a change in Quantity Demanded
Nature of Demand
Demand – In economics it is the amount of a good or service that a consumer is willing and able to buy at various possible prices during a given time period.
DC1
DC2DC3
When the entire curve shifts this a change in demand.
Demand shifts on the Demand Curve
Increase in demand shifts right
Q0
Demand shifts on the Demand Curve
Decrease in demand shifts left
Q0
What Causes a Shift in Demand?
Several factors, besides price, can lead to a change in demand. These are called the: “Non-price Determinants of Demand”
•Consumer tastes and preferences
•Prices of related goods
•Consumer expectations
•Income
•Market Size
The non-price determinants of demand:
Consumer Tastes and Preferences (Advertising)
Does it really matter is a truck is blue or red?
The non-price determinants of demand:
Prices of related goods
Substitute goods – margarine and butter. If butter increases in price the demand for margarine will increase as people switch to the lower priced substitute
Complementary goods – goods that are commonly used with each other.
Can you think of an example?
The non-price determinants of demand:
Consumer Expectations
If many people think they might lose their jobs the overall demand in the economy will go down.
If many people think they will be getting the chance for lots of overtime the overall demand in the economy will go up.
If many people think the price of an item (say houses) is going to up they will increase the overall demand by purchasing more before the price increase. What if something goes on sale tomorrow?
The non-price determinants of demand:
Income
If you get a raise you will have more money to spend.
If you lose your job your demand for all products that are not ‘needs’ will have to go down.
Income ContinuedThe non-price determinants of demand:
Income (con’t.)
• Normal Goods-a good that consumers demand more of when their incomes increase.
– Clothes
– DVD’s
• Inferior Goods-a good that consumers demand less of when their incomes increase.
– Top Ramen
– Powdered milk
– Used books
The non-price determinants of demand:
Market size/Population changes
If there are a lot of people who need/want your product then the demand will be high.
Again, the non-price determinants of demand:
• Consumer tastes and preferences
•Prices of related goods
•Substitute goods
•Complementary goods
•Consumer Expectations
•Income
•Normal goods
•Inferior goods
•Market Size
Section 2 Assessment1. Which of the following does not cause a shift of an entire demand curve?
(a) a change in price
(b) a change in income
(c) a change in consumer expectations
(d) a change in the size of the population
2. Which of the following statements is accurate?
(a) When two goods are complementary, increased demand for one will cause decreased demand for the other.
(b) When two goods are complementary, increased demand for one will cause increased demand for the other.
(c) If two goods are substitutes, increased demand for one will cause increased demand for the other.
(d) A drop in the price of one good will cause increased demand for its substitute.
Section 2 Assessment1. Which of the following does not cause a shift of an entire demand curve?
(a) a change in price
(b) a change in income
(c) a change in consumer expectations
(d) a change in the size of the population
2. Which of the following statements is accurate?
(a) When two goods are complementary, increased demand for one will cause decreased demand for the other.
(b) When two goods are complementary, increased demand for one will cause increased demand for the other.
(c) If two goods are substitutes, increased demand for one will cause increased demand for the other.
(d) A drop in the price of one good will cause increased demand for its substitute.
Section 2 Assessment1. Which of the following does not cause a shift of an entire demand curve?
(a) a change in price
(b) a change in income
(c) a change in consumer expectations
(d) a change in the size of the population
2. Which of the following statements is accurate?
(a) When two goods are complementary, increased demand for one will cause decreased demand for the other.
(b) When two goods are complementary, increased demand for one will cause increased demand for the other.
(c) If two goods are substitutes, increased demand for one will cause increased demand for the other.
(d) A drop in the price of one good will cause increased demand for its substitute.
Whiteboard exercises• Whiteboard Exercises:
• Bananas are found to cause cancer. What happens to the demand for bananas?
• Shortage of steel, price of magnums increases, what happens to demand for magnums?
• Gas prices will double next week, what happens to demand for gas this week?
• Peanut Butter goes on sale. What happens to the demand for peanut butter?
• What happens to demand for jelly?
• Small Pox hits, 25% population dies. What happens to demand for caskets?
• What happens to demand for all other goods?
Whiteboard exercises
• Whiteboard Exercises:
• Price of paint goes up. What happens to demand for paint?
• What happens to demand for paintbrushes?
• Joe wins the lotto, what happens to his demand for all normal goods? What effect is taking place?
• What happens to his demand for inferior goods?
• Eating hot cheetos with cream cheese causes weight loss and extends life expectancy. What happens to the demand for cheetos?
• What happens to the demand for cream cheese? Why?
Whiteboard exercisesFill in the Blank/Short Answer:
• Due to ________________you stop buying nail polish after the 120th bottle, even though the price is only $.25.
• Bart prices sky-rocket, so due to the __________________ you start taking the ferry to work.
• You get a raise and buy a new car instead of a used car. This is due to the ________________. A used car is then considered a ___________ good.
• Mrs. Eugster gives you $1000. You buy more/less Ben and Jerry’s ice-cream.
• Why does the law of demand only apply in a free market economy?
• Are there goods that do not obey the law of demand?
