demand. supply and demand economics in a market economy, at its most basic & fundamental form is...
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Demand
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Supply and Demand
Economics in a market economy, at its most basic & fundamental form is SUPPLY & DEMAND.
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Demand Perspective
Economics from the perspective of the consumer
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DEMANDQuantity of goods and services that a consumer is WILLING and ABLE to purchase at various prices
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DEMAND – 3 Components
Able
Willing
Quantities Purchased at Various Prices
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Demand - AbleYou must have enough money to make the purchase. If you can’t afford something (a private jet, for instance), you don’t have an effective demand for it.
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DEMAND - WillingYou must be willing to make the purchase. If you’re not willing to spend your income on it, you do not have an effective demand for it.
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DEMAND - Quantities purchased at Various Prices
Qty Demanded changes when price changes
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Demand Schedule
List of quantities that would be purchased at various prices in table format
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Demand Schedule
PriceQuantity Purchased Weekly
$20
$25
$30
$35
21
18
15
12
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Demand CurveDemand curve plots these (from Demand Schedule) points
Shows graphically the relationship between price & quantity demanded
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Demand CurveVertical Axis - PricesHorizontal Axis - Quantity Demanded
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Law of DemandInverse Relationship Between Prices and Quantity Demanded:Price Increases -> Less Quantity
DemandedPrice Decreases -> More Quantity
Demanded
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Demand Curve (Inverse Relationship)
Demand
Price
Quantity
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Reasons Why The Demand Line Is
Downward SlopingLaw Of Diminishing
Marginal Utility
Income Effect
Substitution Effect
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Marginal UtilityMarginal – A small change
Utility = Usefulness or Satisfaction
Marginal Utility is the amount of satisfaction derived from 1 additional unit of a product
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Law of Diminishing Marginal Utility
As additional units of a product are consumed during a given period of time, the additional satisfaction derived from the good decreases
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Law of Diminishing
Marginal UtilityUtility
Units of Goods
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Proves Inverse Relationship between Prices and Quantity
Demanded b/c…
At higher quantities, people want it less and so they’ll be less willing to pay higher prices
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Income EffectThe effect that increasing or decreasing prices have on the purchasing power of your income
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Income Effect Cont’dWhat’s the Purchasing Power of $5 (your income) for the items on the dollar menu?
allows you to be able to purchase 5 items
What if the dollar menu became the half dollar menu?
What if the dollar menu became the $2 menu?Price changes affect the buying power of your INCOME & thus your ability & willingness to purchase products
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At Higher Prices, people’s incomes will be ABLE to buy LESS
Proves Inverse Relationship between Prices & Quantity
Demanded b/c…
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Substitution EffectChange in the combination of goods purchased as a result of increasing or decreasing relative prices
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Substitution Effect Cont’d
What might people do if the price of movie theater tickets go up to $15?
Get more Angel Tickets
Buy more DVDs
Go see more Plays or Stand-Up Comedy Acts
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At higher prices, people will substitute that product with cheaper substitutes
Proves Inverse Relationship between Prices & Quantity
Demanded b/c…
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Homework: “Demand 3 Paragraphs”
Explain in your own words each in a separate paragraph The Income EffectDiminishing Marginal UtilityThe Substitution Effect
Each of the paragraphs must include an ORIGINAL example that is explained
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Determinants of Demand
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Change in Quantity
Demandedv.
Change in Demand
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Change in Quantity Demanded
Caused by an increase or decrease in PRICE
Causes movement ALONG the demand line
Price
Quantity Demanded/Purchased
Point A
Point B
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Change in DemandCaused by 1 or more determinants of demand
Causes a shift of the ENTIRE demand line
Price
Quantity Purchased/Demanded
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Determinants of Demand
Demand changes even if there is no change in price
It will shift the entire demand line
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The Determinants
Consumer income
Consumer attitude
Price of a complimentary product
Price of a substitute
Population
Weather
Expectations
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Change in IncomeGenerally, an increase in income leads to an increase in demand. This is b/c consumers are more willing and able to buy more products
Can you think of any products that would be an exception to this statement?
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Change in Income Cont’dNormal goods- Demand increases as income increases
Inferior goods- Demand decreases as income increases. Ex. Ground Meat
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Change in Income Cont’d
If someone who was unemployed for 2 yrs finds employment at a solid-paying job, what will happen to his/her demand for normal goods?
What will happen to his or her demand for inferior goods like canned goods from a generic producer?
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Changing Attitudes
Tastes and Preferences
Trends
Fads
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Changing Attitudes Cont’d
List in your notes 5 examples of trends and fads that have come and gone or are currently in but you expect will end in the near future
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Trends/Fads That Have Come and Gone
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Change in Price of a Complementary
GoodComplementary goods- Products that are used together.
List 4 Examples
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Complimentary Goods Cont’d
If the price of peanut butter was to increase, what would happen to the qty demanded for peanut butter?
Qty Demanded for Peanut Butter will DECREASEWhat will happen to the demand for Jelly?
Demand for Jelly will DECREASE
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Complimentary Goods Cont’d
If the price of Hot Dogs decreases, what will happen to the qty demanded for Hot Dogs?
Qty Demanded for Hot Dogs will INCREASE
What will happen to the demand for Hot Dog Buns?
Demand for Hot Dog Buns will INCREASE
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Change in Price of a Complimentary Good
Cont’d
If qty demanded changes (up or down) for an original good, than the demand changes for the complimentary good in the SAME way
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Complimentary Goods Cont’d
In Price for an Original Good
Qty Demanded for the Original Good
Demand for the Complimentary Good
The OPPOSITE of each is TRUE
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Change in Price of a Substitute
Substitute goods- Products similar enough they can replace the other
List 4 Examples
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Substitute Goods Cont’d
If the price of margarine goes up, what will happen to the qty demanded for margarine?
Qty demand for margarine will DECREASEWhat will happen to the demand for butter?
The demand for butter will INCREASE
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Changing Price of Substitute
If qty demanded changes (up or down) for an original good, than the demand changes for the Substitute good in the OPPOSITE way
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In Price for an Original Good
Qty demanded for the Original Good
Demand for the Substitute Good
The OPPOSITE of each is TRUE
Substitute Goods Cont’d
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Population Changes
Changes to population #s is a determinant of demand. Why? In your notes, explain why population changes would have an effect on demand. Use 1 example and explain it.
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Weather
Weather is a determinant of demand. Why? In your notes, explain why weather would have an effect on demand for many products. Use 1 example and explain it.
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Expectations For Future Income
When consumers are pessimistic about their future incomes, the overall level of demand for goods and services in the economy decreases. The opposite is true.
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Expectations Cont’d
Expectations for Future Income
=Demand for goods and services
Expectations for Future Income
=Demand for goods and services
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In
Times Past
Really Good
White
Beans
Existed
Income
Tastes & Preferences
Related Goods
• Change in Price of Substitute Goods• Change in Price of Complementary Goods
Weather
# of Buyers
Expectations
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Demand Shifts &
Elasticity of Demand
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The Determinants of Demand change demand at EVERY price
This can be represented on a Demand Graph
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Graph: Increase in Demand - Right
Using your first graph and a pencil, draw a second line that would represent an INCREASE in demand. Name this line D2
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Graph: Decrease in Demand - Left
Using your second graph and a pencil, draw a second line that would represent a DECREASE in demand. Name this line D2
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Hold up the appropriate shift that represents the effect of the
comeback of bell-bottoms
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Demand Curve: Tastes and Preferences
Price
Quantity
D1
D2
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Hold up the appropriate shift
that represents the effects of a job
demotion due to a business
consolidation
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Decrease in Demand: Income
Price
Quantity
D2D1
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The price of Pepsi goes up.
Hold up the appropriate shift that represents effect on
Coca-Cola
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Substitutable Goods: Demand will go up for
Coke
Price
Quantity
D1D2
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Price Elasticity of Demand
Draw two graphs (both on the same side of the paper), one with a steep slope and one with a gradual slope
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ElasticityElasticity means RESPONSIVENESS
We measure responsiveness
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Price Elasticity of Demand
Measurement of how responsive the quantity purchased changes when there is a change in price
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Price Elasticity of Demand Cont’d
Equation: % change in quantity
demanded
% change in price
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Demand ElasticThere are products where if the price changes, the Qty Demand will change SIGNIFICANTLY.
These products are said to have ELASTIC demand
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Elastic DemandPrice is elastic if calculated value of price elasticity (equation) is greater than one
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Products W/ Elastic Demand
Non-necessity
There are readily available substitutes for the product
The product’s cost represents a large portion of consumers’ income Car
Lunch Meat
Movie Theater Tickets
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Elastic Demand
Price
Quantity
D
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Inelastic DemandInelastic implies less sensitivity to change in pricePrice inelastic if calculated value of price elasticity (equation) is less than one
As the price of a good increases the quantity demanded decreases minimally
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Products w/ Inelastic Demand
A Necessity
There are few or no readily available substitutes for the product
The product’s cost represents a small portion of consumers’ income
Water
Gasoline
Candy
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Inelastic Demand
Price
Quantity
D
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Unitary Price Elasticity (Unit
Elastic)% change in the quantity demanded equals % change in price
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Total Revenue
Total amount of money a company receives from its sales
Total Revenue = price x quantity sold
Quantity sold is dependent on price
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Relationship between Price, Elasticity, Total
Revenue Elastic Demand Inelastic Demand
Decreasing Price Increases Total Revenue
Decreasing Price Decreases Total Revenue
Increasing Price Decreases Total Revenue
Increasing Price Increases Total Revenue