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Unit 1: Basic Economic Concepts
1
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DEMAND DEFINEDWhat is Demand?
Demand is the different quantities of goods that consumers are willing and able to buy at different prices.(Ex: You are able to purchase diapers, but if you
aren’t willing to buy then there is NO demand)
What is the Law of Demand? There is an INVERSE relationship between
price and quantity demanded
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Example of DemandI am willing to sell several A’s in AP Economics. How much will you pay?
Price Quantity
Demanded
Demand Schedule
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Why does the Law of Demand occur?
The law of demand is the result of three separate behavior patterns that overlap:
1.The Substitution effect
2.The Income effect
3.The Law of Diminishing Marginal Utility
We will define and explain each…6Copyright
ACDC Leadership 2015
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• If the price goes up for a product, consumer buy less of that product and more of another substitute product (and vice versa)
1. The Substitution Effect
• If the price goes down for a product, the purchasing power increases for consumers -allowing them to purchase more.
2. The Income Effect
Why does the Law of Demand occur?
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• Utility = Satisfaction• We buy goods because we get utility from them• The law of diminishing marginal utility states that as you
consume anything, the additional satisfaction that you will receive will eventually start to decrease
• In other words, the more you buy of ANY GOOD the less satisfaction you get from each new unit consumed.
Discussion Questions:1. What does this have to do with the Law of Demand?2. How does this effect the pricing of businesses?
3. Law of Diminishing Marginal Utility
Why does the Law of Demand occur?
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Can you see the Law of Diminishing Marginal Utility in Disneyland’s pricing strategy?
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Graphing Demand
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The Demand Curve• A demand curve is a graphical representation
of a demand schedule.• The demand curve is downward sloping
showing the inverse relationship between price (on the y-axis) and quantity demanded (on the x-axis)
• When reading a demand curve, assume all outside factors, such as income, are held constant. (This is called ceteris paribus)
Let’s draw a new demand curve for milk…
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GRAPHING DEMAND
Q
$5
4
3
2
1
Price of Milk
Quantity of Milk
Demand Schedule
10 20 30 40 50 60 70 80
Draw this large in your notes
12
PriceQuantity
Demanded
$5 10
$4 20
$3 30
$2 50
$1 80
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GRAPHING DEMAND
Q
$5
4
3
2
1
Price of Milk
Quantity of Milk
Demand Schedule
10 20 30 40 50 60 70 80
13
PriceQuantity
Demanded
$5 10
$4 20
$3 30
$2 50
$1 80Demand
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Where do you get the Market Demand?
Q
Billy Price Q Demd
$5 1
$4 2
$3 3
$2 5
$1 7
Jean Other Individuals Price Q Demd
$5 0
$4 1
$3 2
$2 3
$1 5
Price Q Demd
$5 9
$4 17
$3 25
$2 42
$1 68
Price Q Demd
$5 10
$4 20
$3 30
$2 50
$1 80
Market
3
P
Q2
P
Q25
P
Q30
P
$3 $3 $3 $3
D DDD
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Demand Review1. What are the two key aspects of the definition of demand?2. What is the Law of Demand?3. Give an example of the substitution effect4. Give an example of the income effect5. Give an example of the law of diminishing marginal utility6. Explain how the law of diminishing marginal utility causes
the law of demand7. How do you determine the MARKET demand for a
particular good? (from reading)8. Name 10 fast food places
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Shifts in Demand• Ceteris paribus-“all other things held constant.”• When the ceteris paribus assumption is dropped,
movement no longer occurs along the demand curve. Rather, the entire demand curve shifts.
• A shift means that at the same prices, more people are willing and able to purchase that good.
This is a change in demand, not a change in quantity demanded
PRICE DOESN’T SHIFT THE CURVE
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Change in Demand
Q
$5
4
3
2
1
Price of Milk
Quantity of Milk
Demand Schedule
10 20 30 40 50 60 70 80
17
PriceQuantity
Demanded
$5 10
$4 20
$3 30
$2 50
$1 80Demand
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What if milk makes you smarter?
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Change in Demand
Q
$5
4
3
2
1
Price of Milk
Quantity of Milk
Demand Schedule
10 20 30 40 50 60 70 80
18
PriceQuantity
Demanded
$5 10
$4 20
$3 30
$2 50
$1 80Demand
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What if milk makes you smarter?
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Change in Demand
Q
$5
4
3
2
1
Price of Milk
Quantity of Milk
Demand Schedule
10 20 30 40 50 60 70 80
19
PriceQuantity
Demanded
$5 10 30
$4 20 40
$3 30 50
$2 50 70
$1 80 100Demand
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Change in Demand
Q
$5
4
3
2
1
Price of Milk
Quantity of Milk
Demand Schedule
10 20 30 40 50 60 70 80
20
PriceQuantity
Demanded
$5 10 30
$4 20 40
$3 30 50
$2 50 70
$1 80 100Demand
D1
Increase in DemandPrices didn’t change but people want MORE Milk
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Change in Demand
Q
$5
4
3
2
1
Price of Milk
Quantity of Milk
Demand Schedule
10 20 30 40 50 60 70 80
21
PriceQuantity
Demanded
$5 10
$4 20
$3 30
$2 50
$1 80
Demand
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What if milk makes causes
baldness?
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Change in Demand
Q
$5
4
3
2
1
Price of Milk
Quantity of Milk
Demand Schedule
10 20 30 40 50 60 70 80
22
PriceQuantity
Demanded
$5 10
$4 20
$3 30
$2 50
$1 80
Demand
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What if milk makes causes
baldness?
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Change in Demand
Q
$5
4
3
2
1
Price of Milk
Quantity of Milk
Demand Schedule
10 20 30 40 50 60 70 80
23
PriceQuantity
Demanded
$5 10 0
$4 20 5
$3 30 20
$2 50 30
$1 80 60
Demand
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Change in Demand
Q
$5
4
3
2
1
Price of Milk
Quantity of Milk
Demand Schedule
10 20 30 40 50 60 70 80
24
PriceQuantity
Demanded
$5 10 0
$4 20 5
$3 30 20
$2 50 30
$1 80 60
DemandD2
Decrease in DemandPrices didn’t change but people want LESS Milk
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Change in Demand
Q
$5
4
3
2
1
Price of Milk
Quantity of Milk
Demand Schedule
10 20 30 40 50 60 70 80
25
PriceQuantity
Demanded
$5 10
$4 20
$3 30
$2 50
$1 80
Demand
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What happens to the demand for milk if
the price of cereal goes up?
NOTHING!The demand
stays the same
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P
Q Milk
$3
$2
D1
Price of Milk
Quantity of Milk
10 20
Change in Qd vs. Change in Demand
A C
B
There are two ways to increase quantity from 10 to 20
D2
1. A to B is a change in quantity demand (due to a change in price)
2. A to C is a change in demand (shift in the curve)
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What Causes a Shift in Demand?
5 Shifters (Determinates) of Demand:
1.Tastes and Preferences2.Number of Consumers3.Price of Related Goods4.Income5.Future Expectations
Changes in PRICE don’t shift the curve. It only causes movement along the curve.
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Prices of Related Goods
2. Complements are two goods that are bought and used together. – Ex: If price of hot dogs falls, demand for hot dog
buns will... – If the price of one increase, the demand for the
other will fall. (or vice versa)
1. Substitutes are goods used in place of one another. – Ex: If price of Pepsi falls, demand for coke will…– If the price of one increases, the demand for the
other will increase (or vice versa)
The demand curve for one good can be affected by a change in the price of ANOTHER related good.
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Substitutes or Complements?
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Substitutes
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Substitutes
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Substitutes
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Substitutes
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Substitutes
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Substitutes
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Substitutes
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Substitutes
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Complements
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Income
2. Inferior Goods – Ex: Top Ramen, used cars, used clothes – As income increases, demand falls– As income falls, demand increases
1. Normal Goods – Ex: Luxury cars, Sea Food, jewelry, homes– As income increases, demand increases– As income falls, demand falls
The incomes of consumer change the demand, but how depends on the type of good.
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Inferior Goods
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1. Which of the following will cause the demand for milk to decrease?A.Increase in the price of a substitute B.A decrease in income assuming that milk is a normal goodC.A decrease in the price of milkD.An increase in the price of milkE.A decrease in the price of a complementary good
41
Practice Questions
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2. Which of the following will cause the quantity demanded of milk to decrease?A.Increase in the price of a substitute B.A decrease in income assuming that milk is a normal goodC.A decrease in the price of milkD.An increase in the price of milkE.A decrease in the price of a complementary good
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Practice Questions
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Practice
43
ShifterIncrease or Decrease
Left or Right
1
2
3
4
5
6
7
8
Identify the determinant (shifter) then decide if demand will increase or decrease
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Practice
Hamburgers (a normal good)1. Population boom 2. Incomes fall due to recession3. Price of tacos, a substitute, decreases4. Price increases to $5 for hamburgers5. New health craze- “No ground beef”6. Hamburger restaurants announce that they will significantly increase prices NEXT month 7. Price of fries, a complement, increases8. Restaurants lower price of burgers to $.50
Identify the determinant (shifter) then decide if demand will increase or decrease
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