Warm-up

List the last five goods or services you have purchased in the past week and how much you spent on each. What led you to buy each one?

Ch 4.1Understanding Demand

Demand In a market system, the

interaction of buyers and sellers determines the _______of most goods as well as what _________ of a good will be produced. Buyers demand goods, sellers supply those goods and the the interaction between the two groups lead to an __________ on the price and the quantity traded.

Demand is the _______to own something and the _______to pay for it

pricesquantity

agreement

desireability

Law of Demand

When a goods price is ______, consumers will buy _____ of it. When the price is ______, consumers will buy ____ of it.

The law of demand is the result of not one pattern of behavior, but of ___ separate patterns that overlap.

lower

morehigher less

two

Behavior Patterns (2)Substitution effect

• When consumers ______ to an increase in a good’s price by _______________ of that good and more of ________

Pizza = $5 (up from $2) thus go buy a burger ($3) or a taco ($2)

Vice versa…Pizza drops to $1 (from $2) so buy more Pizza

react

consuming lessanother

Behavior Patterns cont.Income Effect The change in consumption

resulting from a change in ____________

With rising prices your budget won’t buy as ______ as it use too & it works in __________ – if prices fall your budget buys more.

economists measure consumption in the __________ of a good bought, not in the amount of _________ spent to buy it.

real income

muchopposite

amountmoney

A Demand Schedule

A table that lists the ________ of a good a person will buy at each different _____.

quantityprice

Market Demand Schedule

A table that lists the quantity of a good all consumers in a market will buy at each different price

Tale of two T-shirts Both are white, both made of 100% cotton, single

pocket, size Large. When the demand for a product _______, manufacturers

can charge ______ for it. And the law of demand says that when prices ______, people buy _____ of a product. So how can T-shirts costing $50 be in such demand when an identical T-shirt that costs $10 sits neglected on the next display table. This is related to demand. One important detail missing from the story is that the more expensive T-shirt has a small nautical flag on the pocket….a logo of a designer in ________. Even though the labor and materials that went into manufacturing the two T-shirts are the same, the ______ of one is nearly 400 percent greater. If the market __________ it, someone will _________ it, and consumers will _____ for it!

risesmore

rise less

demand

valuedemands

produce pay

Demand Curve

A graphic representation of a demand schedulePrice is at the vertical axis, and quantities on

the horizontal

Reading a Demand Curve It assumes all other things such as price of

other goods, income and quality stay ________

It predicts how people will ______ their buying habits

***it is only looking at _______!Z

constant

change

PRICE

Graphing

Graph the following Number of Doughnuts 1, 2, 3, 4, 5, 6 Price at .30, .50, .75, 1.00, 1.25, 1.50 NOTE: as price decreases, the quantity of

demand increases…thus law of demand

…disobeying the law…

Some economists believe that there are goods that do not obey the law of demand, because the demand for them would actually drop if their price fell. One example is a top of the line luxury car. Why do you think prospective buyers might feel differently about these goods? Can you name one other product?

Activity create an individual demand

schedule Think of a good, and create a

series of price levels. Ask 5 classmates how much of

the good he would buy at each price point and create a demand schedule and curve based on the data collected.

Homework – daydream doughnuts

Ch 4.2 Shifts of the Demand Curve

Ceteris Paribus

Latin phrase “________________________.”

This is the assumption that _______ besides the ____ would change when selling a good or service.

When drop ceteris paribus then we do not move along the demand curve…the entire demand curve _____.

all other things held constant

nothingprice

shifts

Changes in Demand A demand curve is accurate only as long

as there are no changes other than price that could affect the consumer’s decisions.

Several other factors can cause demand for a good to change.

1. INCOME – A consumers _______affects his/her demand for goods. Most are considered normal goods – goods demanded when their income increases. There are also other goods called _____________because an increase in income causes a _______ for these goods to ___. For ex: Mac N Cheese, Top Ramen

income

infereior goods

demandfall

2. Consumer Expectations – our expectations about the ______ can affect our demand. If prices will rise, you will buy now, if prices will fall, you will ____. Tell me about a time you waited to purchase a product: ____________________________________________________________________

future

wait

3. Population – changes in the size, change the demand. A growing population needs to be fed, housed, etc.

4. Consumer Tastes and Advertising – who can explain why bell-bottoms or acid washed jeans were everywhere and then gone?

When do luxury goods become a necessity? Give 3 examples…

Where's the Beef? In 1996 British cattle had a disease

that was linked to human death. Oprah Winfrey aired a program about it and declared that she would never eat another hamburger again. Later, a group of Texas cattlemen filed suit against her because at the same time the demand for beef dropped down to a 10 year low. Was she guilty?

A year in the life of …(product)

In pairs choose a product and speculate how demand for that product might change due to income fluctuations, population trends, consumer expectations, tastes and advertising.

Elastic Inelastic

Ch 4.3 Elasticity of Demand

Are there goods that you would always find money to buy, even if the price were to rise drastically? _________________

Are there others that you would cut back on or stop buying? _________________

Elasticity of demand is how economists describe the way that consumers respond to price changes.

Elasticity of Demand

Dictates how drastically buyers will cut back or increase their demand for a good when the price rises or falls

Elasticity= % of change in quantity demanded/percentage change in price

(original number – new number/Original number X 100 = Percentage change)

Inelastic Demand that is not very _______ to a

change in price…you will keep buying it no matter the change in price.

If the demand for a good at a certain price is less than 1

Inelastic Elastic

sensitive

Elastic Demand that is very

sensitive to a change in price and you will buy less of that good after a small price increase.

elasticity is greater than 1

Unitary elastic

If elasticity is exactly equal to 1 If a product increases price by 50% and

sells 50% less…

Elastic or Inelastic?

A pharmaceutical company A computer company A power supplier A sportswear manufacturer A water company An organic egg producer

Factors Affecting Elasticity

Availability of Substitutes If there are a few you will still

buy when price rises because you have ____________. Your favorite musical group, life saving medicine, gas.

no alternative

Importance

If you spend a large share of your income on a good, price increase will force you to make difficult choices.

Necessities vs. Luxuries

This varies person to person. A ________ is a good people always buy even when the price increases. Such as milk (inelastic)

necessity

Change over Time

Consumers don’t always react quickly to a price increase because it takes time to find substitutes. Demand ______________________. But it may become elastic over time.is inelastic in the short term

Elasticity and Revenue

A company’s total revenue is defined as the amount of _______ the company receives by selling its goods Price & quantity determine TR Companies can lose revenue by raising the

price of its goods because of: Available substitutes Limited budget Perception of the good as a luxury item

money

Elasticity and Pricing

Companies must know whether the demand for its product is elastic or inelastic at a given _____.price

McDonalds… For many years McDonalds restaurants

had little __________ because their prices were so low. When McDonald’s prices reached the level at which competitors could make a profit, other fast-food restaurants such as Wendy’s entered the market.

competition

Organs

Does a person who has severe heart disease has an elastic or inelastic demand for a heart transplant?

If it is inelastic then price is no object…should available organs be sold to the highest bidder?

How should medical science address this personal and sensitive issue of demand?

Predict the elasticity of demand for each of the following goods & tell me if the good has a substitute, if it is a necessity or luxury and if her demand for the good will change over time.

1. Frozen Orange Juice

2. Italian sports car

3. Insulin

4. Cellular phone

5. house

Take a Trip

With a group of 3-4 decide whether you are taking a trip or planning a wedding.

Make a list of 25 items you will need and whether they are elastic or inelastic.

Math Practice

Look at Figure 4.7 to calculate the exact elasticity of demand