Unit 4: Demand 1 Copyright ACDC Leadership 2015. Chicken Wing Video 2.

Unit 4: Demand

1Copyright ACDC Leadership 2015

Chicken Wing Video

2

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


Example of DemandI am willing to sell several A’s in AP Economics. How much will you pay?

Price Quantity

Demanded

Demand Schedule



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

• 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



• 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



Can you see the Law of Diminishing Marginal Utility in Disneyland’s pricing strategy?

Copyright ACDC Leadership 2015

UtilityUtility(happiness)(happiness)

Quantity Quantity ConsumedConsumed

The Law of Diminishing The Law of Diminishing UtilityUtility

Graphing Demand


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…


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

13

PriceQuantity

Demanded

$5 10

$4 20

$3 30

$2 50

$1 80


GRAPHING DEMAND

Q

$5

4

3

2

1

Price of Milk

Quantity of Milk

Demand Schedule

10 20 30 40 50 60 70 80

14

PriceQuantity

Demanded

$5 10

$4 20

$3 30

$2 50

$1 80Demand


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


16

Demand

https://www.youtube.com/watch?v=LwLh6ax0zTE

https://www.youtube.com/watch?v=LwLh6ax0zTE

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? 8. Name 10 fast food places


Shifts in Demand

18

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


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

$4 20

$3 30

$2 50

$1 80Demand


What if milk makes you smarter?

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 80Demand


What if milk makes you smarter?

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 30

$4 20 40

$3 30 50

$2 50 70

$1 80 100Demand


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 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


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

$4 20

$3 30

$2 50

$1 80

Demand


What if milk makes causes

baldness?

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


What if milk makes causes

baldness?

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

26

PriceQuantity

Demanded

$5 10 0

$4 20 5

$3 30 20

$2 50 30

$1 80 60

Demand


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

27

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


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

28

PriceQuantity

Demanded

$5 10

$4 20

$3 30

$2 50

$1 80

Demand


What happens to the demand for milk if

the price of milk goes up?

NOTHING!The demand

stays the same

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)


What Causes a Shift in Demand?5 Shifters (Determinates) of Demand:

1. Price of Related Goods2. Outlook/ Future Expectations3. Income4. Number of Consumers5. Tastes and Preferences

Changes in PRICE don’t shift the curve. It only causes movement along the curve.


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…increase.– 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…

decrease.– 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.


Substitute Goods:Substitute Goods:– As price of one rises the demand for the

other rises

– As price of one falls demand for the other falls

1. PRICE OF RELATED GOODS1. PRICE OF RELATED GOODS

Example:Example: Dr. Thunder Dr. Thunder and Dr. and Dr. Pepper.Pepper.

(assuming they taste the (assuming they taste the same)same)

=$ D

THE DETERMINANTS OF DEMAND THE DETERMINANTS OF DEMAND

““P.O.I.N.T”

P.O.I.N.T”

““P.O.I.N.T”

P.O.I.N.T”Complementary Goods:Complementary Goods: (they go well together)(they go well together)

– As the price of one rises the demand for the other As the price of one rises the demand for the other fallsfalls

– As the price of one falls the demand for the other As the price of one falls the demand for the other rises.rises.

Example:Example: Gas, SUVs, and tires.Gas, SUVs, and tires.

+ =$$

Which way will the Demand curve for Tires shift? A: Shift to the left

DEMANDDEMAND



http://images.google.com/imgres?imgurl=http://www.flashinsider.com/images/2005/08/gas.jpg&imgrefurl=http://www.flashinsider.com/category/flash-mx2004/page/2/&h=200&w=164&sz=8&hl=en&start=1&tbnid=ZJbk9xmIFkyMpM:&tbnh=104&tbnw=85&prev=/images?q=gas+pump&svnum=10&hl=en&lr=

34

Substitutes or Complements?

Substitutes

35

Substitutes

36

Substitutes

37

Substitutes

38

Substitutes

39

Substitutes

40

Substitutes

41

Substitutes

42

Complements

43

5. TASTES 5. TASTES (Affected by attitudes, quality, advertising, etc.)(Affected by attitudes, quality, advertising, etc.)

4. NUMBER OF BUYERS4. NUMBER OF BUYERS

3. INCOME3. INCOME


2. OUTLOOK OF THE FUTURE2. OUTLOOK OF THE FUTURESubstitutesSubstitutes vs vs ComplementsComplements

Superior Superior vs vs InferiorInferior Goods Goods

This could work in This could work in numerousnumerous ways. For ways. For example:example:You hear there is going to be a recession so you You hear there is going to be a recession so you stop spending today –OR– you hear that a sale on stop spending today –OR– you hear that a sale on some clothing is ending soon so you run to make a some clothing is ending soon so you run to make a purchase today.purchase today.


““POINT”POINT”

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.


Inferior Goods

46

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

47

Practice Questions


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

48

Practice Questions


Practice

49

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


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


ELASTIC ELASTIC AND AND

INELASTIC DEMANDINELASTIC DEMAND

The Demand & Price The Demand & Price relationship is not the relationship is not the

same for every product.same for every product.LAW OF DEMAND:LAW OF DEMAND:

INVERSEINVERSE RELATIONSHIP BETWEEN RELATIONSHIP BETWEEN PRICEPRICE AND AND QUANTITYQUANTITY..

……but sometimes the relationship between but sometimes the relationship between PRICEPRICE and a and a

change in change in DEMANDDEMAND is not as is not as strongstrong for some goods. for some goods.

: PRICE: PRICE

STRONGER LAW RELATIONSHIPSTRONGER LAW RELATIONSHIP

: PRICE: PRICE

WEAKER LAW RELATIONSHIPWEAKER LAW RELATIONSHIPMORE SUBSITITUTESMORE SUBSITITUTESLESS SUBSITITUTESLESS SUBSITITUTES

Elasticity of DemandElasticity of Demand

ElasticityElasticity is a measure of is a measure of responsiveness between responsiveness between change in demand and a change in demand and a change in the price. change in the price.

It tells how much demand It tells how much demand changes when you change changes when you change the price. the price.

2 Types of Elasticity:2 Types of Elasticity: Inelastic Inelastic ElasticElastic

Elastic DemandElastic Demand

Elastic Demand:Elastic Demand: quantity demanded quantity demanded is is sensitivesensitive to small price changes. to small price changes.

Easy to substitute a good that has elastic demand. Easy to substitute a good that has elastic demand. HAS MANY SUBSTITUTESHAS MANY SUBSTITUTES

When price increases, demand decreases (business When price increases, demand decreases (business revenue decreases)revenue decreases)

Example:Example: price of a good with many substitutes, such price of a good with many substitutes, such as bottle water or soda.as bottle water or soda.

Inelastic Demand

Inelastic Demand:Inelastic Demand: quantity demanded is quantity demanded is NOTNOT sensitivesensitive to price changes. to price changes.Hard to find substitutes for the good. Hard to find substitutes for the good. HAS FEW HAS FEW

OR NO SUBSTITUTESOR NO SUBSTITUTESWhen price increases, business revenue When price increases, business revenue

increasesincreasesExample:Example: needed medication for an illness, such needed medication for an illness, such

as Chemo-Therapy & gas. as Chemo-Therapy & gas. Necessities are Necessities are INElASTIC!INElASTIC!

Elastic and Inelastic Demand CurvesElastic and Inelastic Demand Curves

5.00

1.00

5.00

1.00

Gasoline

Tacos

1 2 3 4 5 6 7 8 9 10

1 2 3 4 5 6 7 8 9 10

If the market price for gasoline was to rise from $1.00 to $5.00, the quantity demanded in the market decreases insignificantly (from 8 to 7 units).(from 8 to 7 units).

If the market price for gasoline was to rise from $1.00 to $5.00, the quantity demanded in the market decreases insignificantly (from 8 to 7 units).(from 8 to 7 units). If the market price for tacos rises from $1.00 to $5.00, the quantity demanded in the market decreases significantly (from 8 to 1 unit).(from 8 to 1 unit).

If the market price for tacos rises from $1.00 to $5.00, the quantity demanded in the market decreases significantly (from 8 to 1 unit).(from 8 to 1 unit). Taco demand is highly sensitivesensitive to price changes and can be described as elasticelastic; gasoline demand is relatively insensitive to price changes and can be described as inelastic.

Taco demand is highly sensitivesensitive to price changes and can be described as elasticelastic; gasoline demand is relatively insensitive to price changes and can be described as inelastic.

ELASTICELASTIC

INELASTICINELASTIC

Elasticity Over Time

Short-RunShort-Run - Consumers - Consumers don’t have enough don’t have enough time time to adjust to the price change in a short to adjust to the price change in a short period of time period of time (ex: stuck with the current product with no substitutes).(ex: stuck with the current product with no substitutes).

Demand tends to be Demand tends to be inelasticinelastic in the in the short-runshort-run

Long-RunLong-Run - Consumers - Consumers have enough timehave enough time to adjust in a longer period of time to adjust in a longer period of time (ex: we will find a substitute to gas if the price remains high)(ex: we will find a substitute to gas if the price remains high)..

Demand tends to be much more Demand tends to be much more elasticelastic in the in the long-runlong-run

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Unit 4: Demand 1 Copyright ACDC Leadership 2015. Chicken Wing Video 2.

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