Divide class into 5 groups. Each group attempt one question 60
minutes given to organize the groupings and for the groups to
prepare the answers 15 minutes for each group to present their
answers (75 mins) TUTORIAL 2
Slide 2
Tut. Questions: 1. State the law of demand and explain why the
other-things-equal assumption is critical to it. 2. Differentiate
between a normal (superior) and an inferior good. 3. Explain how
the prices of related goods also affect demand. 4. Evaluate how the
following situations will affect the demand curve for iPods. (a)
Income statistics show that income of 1825-year-olds have increased
by 10 percent over the last year. (b) Efforts of music artists
wanting greater protection of their music result in more stringent
enforcement of copyrights and the shutdown of numerous illegal
downloading sites. (c) Believing that it has significant control of
the market for portable digital music players, Apple decides to
raise the price of iPods with the goal of increasing profits. (d)
The price of movie tickets decreases. 5. What effect should each of
the following have on the demand for gasoline in a competitive
market? State what happens to demand. Explain your reasoning in
each case and relate it to a demand determinant. (a) an increase in
the number of cars (b) the economy moves into a recession (c) an
increase in the price of car insurance, taxes, maintenance (d)
consumer expectations of substantial price increases in
gasoline
Slide 3
State the law of demand and explain why the other-things-equal
assumption is critical to it. The law states that, other things
being equal, as price increases, the corresponding quantity
demanded falls. There is an inverse relationship between price and
quantity demanded with everything else held constant.
Slide 4
Cont The other-things-equal assumption refers to constant
prices of related goods, income, tastes, and other things that
affect demand besides price. The law of demand only looks at the
relationship between price and quantity demanded.
Slide 5
Differentiate between a normal (superior) and an inferior good.
A normal (superior) good is one whose demand varies directly with
income as is true for most goods and services the more income one
earns, the more one is willing and able to buy.
Slide 6
However, there are exceptions, called inferior goods, whose
demand varies inversely with income. Inferior goods are those whose
demand increases when incomes fall and vice versa.
Slide 7
Explain how the prices of related goods also affect demand.
Substitute goods are those that can be used in place of each other.
The price of the substitute and demand for the other good are
directly related. If the price of Coke rises, demand for Pepsi
should increase.
Slide 8
Complementary goods are those that are used together like
tennis balls and rackets. When goods are complements, there is an
inverse relationship between the price of one and the demand for
the other.
Slide 9
Some goods are not related to each other and are independent
goods. In these cases, a change in price of one will not affect the
demand for the other.
Slide 10
Evaluate how the following situations will affect the demand
curve for iPods. (a) Income statistics show that income of
1825-year-olds have increased by 10 percent over the last year.
Since 1825-year-olds are the main users of portable digital music
players, this will increase the demand for iPods (assuming iPods
are a normal good). This will cause the demand curve to shift
outward.
Slide 11
(b) Efforts of music artists wanting greater protection of
their music result in more stringent enforcement of copyrights and
the shutdown of numerous illegal downloading sites. These efforts
raise the price of MP3s for music users that used to get their
music for free from downloading services because they are now
forced to purchase music through legal downloading sites. Since
MP3s are a complementary good to iPods, the demand for iPods will
decrease as a result of the artists lobbying efforts.
(c)Believing that it has significant control of the market for
portable digital music players, Apple decides to raise the price of
iPods with the goal of increasing profits. A raise in price will
not shift the demand curve for iPods. Rather, the higher price will
simply discourage some consumers from purchasing one and demand for
iPods will decrease along the demand curve to a lower quantity at
the new price.
Slide 14
(d)The price of movie tickets decreases. Since movie tickets
are unrelated to iPods, the decrease in the price of movie tickets
will have no effect on the demand for iPods and the demand curve
will remain the same.
Slide 15
What effect should each of the following have on the demand for
gasoline in a competitive market? State what happens to demand.
Explain your reasoning in each case and relate it to a demand
determinant. (a)an increase in the number of cars Demand would
increase because there would be more buyers of gasoline. The
additional buyers would come from the additional cars and
trucks
Slide 16
(b) the economy moves into a recession Demand would decrease
because consumer and business incomes would fall. Consumer and
businesses would have less money to spend on gasoline.
Slide 17
(c) an increase in the price of car insurance, taxes,
maintenance Demand would decrease because of increase in the price
of complementary goods. Car insurance, car taxes, and car
maintenance expenses are complements to gasoline.
Slide 18
(d) consumer expectations of substantial price increases in
gasoline Current demand for gasoline would increase because
consumer expectations about the future have changed and may prompt
consumers to buy now to beat the future price increases.