Bell Ringer. 1. A gallon of gas 2. Big Mac 3. Apple iphone XS 4. Car. How much would you be willing to pay for the following items?

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1 Bell Ringer How much would you be willing to pay for the following items? 1. A gallon of gas 2. Big Mac 3. Apple iphone XS 4. Car

2 Bell Ringer How much would you be willing to pay for the following items? 1.A gallon of gas - $ Big Mac - $ Apple iphone XS - $999 4.Honda Accord - $25,000

3 Objectives 1. Explain the law of demand. 2. Define determinants of demand. 3. Give an example of how a change in demand for one good can affect demand for a related good.

4 The Law of Demand Demand is the desire to own something and the ability to pay for it. The law of demand states that when a good s price is lower, consumers will buy more of it. When the price is higher, consumers will buy less.

5 The Law of Demand Law of Demand P P D D INVERSE RELATIONSHIP

6 Determinants of Demand What happens to the demand 1. for ice cream when the price of ice cream drops? 2. for cars when people get a tax refund? 3. for umbrellas after the first monsoon? 4. for hot dogs when the price of hot dog buns rises? 5. for gasoline today when people expect prices to fall tomorrow?

7 Determinants of Demand Consumer expectations Substitution Effect Income Effect Normal goods vs. Inferior goods

8 Consumer Expectations The current demand for a good is directly related to its expected future price. If you expect the price to rise, your current demand will rise, which means you will buy the good sooner. If you expect the price to drop, your current demand will fall, and you will wait for the lower price.

9 The Substitution Effect The substitution effect takes place when a consumer reacts to a rise in the price of one good by consuming less of that good and more of a substitute good.

10 Complements and Substitutes The demand for one good can also shift in response to a change in demand for another good. Complements are two goods that are bought and used together. Substitutes are goods that are used in place of one another.

11 Income Effect Normal goods goods/services for which demand increases when real income increases Inferior goods goods/services for which demand increases when real income decreases VS.

12 Closure/Summary Working by yourself or with a partner, answer questions 2 & 8 on page 90 in your notes. Substitution Effect vs. Income Effect pg. 87 We will be discussing the answers together as a class.

13 Bell Ringer The Law of Demand states that as price goes up, demand goes down... How much will demand decrease in the following circumstances? Why? The price of gas increases from $2.50/gallon to $5.00/gallon The price of a haircut increases from $20 to $40 The price of cell phone service increases from $70/month to $140/month The price of milk increases from $2/gallon to $8/gallon

14 Objectives 1. Describe the difference between elastic and inelastic demand. 2. Identify factors that affect elasticity. 3. Explain how firms use elasticity and revenue to make decisions.

15 Elasticity of Demand Elasticity of demand is the way that consumers respond to price changes; it measures how drastically buyers will cut back or increase their demand for a good when the price rises or falls. If you will keep buying a good despite a price increase, your demand for that good is inelastic. If you buy much less of a good after a small price increase, your demand for that good is elastic.

16 Elasticity of Demand What are some goods/services with elastic demand? What are some goods/services with inelastic demand? Can you think of a good/service with perfectly elastic or inelastic demand? Elastic or Inelastic?

17 Elasticity of Demand Food is a necessity. So why is there elastic demand for Little Caesar s Pizza? Clothing accessories are not a necessity. So why is there inelastic demand for Louis Vuitton purses?

18 Factors Affecting Elasticity Elasticity of demand is determined by one or more of these factors: The availability of substitute goods A limited budget that does not allow for price changes The perception of a good as a luxury item.

19 Factors Affecting Elasticity Availability of Substitutes If there are a few substitutes for a good, then even when its price rises greatly, you might still buy it. A lack of substitutes can make demand inelastic; a wide choice of substitute goods can make demand elastic. Other examples?

20 Other Factors Relative Importance A second factor in determining a good s elasticity of demand is how much of your budget you spend on a good. Necessities vs. Luxuries Whether a person considers a good to be a necessity or a luxury has a great impact on a person s elasticity of demand for that good.

21 How do businesses use demand elasticity? The law of demand states that an increase in price will decrease the quantity demanded. When a good has elastic demand, raising the price by a small percentage will decrease the quantity sold by a large percentage. The quantity sold will drop enough to reduce the firm s total revenue. $10.99/month $6+

22 How do businesses use demand elasticity? If demand is inelastic, consumers demand is not very responsive to price changes. Therefore, raising the price of each unit will not significantly decrease the quantity sold. This will result in higher total revenues. $69,900 $499.99

23 Key Terms elasticity of demand: a measure of how consumers respond to price changes inelastic: describes demand that is not sensitive to price changes elastic: describes demand that is very sensitive to a change in price

24 Bell Ringer Oil is a nonrenewable resource. Humanity consumes 96 million barrels of oil per day, and this number continues to climb. However, the world reserves of oil have increased over the past 35 years. (Today s oil reserves stand at over 1 trillion barrels.) In other words, we have more oil than ever. How can this be??

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26 Objectives 1. Define the law of supply. 2. Explain how prices encourage new businesses to join the market.

27 Before we continue When talking about demand, we were talking primarily about the consumers (Their choices about what to buy, when/how much to buy, etc.). When talking about supply, we are talking primarily about producers and firms. An important distinction!

28 The Law of Supply Supply is the amount of goods available. The law of supply states that as prices rise, so will the quantity supplied. As the price of a good increases, producers will offer more of it. As the price decreases, they will offer less. The law of supply includes two movements: 1. Firms changing their level of production 2. Firms entering or exiting the market

29 The Law of Supply Law of Supply P P S S DIRECT RELATIONSHIP

30 Supply Thought Experiment How many hours would you be willing to work in a week if you were paid

31 The Law of Supply, cont. How does the law of supply affect the quantity supplied? As prices rise, producers will offer more of a good and new suppliers will enter the market why? Answer: In the hopes of making a profit.

32 Market Entry Rising prices encourage new firms to join the market and will add to the quantity supplied of the good. Take, for example, the music market: When a particular type of music becomes popular, such as disco, grunge, or dubstep, more bands will play that type of music in order to profit from such music s popularity. This action reflects the law of supply.

33 Market Entry Exercise Working by yourself or with a partner, come up with at least three other examples of products where firms have increased production or entered the market when the price/popularity of a product goes up.

34 Key Terms supply: the amount of goods available law of supply: producers offer more of a good as its price increases and less as its price falls

35 Bell Ringer A carton of cigarettes can cost as much as $70! Why do you think cigarettes cost so much?

36 Objectives 1. Identify the ways that the government can influence the supply of goods. 2. Define subsidies and how their use directly influences food and other commodity production in the U.S.

37 Government Influences Excise taxes are taxes on the production or sale of certain goods They are collected by the producer and not paid directly by the consumer. This makes them "hidden" in the price of a good/service. Examples? Cigarettes, Alcohol, Gambling, Gas, Marijuana

38 Government Influences Excise taxes are often called sin taxes because the government uses them to control or limit certain behaviors (smoking, excessive drinking, gambling, etc.). Do you think sin taxes are appropriate?

39 Government Influences, cont. Subsidies A government payment that supports a business or market Subsidies generally lower cost, which allows a firm to produce more goods. Reasons for subsidizing products include: To prevent food shortages To protect domestic industries from foreign competition. Examples: Soybeans, oil, and CORN

40 Diminishing Returns Has there been a time in your life where you ve put so much effort into doing something that you eventually feel like you re not getting as much out of it as you re putting into it? What was it? How did it make you feel?

41 Law of Diminishing Returns The law of diminishing returns refers to a point in time where the level of benefits gained is less than the amount of money or energy invested. In plain English it simply means the juice isn t worth the squeeze.

42 Diminishing Returns Review What does the Law of Diminishing Returns look like? Imagine that our class runs a business where we get paid for each ball we can transfer from one box to another. Let s see if we can find the optimal number of employees for our business.

43 Rules Every employee must handle every product ( Chinese fire drill style). One ball at a time. The product is fragile No throwing! Dropped product = broken! Only the balls that are in the box when time expires count toward the total output.