Demand. Explain what it means to demand a good or service. In an economy, who generally demands goods & services? Demand

Transcription

1 Demand Explain what it means to demand a good or service. In an economy, who generally demands goods & services? Demand Explain what it means to demand a good or service. Answer: the willingness & ability to consume a good or service at various prices In an economy, who generally demands goods & services? Answer: consumers (but, so do businesses & government)

2 Law of Demand What does a consumer need to have happen to prices in order to consume additional amounts of a good? Explain why a consumer would think this way. Law of Demand What does a consumer need to have happen to prices in order to consume more of a good? Answer: Decrease Explain why a consumer would think this way (think back to marginal cost). Answer: The benefits from consumption decrease with each additional choice (diminishing marginal utility)

3 Law of Demand If the price of a good increases, what do consumers naturally do if they still want similar or equal levels of satisfaction, but don't want to buy the good that is now more expensive than it was? Provide an example where you personally have taken this action. Law of Demand If the price of a good increases, what do consumers naturally do if they still What want satisfaction, does a consumer but don't need want to have to buy happen the good to prices that is in now order more expensive to consume than it more was? of a good? Answer: Seek a substitute (substitute does not = generic brand) Answer: Decrease Explain why a consumer would think this way (think back to Provide marginal an example cost). where you personally have taken this action. Example: Price of steak increased at Sam's Club... decided to buy pork Answer: chops instead. The benefits from consumption decrease with each additional choice (diminishing marginal utility) Could the substitute cost more than the previous good?

4 Law of Demand - As the price of a good or service decreases, the quantity demanded increases (ceteris paribus) - As the price of a good or service increases, the quantity demanded decreases (ceteris paribus) What are synonyms for the term quantity? Graphing Demand Demand Schedule Price Quantity Remember when graphing: - Label axes - Consistent increments - Label curves If price increases or decreases, the quantity of the good responds - move along the curve

5 Determinants of Demand What if something else changes other than the price of the good? How would you react (as a consumer) to each of the following? 1. You get a large pay raise at your job, would you buy a new or used car? 2. The Danville football team is undefeated prior to its game against Southern, would you be more or less likely to buy a ticket for the game? 3. You hear that the price of gas is going to rise tomorrow by 25 cents, would you buy gas now or wait? 4. The price of coffee at Dunkin Donuts increases by 50 cents, would you buy more or less coffee at Sheetz? 5. The price of ipads decreases, would you buy more or less apps? 6. The new freshman class at DHS is bigger than last year's, will they buy more or less pizza at the PLANET pizza stand at the homecoming carnival? Determinants of Demand What if something else changes other than the price of the good? 1. You get a large pay raise at your job, would you buy a new or used car? Normal Goods - If income increases, demand increases Inferior Goods - If income increases, demand decreases 2. The Danville football team is undefeated prior to its game against Southern, would you be more or less likely to buy a ticket for the game? Popularity - The popularity of a good increase, the demand increases

6 Determinants of Demand What if something else changes other than the price of the good? 3. You hear that the price of gas is going to rise tomorrow by 25 cents, would you buy gas now or wait? Expectation of Future Prices - Prices in the future are expected to increase, current demand will increase 4. The price of coffee at Dunkin Donuts increases by 50 cents, would you buy more or less coffee at Sheetz? Price of Substitutes - Price of a good increases, the demand for a substitute good will increase Determinants of Demand What if something else changes other than the price of the good? 5. The price of ipads decreases, would you buy more or less apps? Complementary Goods - Price of a good increases, demand for a complement decreases 6. The new freshman class at DHS is bigger than last year's, will they buy more or less pizza at the PLANET pizza stand at the homecoming carnival? Population Change - More potential buyers, demand increases

7 Determinants of Demand What happens to the graph of demand if something else changes other than the price of the good? Increase Demand At all prices, the quantity demanded is greater. Decrease Demand At all prices, the quantity demanded is lesser. IRDL - Increase Right... Decrease Left (Demand does not go up and down) Shifting Demand - Practice For each example from the determinants of demand, graph the proper change in demand due to the changes that occurred. 1. Income decreases, demand shift for books at the public library? 2. Hair styles become longer, demand shift for haircuts? 3. Expect a sale coming on Black Friday, demand shift the week before Thanksgiving for Christmas sweaters?

8 Shifting Demand - Practice 4. Price of Nike shoes increases, demand shift for Adidas shoes? 5. Price of data plans increase, demand shift for smart phones? 6. Students leave Bucknell for summer break, demand shift for pizza from Dominos? Elasticity of Demand - Explain the meaning of the word "elastic"

9 Elasticity of Demand - Elasticity has to do with the ability to respond or change - Elasticity of demand is the ability of consumers to respond to a change in price - "If price increases, can consumers decrease their quantity demanded for a good?" Determining Elasticity of Demand - In general, the more ability to change quantity demanded due to a price change, the more elastic - List some goods that consumers might have a hard time changing their quantity demanded for if prices increase (making the good inelastic)

10 Determining Elasticity of Demand - What factors influence elasticity? Which are elastic or inelastic? 1. Available Substitutes - Are there substitutes for sandwich bread? Elastic? - Are there substitutes for salt? Elastic? 2. Necessity vs. Luxury - Is a vacation home a necessity or luxury? Elastic? - Is a prescription drug a necessity or a luxury when you are sick? Elastic? Determining Elasticity of Demand - What factors influence elasticity? Which are elastic or inelastic? 3. Time (Short-run vs. Long-run) - The price of fuel oil for heat just increased significantly, is demand elastic in the short-run? The long-run? 4. Narrowly or Broadly Defined Good - Is clothing narrowly or broadly defined? Elastic? - Is a Hollister t-shirt narrowly or broadly defined? Elastic?

11 Elastic vs. Inelastic Demand : Generally, the slope of the curve gives an idea of how much quantity can change with a price change. Which is elastic and which is inelastic? D D Which graph represents the demand elasticity of gasoline in the short run? In the long run? Demand is perfectly inelastic if, regardless of the change in price, the quantity demanded does not change. What good might be close to being perfectly inelastic? Demand is perfectly elastic if, the good will only be purchased at one given price. If the price is higher or lower, the good will not be purchased. What good might be close to being perfectly elastic? D D

12 Basic calculation of elasticity Elasticity of Demand = %Change in Quantity % Change in Price = 50% = 2 25% **if absolute value >1, demand is elastic, if <1, inelastic %change = original - new original X 100