Demand- how much of a product consumers are willing and able to buy at a given price during a given period.

Transcription

1 Ch. 4 Demand Ch. 4.1 The Demand Curve (Learning Objective- explain the Law of Demand) In your world- What are the goods and services that you demand? What happens to your buying when the price goes up or down? This concept is the important to understand the consumer. The Law of Demand How many Large Pizzas are bought each day in America? How much do they cost? How many are bought if the price is $12? How many are bought at $9? How many at $6? This is called- Demand. What happens to the amount of a good or service purchased when the price drops? Demand- how much of a product consumers are willing and able to buy at a given price during a given period. What does willing and able mean? Do you have the $ and do you want to buy it? The relationship between price and quantity demanded is called the Law of Demand. Rule- the higher the price, the smaller the quantity demanded.

2 Demand, Wants, and Needs These are not the same. Wants are Unlimited! Wants tend to be expansive and therefore the Demand is Low. Needs are different. You may need a new coat but if the price is too high, you may wait until you can find another one cheaper. Substitution Effect We all have wants and needs. Depending on our ability and willingness to buy things, we will try to satisfy our wants and needs. Mostly, how much MONEY we have and our willingness to spend it. We may try to substitute other things to satisfy our wants and needs. We look for cheaper alternatives! (Example- We may want a new car but we often buy a cheaper one. Or, we may be hungry and want a steak dinner, but we substitute a burger. Or, we may want an expensive coat, but we buy a cheaper one instead.) Income Effect We only have a limited amount of Money. We can t spend more than we earn. This affects your Demand. (example- if you make $36/week, how many $9 pizzas can you buy? What if the price drops to $6?) If the price of a good drops, you now have a greater ability to buy.

3 Diminishing Marginal Utility Marginal Utility- The satisfaction you get from each additional unit of a product. (Example- how much do you value the 2 nd, 3 rd, 4 th slice of pizza you buy? Less with each one.) Law of Diminishing Marginal Utility- the more of a good you consume, the smaller the marginal utility. *This affects your Demand!! **Consumers buy things every day to satisfy their wants and needs. In making the decision of what to buy, people will consider- - A cheaper alternative - Their actual income. Do they have enough $? - The Marginal Utility of each purchase. How important it is to them. **If the price goes down, things change. They can buy more of what they want as long as it is important to them. Groups- get into groups and discuss the meaning of the Law of Demand. The Demand Curve Demand can be expressed visually by the Demand Curve. This is a way to visually see the relationship between price and demand. See pg. 105 When you describe Demand, you must specify the units being measured over a given period of time. (example- Large pizzas sold in a week) In Figure 4.1 (B) you can see the number of pizzas sold at each price. Notice the number increases as the price decreases. This creates a downward slope.

4 *This assumes that the price of other goods remains constant. So, the Demand Curve reflects the change in the price of pizza and the amount purchased relative to other prices of goods that remain constant. Individual Demand versus Market Demand Individual- The demand of an individual consumer. Market Demand- The sum of all the individual demands of all consumers. See Figure 4.2 on pg. 107 (3 Individuals and the sum of all) **Do- Technology and Demand- on pg. 108.

5 Ch. 4.2 Elasticity of Demand (Learning Objective- try to compute the elasticity of Demand) In your World- suppose you manage a restaurant. How can understanding the Demand Curve help you manage your revenue? Computing the Elasticity of Demand Figure 4.3 on pg the demand curve of Pizza. What happens when the price drops from $12 to $9? (14 million to 20 million pizzas) Elasticity of Demand means the response of Consumers to price changes. *It measures the % change in quantity demanded divided by, the % change in price. See pg (See example on pg. 110.) Elastic Values Once we calculate the Elastic Value, we can see if consumers are sensitive to the price change. 3 Categories Elastic- If the % change in quantity demanded exceeds the % change in price. (over 1.0) Unit Elastic- If they are equal. (at 1.0) Inelastic- If the % change in quantity demanded is less than the % change in price. (less than 1.0) What does this really mean? It is a way to determine how consumers will react to price changes.

6 Elasticity and Revenue This knowledge is important to producers. This will impact their revenue. Total Revenue- price multiplied by the quantity demanded at that price. Producers want to know what happens to their revenue when the price drops. (they will sell more units but the income per unit drops) If the Elastic Value is- Elastic- a profit can be made. Unit Elastic- break even. Inelastic- lose money. Knowing this can help a business plan their pricing decisions. **If you were the owner of a pizza restaurant, how could the data on Fig. 4.3 be valuable? What would sell your large pizzas for to make the most profit? Factors that influence the Elasticity of Demand 1. Availability of Substitutes. Wants can be satisfied in a variety of ways. If the price of a good rises, other goods will seem more attractive. If there are other available and similar other goods, it is easier for consumers to switch. These goods are considered Elastic. (Example- Shoes. If one type of shoes goes up, people will buy other brands. Prescription Drugs. There are not many alternatives so people will pay the higher price.) A good with few alternatives is considered Inelastic. 2. Share of Consumer s Budget spent on the Good. Higher prices reduce demand in part because it lowers your spending power. A consumer has to decide just how important certain goods are to their budget. The more important a good is to a consumer, the more inelastic it is. If a good is not very important, a price change will not impact the budget as much. (example- if the price of natural gas goes up, it will impact your budget since a large % is spent on heating. However, if the price of paper towels rises, it will not be as impactful.) 3. Duration of Adjustment Period. Finding a substitute for a higher priced good takes time. When the price of something goes up, people adjust over time. The longer the adjustment period, the easier it is to find a substitute. For many goods, they become more elastic over time. (examplewhen the price of oil rises, people adjust. They buy smaller cars of drive less. Figure 4.4 shows how the price of oil caused the demand to become more elastic over time.)

7 Look at some examples See Figure 4.5 on pg. 116 Prices are usually more elastic in the long term. Why? *people have time to adjust their budgets. **Look at Figure 4.5 on pg Describe how consumers adjust over time to price increases in each example. **Do Teamwork on pg. 118

8 Ch. 4.3 Changes in Demand (Learning Objective- Identify the factors that change the Demand Curve.) *Remember- the Demand Curve shows the relationship between price and quantity demanded. Changes that shift the Demand Curve These factors can cause changes to the Curve- 1. Consumer Income 2. Price of related goods 3. The number and composition of Consumers 4. Consumer expectations 5. Consumer Tastes How does a change in each affect Demand? Consumer Income A change in personal income affects Demand. If your income decreases, your Demand drops. If your income increases, your Demand rises. (Duh!) In reality it changes the Demand Curve. (See Figure 4.6) What happens is the Curve shifts to the right. That means the people are more able and willing to buy more. But there is more. Normal Goods do respond to the change, but inferior goods do not. (Even if you have more $ you will probably not buy more bologna sandwiches or used furniture)

9 Change in the Price of Related Goods What happens to the demand for a good when the price of something similar changes? Remember- people are always trying to find an alternative. Substitutes- Pizza and Tacos are substitutes. If the price of one goes up, the demand for the other will rise. (See Figure 4.7) A left shift in the Curve is caused by decrease in demand. Compliments- Certain goods go together and complement each other. Pizza and Soda, Milk and Cookies, Airline Tickets and Rental Cars. An increase in the price of one, will cause a change in the demand for the other. Changes in the Size and Composition of the Population If the overall population increases, the overall demand will increase. (More people will buy more stuff) If the demographics (age, gender, and race) change, there will be a change in what is bought and sold. What will be demanded if the amount of teenagers rises? What about old people? What about babies? Video games, Dentures, Diapers? Change in Consumer Expectations If consumers believe the prices or quality will change, they buy more now. If you think that the price of pizza will go up next week, you may buy an extra one now. The expectation of lower prices has the opposite effect. You may put off a purchase.

10 Change in Consumer Taste Most of the things that people buy are influenced by taste (what people like). Do you eat anchovies on your pizza? Do you put sauerkraut on your hotdog? What we like affects what we buy! Can you think of something that we used to buy, but not much anymore? (Postum?) What would happen if scientists discovered that pizza sauce improved heart health? Movement along the Curve vs. a Shift in the Curve There is a difference! A simple a change in price can change along the Curve. A change in one of the 5 factors above will cause a shift in the Curve. *Discuss in groups- What causes Consumer Tastes to change? Give examples. The Role of Time in Demand Consumption does not take place instantly. Time is a Factor. When you buy something, there is a money price that you pay. There is also a time price. This means that you value the services that each good provides you. *Most of us would pay more $ to get the same benefit in less time. Your time has value! We all like to save time. Would you pay more to get a faster cooking oven? Aspirin that works faster? A faster Computer? This is part of our opportunity cost to buy something.

11 We all have different attitudes about time A retired couple might- Cut coupons and try to save pennies. Scan newspapers to find bargains. Shop various stores to find items on sale. Drive across country while on vacation. WHY??????? A working couple might- Ignore coupons and sales. Eat out more often to save time. Buy more at convenience stores to save time. Shop at only one store to save time. Fly to their vacation destination. WHY???????? Time is an opportunity cost that we have to consider. *What is the Difference between Money price and Time price? How does this affect your family s choices? *Teamwork- Discuss in groups several ad campaigns on TV. Why are they so persuasive? Explain how each is designed to shift consumer demand. *Connect to History- See pg Discuss the demand for Cotton in England.