Law of Demand. Class Demand Schedule for. Number of Students Willing and Able to Buy at this Price. Price $10

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1 Law of Demand Class Demand Schedule for Price Number of Students Willing and Able to Buy at this Price $1 $2 $3 $4 $5 $6 $7 $8 $9 $10 1. Why might some students be willing to pay $10 for this product? 2. Why might some students choose not to pay even $1 for this product? 3. You have created a demand curve for the product. What happens to the quantity demanded for this product when the price goes down? When the price goes up? 4. Most demand curves look similar to the one you created. Given this, what do you think the law of demand might say?

2 The Law of Demand A change in the of a good affects the of that good. Quantity demanded is the amount of a good that consumers are and to purchase at a particular over a given period of. Why? 1. Substitution Effect When an increase in the price of a good causes consumers to away from that good and toward other goods that do not experience a price increase. Likewise, a decrease in the price of a good causes consumers to switch toward that good. 2. Income Effect The change in that results from a change in the of a consumer s income. Purchasing power is your to buy things. If your income rises, you can buy more. If your income falls, you can buy less. When we talk about the purchasing power of your income, we are using an economics term called. Your real income is what you can buy with the $ you make. 3. Law of Diminishing Marginal Utility States that as a person consumes units of a good, the gained from each additional unit of the good. Diminishing means decreasing Marginal means additional Utilit y means satisfaction EXAMPLE: Why do prices for Disneyland and Disney World multi-day tickets decrease the more days you buy?

3 The substitution effect, the income effect, and the law of diminishing marginal utility can be reasons why consumers buy of a good when its price or of a good when the price. All Else Equal Assumption The law of demand applies only when we assume that influences on the quantity demanded, such as peoples for a good, are held constant or when the good s price changes. If the price changes and other influences change at the same time, the law of demand might not hold. Economics term: ceteris paribus or all else equal Holding everything else constant helps us understand how work and how different and are likely to influence the market. Demand Schedules A that indicates quantity demanded of a particular good at prices. Demand schedules can be for (A, B, C, and D) or for the entire (A + B + C + D).

4 Demand Curves A representation of the demand schedule for a good, showing the quantity demanded at each price. A demand curve slopes -to- which means that the lower the price, the higher the quantity demanded. Changes in that result in a change in quantity demanded is represented as movement along the demand curve. The curve itself does change position. Just like a demand schedule, a market demand curve is a graphical representation of how the quantity demanded by consumers in the market varies with the price.

5 PRACTICE: The Law of Demand The law of demand can be represented in numbers using a demand or it can be represented as a graph showing a demand. 1. Use the demand schedule to create a demand curve for Simon's consumption of music downloads on the grid shown. Label the curve D 1. DEMAND SCHEDULE FOR SIMON Price Quantity Demanded $7 1 $6 2 $5 3 $4 4 $3 5 $2 6 $1 7 Use the graph to answer questions The demand curve shows that at a price of $7, Simon will buy music download(s), and at a price of $1, he will buy music download(s). 3. Simon's buying behavior demonstrates the law of. 4. Simon's change in buying behavior at different prices is a change in. 5. Simon is not willing to pay $7 for every download because his utility (satisfaction) decreases as he downloads more and more music. Economists call this concept the law of. 6. How does the concept in question 5 explain the slope of the demand curve? All people do not have the same demand for a good. Some people have a greater willingness and ability to purchase a good than other people do.

6 7. Use the demand schedule below to create a demand curve for Carla's consumptions of music downloads. Draw the graph on the same grid where you graphed Simon s demand. Label the curve D 2. DEMAND SCHEDULE FOR CARLA Price Quantity Demanded $7 4 $6 5 $5 6 $4 7 $3 8 $2 9 $1 10 To answer questions 8-12, use the updated graph on the previous page, which now shows both Simon's and Carla's demand curves. 8. Carla's demand curve (D 2 ) is to the (right or left) of Simon's demand curve (D 1 ). 9. For each of the listed prices, Carla is willing and able to buy (more or less) music downloads than Simon is willing and able to buy. 10. At each of the possible quantities, Carla is willing and able to pay a (higher or lower) price than Simon is willing and able to pay. 11. The demand curves you created on the grid are (individual or market) demand curves. 12. Suppose Simon and Carla are the only buyers of music downloads. How would you create a market demand curve from the demand curves you drew on the previous page? 13. Fill in the market demand schedule for Simon and Carla's music downloads in the space below and then graph the market demand curve. DEMAND SCHEDULE FOR MUSIC DOWNLOADS Price Quantity Demanded $7 $6 $5 $4 $3 $2 $1

7 Shifts vs. Movements Changes in Demand A movement refers to a change a curve. On the demand curve, a movement denotes a change in both and from one point to another on the curve. The movement implies that the demand relationship remains. In other words, a movement occurs when a change in the quantity demanded is caused by a change in price, and vice versa. A shift in a demand curve occurs when a good's quantity demanded even though price. Shifts in the demand curve imply that the original demand relationship has changed, meaning that quantity demanded is affected by a factor than price. A shift of the demand curve means that at price, the amount people are willing and able to buy has. A movement is a change in quantity demanded as a result of a change. When the demand curve shifts, we call the change in consumers willingness to buy the produce a change in. Demand refers to the relationship between price and quantity demand, as represented by the demand curve. A rule to remember: A change in the of the good causes a along the demand curve. A change in any influence on consumers OTHER THAN the price of the good causes the demand curve to.

8 What causes shifts in the demand curve? TASTES Trends, styles, preferences Firms try to tastes by hiring advertising agencies to promote new products and styles. If a good becomes attractive/trendy, the demand curve will shift to the. If a good becomes popular, the demand curve will shift to the. Fashion in the 1980 s video How have tastes and preferences in fashion changed from the 1980s? Are any of these outfits popular again today? INCOME A rise in income means there is more to spend on consumption. A fall in income generally causes people to on the quantity of goods they buy. The demand for a NORMAL GOOD when income and falls when income decreases. Most goods are normal goods. The demand for an INFERIOR GOOD when income and increases when income falls. Examples: intercity bus transportation, canned meat and vegetables, processed cheese More popular among and others with relatively income

9 PRICE OF RELATED GOODS A change in the of one good can shift the curve for another good. Two goods are SUBSTITUTES if an in the price of one of the goods leads to an in the demand for the other. Hamburgers and hot dogs Coffee and tea DVDs and movie downloads McDonald s and Burger King Two goods are COMPLEMENTS if, because they are consumed, an in the price of one of the goods leads to a in the demand for the other. Hamburgers and hamburger buns Pancakes and syrup Gasoline and SUVs Tennis balls and racquets EXPECTATIONS If you the price of a good will fall in the, you are likely to postpone your purchase of that good until the price is lower. Example: there is a shift to the left in the demand curve for Macy s clothing in the days before a major If people think the price of a good will in the future they will buy more of it. Example: If people expect gas prices to increase due to or a, they will fill up their tanks before. NUMBER OF BUYERS If the number of consumers increases, then demand will increase. Example: population, baby boom generation If the number of consumers decreases, then demand will decrease. Example: disease, changing policies

10 SUMMARY CHART

11 PRACTICE: Changes in Demand Changes in Demand and Shifts in Demand Curves When demand changes, the demand curve shifts If demand increases, the demand curve shifts to the (right or left), meaning the buyers want to buy (more or less) of a good at each and every price. 2. If demand decreases, the demand curve shifts to the (right or left), meaning the buyers want to buy (more or less) of a good at each and every price. Factors the Cause Shifts in Demand Curves Listed below are the five factors that cause demand curves to shift. For each factor, fill in the blanks to describe how the factor affects the demand for a good. Factor: INCOME 3. As income rises, demand for (normal or inferior) goods rises while demand for (normal or inferior) goods falls. As income falls, demand for normal goods (rises or falls) while demand for inferior goods (rises or falls). Factor: PREFERENCES 4. Increased preference for a good (increases for decreases) demand; decreased preference for a good (increases or decreases) demand. Factor: PRICES OF RELATED GOODS 5. If two goods are (substitutes or complements) and the price of one good rises, the demand for the other good rises. If two goods are (substitutes or complements) and the price of one good rises, the demand for the other good falls. 6. If two goods are (substitutes or complements) and the price of one good falls, the demand for the other good rises. If two goods are (substitutes or complements) and the price of one good falls, the demand for the other good falls. Factor: NUMBER OF BUYERS 7. The more buyers in a particular market area, the (higher or lower) the demand; the fewer buyers, the (higher or lower) the demand. Factor: FUTURE PRICE 8. If buyers expect prices to rise in the future, they will buy (now or later). If buyers expect prices to fall in the future, they will buy (now or later).

12 Movement along the Curve or a Shift in the Curve For each of the following situations, indicate what will be the resulting impact on demand or quantity demanded. Also indicate the direction of movement or change. Situation 9. The price of jeans decreases 10. Additional consumers find vitamin-enriched bottled water pleasant tasting. 11. John enjoys steaks and expects his income to double within the next two years. 12. Dress shirts and ties are complements. The price of shirts increases. What happens to the tie market? 13. The birth rate in a country falls. What happens in the disposable diaper market? 14. Soft drink companies launch a successful advertising campaign. 15. You expect the price of orange juice to increase next week. Movement or Shift Upward or Downward (Movement) Left or Right (Shift) Changes in Demand and in Quantity Demanded In the following questions, fill in the blanks to describe how each event will affect the demand for large sport utility vehicles (SUVs). 16. The price of gasoline hits $5 a gallon. Affect: The demand for large SUVs will (increase, decrease or stay the same). The demand curve will shift to the (right, left, or none) because of (Circle one) Income Tastes / preferences Price of related goods complements Price of related goods substitutes Number of buyers Future price A change in price (this is change in quantity demanded, not a change in demand) 17. Smaller, sportier crossover vehicles hit the market and become the latest craze. Affect: The demand for large SUVs will (increase, decrease or stay the same). The demand curve will shift to the (right, left, or none) because of (Circle one) Income Tastes / preferences Price of related goods complements Price of related goods substitutes Number of buyers Future price A change in price (this is change in quantity demanded, not a change in demand)

13 18. Rising steel prices cause the prices of SUVs to rise. Affect: The demand for large SUVs will (increase, decrease or stay the same). The demand curve will shift to the (right, left, or none) because of (Circle one) Income Tastes / preferences Price of related goods complements Price of related goods substitutes Number of buyers Future price A change in price (this is change in quantity demanded, not a change in demand) 19. Government data shows that the incomes of Americans are expected to rise faster than ever over the next year. Affect: The demand for large SUVs will (increase, decrease or stay the same). The demand curve will shift to the (right, left, or none) because of (Circle one) Income Preferences Price of related goods complements Price of related goods substitutes Number of buyers Future price A change in price (this is change in quantity demanded, not a change in demand) 20. Word leaks to consumers that General Motors and Ford plan to offer big rebates on SUVs next month. Affect: The demand for large SUVs will (increase, decrease or stay the same). The demand curve will shift to the (right, left, or none) because of (Circle one) Income Preferences Price of related goods complements Price of related goods substitutes Number of buyers Future price A change in price (this is change in quantity demanded, not a change in demand) 21. The government loosens immigration laws, allowing millions of immigrants into the country. Affect: The demand for large SUVs will (increase, decrease or stay the same). The demand curve will shift to the (right, left, or none) because of (Circle one) Income Preferences Price of related goods complements Price of related goods substitutes Number of buyers Future price A change in price (this is change in quantity demanded, not a change in demand)

14 The Relationship between Income and Demand As a result of an increase in wages from his employer, Joe increased his consumption of Junior Mints and mangos, decreased his consumption of fried chicken, and maintained the same consumption of yogurt. Identify each of the goods consumed by Kramer as a normal good, an inferior good, or a neutral good. Then write the letter of the graph that represents the change to Joe s demand curve for each of the goods. 22. Junior Mints: Graph 23. Mangos: Graph 24. Fried Chicken: Graph 25. Yogurt: Graph

15 Analyzing Demand Headlines For each demand headline you analyze, do the following: (1) Draw what will likely happen to the demand curve based on the headline. (2) Explain your graph in a complete sentence using the the demand shifters from your notes. (3) Underline or highlight the demand shifter in your explanation. (2 points per headline) If the headline results in the curve not shifting, explain why the curve did not shift and whether the quantity demanded increased or decreased. Headline Demand Curve Explanation Average wages decline for workers around the country. Movie Tickets How will this information likely affect the demand curve for movie tickets? 1970s styles popular with high school and college students. Disco Albums How will this information likely affect the demand curve for albums of disco music? Fast food chain raises prices on all menu items. Burgers How will this information likely affect the demand curve for the chain s burgers? Analysts predict video game prices to increase next year. Video Games How will this information likely affect the current demand curve for video games?

16 Headline Demand Curve Explanation Gas prices increase 200% since last year. Sport Utility Vehicles How will this information likely affect the demand curve for new sport utility vehicles? Price for fresh blueberries skyrockets - cold weather to blame Fresh Strawberries How will this information likely affect the demand curve for fresh strawberries? Hospitals report dramatic decrease in births. Strollers How will this information likely affect the demand curve for baby strollers? Computer maker announces 20% price cut. Laptops How will this information likely affect the demand curve for the company s laptops?

17 Elasticity of Demand How sensitive quantity demanded is to price changes Calculating Elasticity Percent Change = (New - Old) / Old x 100 Step 1: Calculate the percentage change in the. Step 2: Calculate the percentage change in the. Step 3: the percentage change in the quantity demanded by the percentage change in the price. EXAMPLE If the price of chocolate rises from $2 per bar to $2.50, the quantity demanded falls from 20,000 to 10,000 bars. Step 1: (10,000-20,000) / 20,000 x 100 = -50% Economists generally ignore the negative. Step 2: ($2.50-2) / $2 x 100 = 25% Step 3: 50% / 25% = 2 Elastic Demand Consumers are sensitive to the price. Consumers respond to a price increase with a relatively decrease in quantity demanded. The slope for elastic demand is. A perfectly elastic demand curve would be. Elasticity is 1 Quantity demanded changes by a % than the price. What makes demand more elastic? Characteristic Example Your own example The good is a There are close substitutes A share of income is needed to buy the product There is a time to research options The pays the bill Cashmere sweaters Dasani brand water Yacht Plastic surgery Backpacks

18 Elastic Demand and Total Revenue Economists and businesses use elasticity of demand to the effect of price changes. Total Revenue = price x quantity When demand is elastic, a in price makes total revenue. But a drop in price, makes total revenue. Inelastic Demand Consumers are sensitive to the price. Consumers respond to a price increase with a relatively decrease in quantity demanded. The slope for elastic demand is more. A perfectly inelastic demand curve would be vertical. Elasticity is 1 Quantity demanded changes by a % than the price. What makes demand more inelastic? Characteristic Example Your own example The good is a There are close substitutes A share of income is needed to buy the product There is a time to research options Open heart surgery Drinking water Bubble gum Emergency room visit else pays the bill Health care covered by insurance

19 Inelastic Demand and Total Revenue When demand is inelastic, a in price makes total revenue. But a in price, makes total revenue. Unit-Elastic Demand Consumers are sensitive to the price. Example: soft drinks The slope for elastic demand is about. Elasticity 1 Quantity demanded changes at the % as price. A price increase or decrease has on total revenue.

20 PRACTICE: Elasticity of Demand Elasticity vs. Inelasticity According to the law of demand, when price rises, quantity demanded falls and when price falls, quantity demanded rises. Elasticity of demand is a measure of how much the quantity demanded of a good rises or falls due to a change in the price of the good. You can think of elastic demand as being like an elastic band - the quantity demanded of the good will stretch freely when pulled by a change in the good's price. Inelastic demand is more like a rope - the quantity demanded of the good will not stretch easily when pulled by a change in the good's price. 1. If the price of a good with elastic demand increases, which of the following describes the effect on the quantity demanded of the good? A. increases a little B. increases a lot C. decreases a little D. decreases a lot 2. If the price of a good with inelastic demand increases, which of the following describes the effect on the quantity demanded of the good? A. increases a little B. increases a lot C. decreases a little D. decreases a lot In questions 3-6, the four factors that determine the elasticity of demand are listed. For each factor, fill in the blanks to describe how the factor affects the elasticity of demand for a good. 3. Factor: Number of Substitutes Description: More available substitutes tend to make demand for a good (elastic or inelastic); fewer available substitutes tend to make demand for a good (elastic or inelastic). 4. Factor: Luxuries versus Necessities Description: The demand for (luxuries or necessities) tends to be elastic; the demand for (luxuries or necessities) tends to be inelastic. 5. Factor: Percentage of Income Spent on the Good Description: The demand for goods that take a (large or small) percentage of income tends to be elastic; the demand for goods that take a relatively (large or small) percentage of tends to be inelastic. 6. Factor: Time Description: The less time you have to respond to a price change in a good, the more likely it is that your demand is going to be (elastic or inelastic).

21 Considering the factors you listed in questions 3-6, identify the demand for the goods in questions 7-9 as elastic, inelastic, or unit-elastic. Explain the reason for each choice. 7. T-Bone Steak: Demand for a T-bone steak would most likely be because there are available, it is a good, and it takes a relatively portion of income. (FYI: a T-bone steak is considered a luxury good for most people) 8. New Sport Utility Vehicle : Demand for a new SUV would most likely be because there are available, it is a good, and it takes a relatively portion of income. 9. Insulin: Demand for insulin would be because there are no and it is an absolute for a diabetic regardless of the percentage of income spent. In each of the cases described in questions 10-12, identify whether the demand for the good is elastic, inelastic, or unit-elastic. Write your answers on the lines provided. REMEMBER: If change in quantity demanded falls more than change in price, the demand is elastic. If change in quantity demanded falls less than price, the demand is inelastic. If they change at the same rate it is unit-elastic. 10. The price of corn rises 5%, and the quantity demanded falls 15%. 11. The price of bagels rises 8%, and the quantity demanded falls 8%. 12. The price of telephones rises 10%, and the quantity demanded falls 2%. Elasticity and Total Revenue Elasticity of demand matters to sellers of goods because it relates to their total revenue (Price x Quantity sold = Total revenue). Questions relate to how the elasticity of demand for a good affects a seller's total revenue when the seller changes the price of the good. Fill in each blank with the correct answer. 13. If demand for a good is elastic and price increases, then total revenue will (increase, decrease or stay the same). 14. If demand for a good is elastic and price decreases, then total revenue will (increase, decrease or stay the same). 15. If demand for a good is inelastic and price increases, then total revenue will (increase, decrease or stay the same). 16. If demand for a good is inelastic and price decreases, then total revenue will (increase, decrease or stay the same). 17. If demand for a good is unit-elastic and price increases, then total revenue will (increase, decrease or stay the same). 18. If demand for a good is unit-elastic and price decreases, then total revenue will (increase, decrease or stay the same). 19. If a seller would like to increase revenue, the seller should (a) increase the price of the good if the demand for the good is (elastic or inelastic) or (b) decrease the price of the good if the demand for the good is (elastic or inelastic).

22 In each of questions 20-22, complete the table to calculate the total revenue for the good. Then fill in the blanks in the question following the table to summarize the results in each case. 20. When Edith increased the price of a good from $2 to $3, the quantity demanded rose from 100 to 110. Price X Quantity sold = Total revenue Original $ $ New $ $ So, because revenue (rose or fell) when the price (rose or fell), demand for the good must be (elastic or inelastic). 21. When Renaldo increased the price from $10 to $12, the quantity demanded fell from 80 to 40. Price X Quantity sold = Total revenue Original $ $ New $ $ So, because revenue (rose or fell) when the price (rose or fell), demand for the good must be (elastic or inelastic). 22. When Keiko decreased the price from $150 to $125, the quantity demanded rose from 60 to 120. Price X Quantity sold = Total revenue Original $ $ New $ $ So, because revenue (rose or fell) when the price (rose or fell), demand for the good must be (elastic or inelastic). In each of questions 23-27, determine if the demand in each case is elastic, inelastic, or unit-elastic 23. A grocery store owner finds that her total revenue increases when she lowers the price of fresh produce. 24. A corner gas station owner finds that his total revenue decreases when he lowers the price of gas. 25. A music store owners realizes that when the price of CDs increases by 20%, there is a 40% decline in sales. 26. A movie theater owner finds that her total revenue stays the same when she raises the price of tickets. 27. A car dealership owner finds that when he lowers the price of new cars by 10%, he experiences a 5% increase in sales.

23 Elasticity of Demand and a Cigarette User Fee To increase state revenue and decrease smoking rates, the governor of Minnesota proposed that the state impose a $0.75 per pack cigarette user fee. His proposal was passed by the state legislature. Use this information and your knowledge about elasticity of demand to answer questions Did the governor of Minnesota assume that demand for cigarettes was elastic or inelastic when he made his proposal? The governor assumed that demand for cigarettes was (elastic or inelastic) because one of his goals was to decrease smoking rate. If you raise the price of a good with this type of demand, the quantity demanded will go (up or down). 29. Given the large increase in price, in which income groups and age groups would you expect to see the greatest decrease in quantity demanded? People with (larger or smaller) incomes likely will be affected because the relative percentage of their income spent on cigarettes will be greater. Also people who smoke occasionally but are not addicted to nicotine likely will be affected because they may view cigarettes as a (luxury or necessity) instead of a (luxury or necessity). 30. Which of the four factors that determine elasticity of demand do you think plays the largest role in people's demand for cigarettes? Elasticity of Demand and Gas Prices Many people once believed that an increase in the price of gasoline would change consumer attitudes and driving behavior. For instance, economists assumed that people would drive less often and buy smaller, more efficient cars as the price of gasoline increased. However, gas prices increased in 2005 and 2008, and while the sales of sport utility vehicles suffered, people's driving habits and gas consumption levels changed very little. Use this information and your knowledge about elasticity of demand to answer questions Is the demand for gasoline more elastic or more inelastic than previously thought? Explain your answer. The demand for gasoline seems to be more (elastic or inelastic) than previously thought. If you raise the price of this type of good, the quantity demanded will (increase or decrease) only a little. 32. Which two of the four factors that determine elasticity of demand do you think plays the largest role in people's buying habits for gasoline? How might time affect this scenario?

24 Elasticity of Demand in Graphs In questions 34-36, use your understanding of elasticity of demand to decide whether the graph shows a good with elastic demand or a good with inelastic demand or a good with unit-elastic demand Analyze and explain Indicate whether the demand for each item is likely to be elastic or inelastic. The explain your choice. 37. Ballpoint pen Product Elastic or Inelastic Explanation 38. Crest toothpaste 39. A gallon of water 40. Sugar 41. A luxury holiday vacation 42. Refrigerator 43. Life-saving medical treatment 44. Diamond ring