Download Demand

Demand
Do you agree with the store
manager or would you
suggest an alternative action?
Why do stores put items on
sale?
What would lead to an
increase in sales of this card?
Demand
 How
much of a good or service someone
is willing and able to buy at a given price.
Disclaimer


If you can’t afford it you cannot demand it.
If you don’t want it you wouldn’t want to
demand it.
Law of Demand
 Consumers
buy more of something when
it is cheaper and less when it is expensive.
Demand Schedule
 This
table lists the quantity of goods that
an individual person or household would
purchase at different prices.
Cans of Pop
Price
Free
.25
.50
.75
1.00
1.25
1.50
Quantity
Cans of Poop
Price
Free
.50
1.00
1.50
2.00
2.50
3.00
Quantity
Market Demand Schedule
 This
table lists the quantity of goods that
all consumers combined would purchase
at different prices.
Bag of M&Ms
Price
Free
.25
.50
.75
1.00
1.25
1.50
Quantity
Lowest to Highest
Y axis = Price
Demand Curve
Lowest to Highest
X axis = Quantity Demanded
Things that impact demand
 Price
of the Product
 The Consumer's Income
 The Prices of related Goods
 The Tastes and Preferences of the
Consumer
 The Consumer's Expectations
 The Number of Consumer's in the Market
Substitution Effect
 When
a consumer chooses an alternative
product because of a price change.
The Income Effect
 When
consumers buy less because of a
change in real income.
 Real
income = actual buying power
Limits of the DC
 Only
works if everything else stays the
same.
 Ceteris Paribus – All things constant.
 In
reality it is never this simple. People
make decision based on more than just
price.
Discuss with a partner
 What
does the law of demand state?
 What's a demand schedule?
 What's the difference between a market
demand schedule and a demand
schedule?
 How does the income effect impact
demand for goods?
Shifting
Curves
AKA a Change in
Demand
Other than price, what are
some reasons you would
choose one product over
another?
3.50
3.00
2.50
2.00
1.50
1.00
.50
1
2
3
4
5
6
7
8
3.50
3.00
2.50
2.00
1.50
1.00
.50
1
2
3
4
5
6
7
8
3.50
3.00
2.50
2.00
1.50
1.00
.50
1
2
3
4
5
6
7
8
3.50
3.00
2.50
2.00
1.50
1.00
.50
1
2
3
4
5
6
7
8
3.50
3.00
2.50
2.00
1.50
1.00
.50
1
2
3
4
5
6
7
8
Demand Curve Shift
 Happens
as a result of a change in
demand.
 Due to the factors other than price of the
good in question.
Change in Demand
 Income
 Expectations
 Population
 Consumer
tastes
 Advertising
 Prices in related goods

Substitutes or Complementary
Income
600
500
400
300
200
100
1
2
3
4
5
6
7
8
9
Income
600
500
400
300
200
100
1
2
3
4
5
6
7
8
Expectation
“The price of this
item may go up after
Christmas”
600
500
400
300
200
100
1
2
3
4
5
6
7
8
Expectation
“I read in the paper
that there will be a
promotion next
week on I phones”
600
500
400
300
200
100
1
2
3
4
5
6
7
8
Normal vs. Inferior Goods
 Write
out inferior goods for the following
normal goods:



Charmin Ultra soft toilet paper
Kellogg's Frosted Flakes
Premium gas
Demand vs.
Quantity Demanded
 Demand
= How much people want at
different prices.

The entire Demand Curve. (Many points)
 Quantity
Demanded = How much of a
product is demanded at one particular
price.

Just one point on the demand curve.
600
500
400
300
200
100
1
2
3
4
5
6
7
8
A
Change in price of a good leads to a
change in quantity demanded

(Movement along the curve)
A
change in income, preferences, or
changes regarding alternative goods
leads to a change in demand.

Shift of the Curve
Discuss with a partner
A
shifting curve shows a ________ in
demand.
 What is an inferior good?
 Would you expect customers to respond
greater to a change in price for cereal or
for electricity?
How did they do?
While you watch…
 Write
out three things discussed about the
economy that you agreed with (on
green) and three you disagreed with (on
pink)during the debate.
 Indicate who said it on the back of the
post it.
Elasticity of
Demand
(Ed)
Which one is more elastic?
Price Elasticity of Demand
 How
MUCH will consumers change their
demand for a good given a price
change.

Sensitivity to price changes
Calculating Elasticity
Ed =
% change in quantity demanded
% change in price
Calculating Elasticity
 First
pick two points on the demand
curve.
 Then figure out the percentage change
of quantity
Q1 – Q2
Q1
X 100
Calculating Elasticity
 Then
figure out the percentage change
of Price for the same two points.
P1 – P2
P1
X 100
Calculating Elasticity
 Lastly,
divide the two numbers together,
which gives you the elasticity.
ΔQ
ΔP
= Elasticity
Q1 – Q2
Q1
X 100
14
12
Q1
10
40 – 70
40
8
X 100
6
Q2
4
2
Δ Q = 75%
10
20
30
40
50
60
70
80
Figure out Change (Δ ) in Q
P1 – P2
P1
X 100
14
12
Q1
10
10 – 5
10
8
X 100
6
Q2
4
2
Δ P = 50%
10
20
30
40
50
60
70
80
Figure out Change (Δ ) in P
Calculating Elasticity
ΔQ
= Ed
ΔP
75%
50%
Elasticity = 1.5
What does the number mean?
 Inelastic:
Elasticity is < 1
 Elastic: Elasticity is > 1
 Unitary Elastic: Elasticity = 1
Why would an
economist care about
Elasticity of demand?
Elastic
14
12
10
8
6
4
2
10
20
30
40
50
60
70
80
Inelastic
Goods
Estimated Elasticity
of Demand
Salt
Matches
Gasoline
Natural gas
Coffee
Tobacco products
Automobiles, long-run
0.1
0.1
0.2
0.1
0.25
0.45
0.2
Inelastic
14
12
10
8
6
4
2
10
20
30
40
50
60
70
80
Unitary Elastic
Goods
Estimated Elasticity of
Demand
Movies
0.9
Housing
1.2
Private education 1.1
Tires, short-run
0.9
Elastic
Goods
Estimated Elasticity of
Demand
Restaurant meals
Foreign travel
Fresh green peas
Chevrolet
automobiles
Fresh tomatoes
2.3
4.0
2.8
4.0
4.6
Elastic or
Inelastic
14
12
10
8
6
4
2
10
20
30
40
50
60
70
80
Let’s see it in action…
 Scenarios
1-4
 Complete the demand schedules on the
worksheet individually for each scenario.
Do ALL 4 scenarios
Individual Quantities Market Quantities
Can of Coke =$1
Snickers Bar =$1
Twinkie =$1
Carton of Milk =$1
Create a Market Demand
Curve
 As
an Economist, you are interested in
how these various factors impact
the Market Demand for these products.
Therefore, you need to develop a market
demand curve.
 Determine the "Market Quantities"
for situation 1 and situation 2 only… This
means add up the quantities from
everyone in the group and put it in the
Market Demand Schedules.
For situations 1 and 2
Individual Quantities Market Quantities
Can of Coke =$1
Snickers Bar =$1
Twinkie =$1
Carton of Milk =$1
What is the Elasticity of
snickers?
What factors effect
Elasticity?
Relative Importance
 Price
of the good
 % of your budget
 Expensive = Elastic
 Inexpensive = Inelastic
Loyalty to a brand
 If
you like a certain brand you will likely
purchase it even at the higher price.

High Loyalty = Inelastic
Availability of Substitutes
 If
there are a large amount of other
brands = elastic.
 If there aren’t many substitutes = inelastic.
Necessity vs. Luxury
 Luxury
= Elastic
 Necessity = inelastic
Time Horizon
 It
takes people time to adjust to price
changes. (Finding another alternative to
your previous buying habits)

Short term = inelastic
Long term = elastic

Computer example

Total Revenue
 The
amount of money a company
receives by selling its goods. (Not to be
confused with profit)
 Equation
can be written as:
TR = P· Q
TR = P· Q
14
TR = 10· 40
12
Price
TR = $400
10
8
6
4
2
10
20
30
40
Quantity
50
60
70
80
Revenue Table
Price of
Quantity Demanded
14
12
10
8
6
4
2
Total Revenue
14
12
Price
10
8
6
4
2
10
20
30
40
Quantity
50
60
70
80
Revenue Table
Price of
Quantity Demanded
Total Revenue
14
17
238
12
28
336
10
40
400
8
51
408
6
62
372
4
74
296
2
86
172
Revenue Table
Price of
Quantity
Demanded
Total
Revenue
Δ Total
Revenue
14
17
238
(98)
12
28
336
(64)
10
40
400
8
8
51
408
36
6
62
372
76
4
74
296
124
2
86
172