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Pump Primer
• Without using your textbook, explain what
you believe this term called “price” means.
“ECONOMICS”
By Alan J. Carper & Elizabeth Payne
Bob Jones University Press. 2010
Unit 1: What Is Economics?
Chapter 3:
“Value & Demand”
Objectives:
You should be able to...
• Identify and explain the principle of diminishing marginal
utility
• Describe the three functions of price.
• Define demand.
• Identify the law of demand.
• Explain how changes in demand occur.
BIBLICAL INTEGRATION
• This world constantly changes, but God
is the same today, as He was yesterday,
and as He will continue to be tomorrow.
(Heb.13:8)
Value
Value:
1.
Karl Menger’s Rule
a)
b)
c)
2.
“value” = mind of buyer
unsettling to many
possibility goods = millions of different values
Free Market
a)
Individual choices = own needs
(Carper, 13)
Value
Diminishing Marginal Utility:
Second Principle to Menger’s Rule
a. Items may lose personal value
(Carper, 14)
Diminishing Marginal Utility
• William Stanley Jevons (English
economist)
– 1871 solved “riddle” in Theory of Political
Economy.
– Developed – “Principle of Diminishing Marginal
Utility”
• “receive less and less (diminishing) additional
(marginal) satisfaction” as they receive more and more
during a specific period of time
(Carper, 14)
Principle of Diminishing Marginal Utility
“Utils”
Satisfaction:
1st bar
2nd bar
3rd bar
Total
= 6 utils
=6
= 4 utils
= 10
= 3 utils
= 13
Satisfaction decreases with each additional bar
Principle of Diminishing Marginal Utility
• Total satisfaction =
personal relationship w/God
• World searches for earthly possessions for
satisfaction = endless desire for more.
– “But those who desire to be rich fall into
temptation and a snare, and into many foolish and
harmful lusts which drown men in destruction and
(“The New King James”)
perdition.” I Tim. 6:9
(Carper, 16)
The Function of Prices
Value:
a. Greater than or equal to the price = sold
b. Price higher than the value = no sale
The Function of Prices
“What is this thing called price?”
 Three functions:
1. Prices “transmit information”
2. “Provide incentives”
3. “Redistribute income”
(Carper, 15)
Function of Prices
Rising prices
 Business need larger supplies
 Motivates to meet need
Falling prices

Warning!
 Cut production

Reevaluate goods or services
(Carper, 17)
The Demand Curve
In a world of scarcity, individuals incur trade-offs
• thus, economists developed the idea of demand
• demand analysis employs data on price and the
quantity the consumer is willing to purchase at each
price
True Prices Determine by Supply and
Demand
•
Buyers are just as important in the pricesetting process as sellers.
A. The Law of Demand
Demand = how many units of a product will be
bought at a given price.
(Carper, 19)
The Law of Demand
• Consumers
– “Want”
• Economist
– Act of buying
• Casting their vote with dollars
• Informs business what goods and/or services are
wanted or needed.
(Carper, 19)
The Law of Demand
• There is no effect on the market until the good
or service is actually bought.
• Example: Introduction of a new sports car.
(Carper, 19)
Law of Demand
• “Everything else being held constant, the lower the
price charged for a good or service, the greater the
quantity people will demand and vice versa”
• Economist, wishing to observe the effects of price
changes on a product’s demand, construct a demand
schedule.
(Carper, 19, 20)
Demand Schedules and Demand Curves
• constructed from information gathered in market
research
• approximations based on the most reliable
information available
• buyers adjust their demand accordingly
• demand curve is merely a series of connected
points rather than a line
Demand Schedule
Price per gallon
Gallons per day
$0.07
0.04
0.02
0.01
0.005
25
40
80
160
320
A demand schedule is a table showing consumption data
Demand Curve
• Using the data, we can draw a chart where
– the vertical axis shows possible prices that
might be charged
– the horizontal axis shows quantity
purchased at those prices
• Economists call this a demand curve
Demand Curve
$.07
PRICE PER GALLON
.06
.05
.04
.03
.02
.01
.00
0
40
80
120
160
200
240 280
GALLONS OF WATER PER DAY
320
360
400
DEMAND
•Individual Demand and Market Demand
–Market demand is the sum of the demands of all
the buyers in a market.
–The market demand curve is the horizontal sum of
the demand curves of all buyers in the market.
(Bade 93)
DEMAND
(Bade 93)
Change In DEMAND
• Changes in Demand
– Change in demand is a change in the quantity that
people plan to buy when any influence other than
the price of the good changes.
– A change in demand means that there is a new
demand schedule and a new demand curve.
(Bade 94)
Change In DEMAND
Figure 4.3 shows
changes in demand.
1. When demand decreases,
the demand curve shifts
leftward from D0 to D1.
2. When demand increases,
the demand curve shifts
rightward from D0 to D2.
(Bade 94)
Change in Quantity Demanded
• “Some demand curves have the same slope,
however, some are steeper becoming more
vertical”
– Reflect relative inelastic demand for the good or
service
• Example: Insulin
– Price does not determine need
– “quantity is less responsive to price”
(Carper, 21)
Change in Demand
• Influences that can cause a change in demand
for a good:
– number of customers
– change in customer tastes
– change in income
– change in price of a substitute
– change in price of a complementary good
– change in the expected future price
Related Goods
– Prices of Related Goods
A substitute is a good that can be consumed in place of
another good.
For example, apples and oranges.
The demand for a good increases, if the price of one of its
substitutes rises.
The demand for a good decreases, if the price of one of
its substitutes falls.
(Bade 94)
Complement Goods
A complement is a good that is consumed with another
good.
For example, ice cream and fudge sauce.
The demand for a good increases, if the price of
one of its complements falls.
The demand for a good decreases, if the price of
one of its complements rises.
(Bade 95)
Normal & Inferior Goods
– A normal good is a good for which the demand
increases if income increases and demand
decreases if income decreases.
• Luxury goods, such as expensive automobiles, swimming
pools, caviar, and precious jewelry, are normal goods,
and their demand is extremely responsive to changes in
income.
– An inferior good is a good for which the demand
decreases if income increases and demand
increases if income decreases.
• Recapped tires, travel on city buses, used cars,
secondhand clothing, and powdered milk
(Bade 95)
“Giffen Goods”
• Goods that experience an increase in quantity
demanded as the price increases
– goods that possess “snob appeal,” such as caviar,
Rolls Royce automobiles, and other status symbol
objects.
(Carper, 23)
Change in the Price of Related Goods
“No single good or service can be definitely
called a normal good or an inferior good since
an inferior good to one person may be a
normal good to another.”
 Substitute Goods = goods that resemble one
another and that may be used in place of
others
chicken and beef
hot dogs and hamburgers
ice cream and ice milk
(Carper, 23)
Complementary Goods
• “goods usually purchased or used together”
– film and camera
– gasoline and automobiles
– hamburgers and French fries
– peanut butter and jelly
(Carper, 24)
Change in Expectations
• “Prices can change to lack or shortage of a
product .”
Expectations of many other things lead to a shift
of the demand curve: expectations of changes
in weather, business conditions, etc.
(Carper, 24)
Change in Tastes and Preferences
• “As a product gains popularity, its demand curve
experiences a rightward shift as people demand
more at any given price.”
• “As the product loses popularity, its demand curve
begins to shift to the left.”
“Shifts caused by change in tastes and preferences are
usually from “fad” items”
(Carper, 24)
Change in Quantity vs. Change in
Demand
 A change in the quantity demanded is a change in
the quantity of a good that people plan to buy
that results from a change in the price of the
good.
 A change in demand is a change in the quantity
that people plan to buy when any influence other
than the price of the good changes.
(Bade 94)
Change in Quantity Demanded vs. Change in
Demand.
• Change in quantity demanded
– movement along a given demand curve,
prompted by a change in price
• Change in demand
– shift of a demand curve to the left or right
(Carper, 21)
Demand and quantity demanded
Change in quantity demanded
P
Change in demand
P
D2
D
D1
Q
Q
Activity 4
Demand
National Council on Economic Education, New York, N.Y.
Objectives
• Define demand schedule and demand curve.
• Construct a demand curve using hypothetical data.
• Explain why consumers buy more of a good or service when
the price decreases.
• Explain the difference between a shift in the demand curve
and a movement along the demand curve.
• Describe and analyze the forces that shift the demand curve.
• Explain why a demand curve would shift to the right or left
given a scenario.
Introduction
• This lesson introduces the market system
– Demand is half of a market and a demand
schedule represents the quantities that people are
willing and able to buy at alternative prices.
– The Demand Curve is a graphical representation of
the demand schedule.
• Understanding a market is essential to success
in Economics.
Introduction
• You will be graphing a demand schedule,
which will help you to understand the
implications of a shift in the demand curve.
• Activity 3 focuses on the factors that shift the
demand curve (homework sheets).
• Activity 4 reinforces the factors that cause a
demand curve to shift, the direction of the
shift and whether the shift represents an
increase or decrease in demand.
Movement Along a Demand Curve
• As the price declines
from P to P1, the
quantity increases
from Q to Q1
• As the price
decreases, the
quantity demanded
increases
Shift in Demand
The graph shows an increase in
demand is a shift to the right
(and a decrease in demand is
a shift to the left)
Increase in demand from D to
D1 shows that at the same
price (P), the quantity
increased from Q to Q1.
Shift in Demand
Factors that Shift Demand:
• Number of Consumers
• Price of complementary good
• Price of substitute good
• Consumer income
• Expectations about income or prices
Activity 4: Reasons for Change in Demand
• Break-up into groups of two or three and
complete the following activity.
Activity 4: Reasons for Change in Demand
• Part A
– Read the eight newspaper headlines in Figure 4.2, and use
the table to record the impact, if any, of each event on the
demand for beef.
– Use the first column to the right of the headline to show
whether the event causes a change in demand.
– Use the next column to record whether the change is an
increase or a decrease in demand.
– In the third column, decide whether the curve shifts left or
right.
– Finally, write the letter for the new demand curve.
– Use Figure 4.1 to help you.
– Always start at curve B, and move only one curve at a
time.
• One headline implies that the demand for beef does not change.
Activity
4
Y
Inc.
R
C
Y
Y
Inc.
Dec.
R
L
C
A
Y
N
Dec.
--
L
--
A
--
Y
Dec.
L
A
Y
Y
Dec.
Inc.
L
R
A
C
Activity 4: Reasons for Change in Demand
• Part B
– Categorize each change in demand in Part A according to
the reason why demand changed.
– A given demand curve assumes that consumer
expectations, consumer tastes and preferences, the
number of consumers in the market, the income of
consumers, and the prices of substitutes and complements
are unchanged. In the table, place an X next to the reason
that the event described in the headline caused a change
in demand.
– One headline will have no answer because it is a change in
quantity demanded.
X
X
X
X
X
X
X
Works Cited
Blade, Robin, and Michael Parkin. Foundations of
Economics: Instructor’s Manual. 2nd ed. Boston:
Pearson Education, Inc., 2004.
Carper, Alan. Economics for Christian Schools.
Greenville: Bob Jones University Press, 1998.
Leppel, Professor Karen. “Introduction to Graphs.”
Widener University. 25 Jul 2008.
http://www.muse.widener.edu/~kleppel/EC202_ppt/
GRAPHS.PPT
"The New King James Version." Logos Bible Software.
CD_ROM. ed. 2004.