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CHAPTER 3
The great mystery of
demand……muuuuuahahahahaha
Questions I know you asked yourself today
1.
What is demand?
2.
What is the most important thing I consider when I buy something?
3.
How does the law of demand explain my behavior?
4.
How will I be able to buy more than one piece of pizza today?
5.
Is Shaler going to beat North Hills tomorrow?
6.
Does Miss Benson really think I care about this as much as she does?
Demand

Demand is simply put the desire to own something
AND the ability to pay for it
(You want the good AND you can afford it.)
Example of Demand

Which car can I accurately say I have demand for?

How did you come to this conclusion?
Law of Demand

What was the last thing you bought?

Why did you buy this item?

How much of it did you buy?
In other words…
People will buy more of a good when its price
decreases and less of a product when its price
increases
 In symbol
form:
P↑ Qd↓
P↓ Qd↑


Don’t stress over this concept.
Think of it like this: if you go to
the store and notice that Red
Bull is .50 a can how many
would you buy? What if Red
Bull was $4.00 a can?
The Effect Thingy

The law of demand is the result of two different
behaviors acting separately, but together.
 Substitution
Effect: when the price of a good rises
people will buy less of that good and more of a
substitute
 Income
Effect: when prices rise people will buy less of
that good because of the effect on their income
Example: Substitution Effect
PRICE OF CHILI CHEESE DOGS INCREASES, SO YOU
BUY FEWER CHILI CHEESE DOGS AND MORE OF A
SUBSTITUTE…CHEESEBURGERS
Example: Income Effect
A Little Class Activity

C is for Cookie and the Old Cookie Monster was
WAY cooler than this healthy imposter they now
have on Sesame Street, therefore our activity will
revolve around COOKIES!!!!!!
ARGHHHHHHH!!!!!! COOKIE COOKIE COOKIE!!!!!!
Consider This

How many cookies would you buy in a week?
 List

3-4 things that would determine your answer.
On the next slide, please replicate this chart in your
notebook and fill the empty spots in with your own
answers.
Awesome Chart
Column1
Column2
Column3
YOU
$7.00
$5.00
$4.00
$3.00
$2.00
1
0.5
SOMEONE NEXT TO YOU
Column4
SOME ONE ELSE
Column5
TOTAL
Part Duex



Did you notice any pattern between responses?
What substitutes could you buy if the price of cookies
became too high?
Homework: Chart the following information in a graph.
X-Axis is the Quantity (# of cookies)
 Y-Axis is the Price (of each cookie)
 Now graph your individual cookie demand, and the total
cookie demand

To review from yesterday…





TO SUMMARIZE: A CHANGE IN PRICE = A
CHANGE IN QUANTITY DEMANDED (QD)
This is movement along the demand curve.
Example: If the price of pizza ↑, the quantity of
pizza that people will buy ↓.
What is the ONLY reason why you wanted more
burgers at $.50? - b/c price was lower!
But that assumes ceteris paribus: all other things
held constant
Now to really confuse you…


There are other factors that can cause the demand
itself for a good to change. When this happens,
people will demand all different quantities at every
single price.
This is shown by a shift of the entire demand curve
WHAT SHIFTS THE
DEMAND CURVE?
(AKA: Determinants of
Demand)
#1: Income
Changes in income will change how much people are
able to buy

Normal goods (↑ income causes ↑ demand)
 When
we make more money, we can afford new
things, like cars and meals out

Inferior goods (↑ income causes ↓ demand)
 When
we make more money, we buy fewer generic
cereals and opt for the name brand!
#2: Consumer Expectations

If we expect the price or availability of a
good to change in the future, we will change
our buying habits today
 If
we expect price of gas to go up tomorrow, we
will fill up on the way home from work today
#3: Population

If # of buyers ↑, demand ↑ (immigration)

If # buyers ↓, demand ↓ (deaths)
#4: Consumer Tastes and
Advertising


New fads ↑ demand for those popular items
Negative news reports ↓ demand for goods
#5: Prices of Related Goods

Complements (hot dogs and hot dog buns)
 If

price of hot dogs ↑, demand for hot dog buns ↓
Substitutes (sugar and Splenda)
 If
price of sugar ↑, demand for Splenda ↑
Elasticity of Demand
 the
way that consumers respond to price changes
 How much buyers will cut back or increase their
demand for a good when the price rises or falls
 Inelastic demand – you will keep buying even when
the price increases (you DO NOT change your
mind)
 Elastic demand – you buy much less of a good
after a small price increase (you DO change your
mind)
Factors Affecting Elasticity

Availability of Substitutes
 More

Relative Importance
 More

substitutes = More elastic
important to you = More inelastic
Necessities versus Luxuries
 Necessities

Change over Time
 More

= Inelastic
time to adjust = More elastic
Expense (% of your budget/income)
 Greater
% of your income = More elastic
Calculating Elasticity
Elasticity of Demand for a good =
Percentage change in quantity demanded
Percentage change in price
*Remember to find any Percentage change =
Original number – New number
x 100

Original number
Review…

What two conditions must be met in order to say
someone has DEMAND for a good?
Review…

What is the law of demand?
Review…

When the price of a good changes, what do we say
happens?
 Is
it a change in demand?
 Is it a change in quantity demanded?
Review…

What is the substitution effect? (For example, what
will people do when the price of ground beef goes
up?)
Review…

What is the income effect?
Review…

What does it mean to say that there has been a
change in demand?
Review…

Give an example of complements.
Review…

Give an example of substitutes.
Review…

What does elasticity measure? (What is it all
about?)
Review…

If you keep buying a good even when the price
increases, what type of demand do you have for
the good?
Review…

If you cut back a lot on how much you buy of
something when the price increases, what type of
demand do you have for the good?
 Give
an example!
Review…


If elasticity is less than 1, then your demand for the
good is…
If elasticity is greater than 1, then your demand for
the good is…
Review…

If you were a company, would you want demand
for your product to be elastic or inelastic? Why?
Review…

The less expensive the good, the more
___________ demand tends to be (elastic or
inelastic).
Review…

The more substitutes a good has, the more
__________ demand tends to be (elastic or
inelastic).