Download Happy Austin 3:16 Day! Chapter 4- Demand Imagine the following

Happy Austin 3:16 Day!
Chapter 4- Demand
Imagine the following scenario…
Your favorite team is playing in the Super Bowl in NYC (only 3 hours away). You just have to get to this
game. Here are some things to consider…
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How many other people are trying to get tickets?
How many tickets are available?
What determines the price of tickets?
From whom are you going to buy your ticket? Is there more than one ticket outlet?
What do all of these questions have in common?
That’s right, they are all based on the laws of supply and demand- two of the most important tools of
economic analysis.
Can you think of an event that is happening locally that will be in high demand and probably fetch
a pretty price?
Could you make money off this event???
In a market economy, the interactions of buyers and sellers determine the price of most goods as well as
the quantity that will be produced.
Buyers demand goods, sellers supply those goods, and the interactions between the two groups lead to
an agreement on the price and the quantity traded.
Demand- the ability and desire of consumers to buy a good.
The law of demand: when a good’s price is lower, consumers will buy more of it. When the price is
higher, consumers will buy less of it.
The price of a good strongly influences our decisions to buy goods.
Would you buy a slice of pizza for $1?
Sure, pizza is good.
Would you buy a slice of pizza for $2?
Sure, pizza is good but I probably wouldn't buy more than one.
Would you buy a slice of pizza for $10?
$10!?!?!?!? What is it made of gold? Is it healthy and somehow zero calories? That better be some
darn good pizza!
The law of demand states that as the price of pizza gets higher and higher, fewer of us are willing to buy
it.
Even simple monkeys understand the law of demand. [Insert monkey story here].
What causes the law of demand?
Two Behavior patterns:
The substitution effect and income effect.
Two different ways that a consumer can change their spending habits.
The Substitution Effect
When the price of pizza rises and comparable goods stay the same, consumers are more likely to buy one
of the alternatives (tacos, burgers, sandwiches, salads) as a substitute for pizza.
Can also apply when the price of a good drops. If the price of pizza is cheaper to comparable substitutes,
consumers will now substitute pizza for tacos, salads or other lunch choices.
The Income Effect
Rising prices have another effect. They make us all feel poorer. When the prices of goods you usually
purchase all increase, your budget won’t buy as much as it used to.
If you buy fewer slices of pizza AND do not increase your purchases of other foods, that is the income
effect.
Normal Goods: goods that consumers demand more of when their incomes increase.
Inferior goods: an increase in income causes demand for these goods to fall. Goods that you would buy
in smaller quantities, or not at all, if your income were to rise and you could afford something better.
Examples- macaroni and cheese, generic cereals, and used cars.
Complements: are two goods that are bought and used together.
Substitutes: goods used in place of one another.
Name of Product
Type of Good(s) Normal,
Inferior, Substitutes,
Complements?
Why do you think it is
this type of good?
PC Lemon Lime Soda
Inferior Good
Knock off of Sprite
What will happen to the
demand of this good if
the prices goes up?
What will happen to
demand if the price goes
down?
Income goes up, demand
goes down. Income goes
down, demand goes up
3/29/16
Demand Schedules- A table that lists the quantity of a good that a person will purchase at each price in
the market.
The Market Demand Schedule- shows the quantities demanded at each price by all consumers in the
market. Useful information for business owners.
The Demand Curve- a graphic representation of a demand schedule.
Vertical axis with lowest prices at the bottom and highest at the top.
Horizontal axis- lowest quantities at the left.
Connecting the points creates a demand curve.
Limits of a Demand Curve
 Can change because of more circumstances other than just price.
Use the following demand schedule to create your own demand curve for miniature golf…
Cost to play a game
$1.50
$2.00
$3.00
$4.00
Games Played Per Month
350
250
140
80
*What are some other factors that would affect the quantity of miniature golf rounds demanded?
Shifts of the Demand Curve
Changes in Demand- demand curve is only accurate as long as there are no changes other than price.
A sudden winter storm can increase the demand for snow shovels.
Movement along the demand curve is referred to as a change in the quantity demanded.
When the demand curve moves, it is referred to as a shift in demand.
What causes a shift in demand?
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Income changes demand for normal and inferior goods
Consumer expectations
Population
Consumer tastes and advertising
3/31/16
Elasticity of demand: how drastically buyers will cut back or increase demand for a good when the price
rises or falls.
Elastic demand- price is lowered, total revenue rises
Or, price is raised total revenue falls
Inelastic demand- as price is lowered, total revenue falls.
Or, if price is raised, total revenue rises.
Factors affecting elasticity:
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Availability of substitutes
o Concert by your favorite band  not a substitute so we call that inelastic demand
o Life saving medicine is inelastic  think “Pharma Bro”
 Lack of substitutes makes demand inelastic
 Lots of substitutes makes demand elastic or responsive to price changes.
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Relative importance
o Gasoline = inelastic
 If you need gas to get to work, a price change will not affect your demand=inelastic.
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Necessities vs. luxuries
o Milk= necessity. Necessity= inelastic demand
o Steak= luxury. Luxury = elastic demand.
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Change over time
o Consumers are slow to react to price changes.
o If gas prices stay high over a long period of time, consumers will slowly start to purchase
more fuel-efficient vehicles.
Total revenue- amount of money a company receives by selling its goods.
Determined by: the price of goods and
The total quantity sold times the price of the good.
Ex: If a pizzeria sells 100 slices of pizza at $2.00/slice, its total revenue = $200.00
Elasticity of Demand- how much the change in price affects total revenue.
If a firm knows that its product has elastic demand, it will not raise its prices because it risks losing total
revenue because there will be a lower quantity demanded at a higher price.
If a firm knows that its product has inelastic demand, it can raise its prices because it knows that the
quantity demanded will stay the same even at a higher price.
4/5/2016
Imagine you owned a factory that produces sunglasses. Then, the prices of sunglasses starts to grow
drastically. Would you want to produce more pairs, or less pairs in this situation?
Understanding Supply
We look at supply from an entrepreneur’s perspective.
If you were a producer of goods, if prices were higher than usual for the good you produced, would you
try and produce more or less of that good?
Supply = the amount of goods available.
Law of supply = the higher the price, the higher the quantity produced.
Quantity supplied = how much of a good is offered for sale at a specific price.
If a firm, let’s say a pizzeria is already making a profit, and all of their costs stay the same, it would benefit
them to produce more slices of pizza to make a larger profit.
How is the law of supply different than the law of demand?
Supply Schedule
Elasticity of supply = how suppliers respond to a change in price.
Timing important in understanding elasticity of supply
Short run vs. long run
In the short run, supply is inelastic whether the price increases or decreases.
Example= oranges.
Oranges take a long time to grow. Impossible for orange farmers to immediately produce more. This
makes supply inelastic in the short run run.
Supply can become more elastic over time. Over time, the orange grower can grow more trees over time.
4/6/16
Changes in Supply
The Big Idea:
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Changes in the costs of inputs can raise or lower the supply of a good at all prices. The number of
firms in a market and the price and supply of other goods can also have an effect on the supply of a
good.
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When supply changes, it is shown as a shift to the right or left in the supply curve.
Input Costs
Examples- raw materials used to produce a good, machinery, labor, etc.
When the rise in the cost of an input occurs, supply will fall at all price levels because the good has
become more expensive to produce. In contrast, if the cost of an input falls, the supply will increase.
Technology
Technology can cause input costs to drop. Advances in technology can lower costs in many industries.
Technology lowers costs and increases supply at all price levels. This is shown by a shift to the right in
the supply curve.
Ex: Assembly lines and cars.
Government’s influence on Supply
Can raise or lower the cost of producing goods in different ways.
Subsidies
Subsidy = a government payment that supports a business or market. Typically, the government pays a
producer a set subsidy for each unit of a good produced.
http://www.cheatsheet.com/business/high-on-the-hog-the-top-8-corporate-welfarerecipients.html/?a=viewall
https://www.youtube.com/watch?v=7Nqdi0LyHwo
Taxes
Government can reduce the supply of some goods through an excise tax- tax on the production or sale of
a good.
Can be used to discourage the sale of goods the government thinks are harmful
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Cigarettes
Alcohol
High-pollutant gasoline
Excise taxes are built into the prices of goods so it causes the supply to decrease at all levels; The supply
curve with shift to the left.
Regulation
1970s, started limiting the amount of pollutants put into the atmosphere by factories. Regulations
increase the cost of manufacturing automobiles, shift the supply curve to the left.
Future Expectation of Prices
If supplier expects prices to rise in the future, they can store or hoard goods to sell later at a higher price.
Number of Suppliers in the Market
Case Study- Are Baseball Players Paid Too Much?
1. What arguments might players make for free agency?
2. How do the laws of supply and demand affect baseball players’ salaries?
NY Yankees luxury seats
https://www.youtube.com/watch?v=6J9viOvUbOY
Are baseball players paid too much?
4/7/16
Combining Supply and Demand
The Big Idea
In an uncontrolled market, the price of a good and quantity sold will settle at a point where the quantity
supplied equals the quantity demanded. The government can set a maximum or minimum price, but that
can lead to an imbalance between supply and demand.
Equilibrium- the point of balance between price and quantity. At equilibrium, the market for a good is
stable. The point where the quantity demanded equals the quantity supplied.
disequilibrium- any price or quantity not at equilibrium; when quantity supplied is not equal to quantity
demanded in a market.
Excess demand- when quantity demanded is more than the quantity supplied shortages.
Pizzeria
At $1.00/ slice, demand will exceed the equilibrium price. This will lead to excess demand and a shortage
in the quantity supplied of slices. Long lines, not maximizing profits.
So what do you think the pizzeria owner should do?
Excess Supply- the quantity supplied exceeds quantity demanded.
Pizzeria- at a higher price, they won’t sell as much and will have lots left over.
Market forces will eventually push the market toward the equilibrium.
Government intervention: can intervene in one of two ways: by setting price ceilings or price floors.
Price ceiling: a maximum price that can be legally charged for a good.
Price floor: a minimum price for a good or service.
Price Ceilings
Typically set on goods that the government views as necessary or essential and might be too expensive
for some consumers.
Example  rent control- a price ceiling placed on rent.
Economic effects:
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Higher demand
Not enough supply
Less profit for landlords
Fewer apartment buildings built
Convert older ones into offices or stores
Fewer houses built
Long waiting lists
Housing discrimination
Landlords cut costs on maintenance of their buildings
If there are waiting lists, then there’s no incentive for landlords to do upkeep on buildings
Price Floors- a minimum price for a good or service.
Imposed by the government when they want sellers to receive some reward for their efforts.
Examples: minimum wage
If the minimum wage is set above the market equilibrium rate, employment will decrease.
Price supports in agriculture
Government can set minimum prices for crops. Would buy excess crops anytime the price fell below a
certain level. FDR in the Great Depression.
Price Controls- https://www.youtube.com/watch?v=01lKDkYSFDg
Market Failures- https://www.youtube.com/watch?v=13JOGWzY8kE
The Role of Prices
Like a language for buyers and sellers.
The easiest way for producers to change the supply of goods.
Flexible
Free
A wide choice of goods
Businesses prosper by finding out what people want, and then providing it.