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Agenda •Anything New? •Tests Returned •Law of Demand….Review and New Stuff •Lecture •Worksheets •Elasticity of Demand •Homework Worksheet, Chapter 4, Section 3 Review Powerpoint for next class (online) Read “Current Reading Assignment” (online) ANYTHING NEW? TESTS RETURNED “The first law is that when price goes up, consumption goes down. That law is divine.” Sheikh Yamani, Saudi Prince • Law of Demand – As price increases, quantity demanded decreases – As price decreases, quantity demanded increases – P Qd , P Qd – “Quantity demanded” means willing and able to buy the good or service Demand = Willing and Able http://blogs.wsj.com/economics/2013/01/29/ consumers-have-lighter-wallets-anddarker-moods/?mod=WSJ_latestheadlines LAW OF DEMAND As Price Falls… …Quantity Demanded Rises As Price Rises… …Quantity Demanded Falls Price Quantity Demanded • Law of Demand can be represented in a “Demand Schedule” • A Demand Schedule is a table that relates Price (the driver) to Quantity demanded (the responder) P $6 8 10 12 14 Qd This is a Demand Schedule • The Law of Demand can be represented graphically Price Demand Curve Quantity Student Video Law of Demand http://www.youtube.com/watch?v=YQ7U7X3iIYw New Stuff Five Determinants of Demand • • Things that effect demand, i.e. your willingness and ability to buy a good or service Things that shift the demand curve • Complimentary Goods – Things that go together Example - peanut butter and jelly, shoes and sox, printer and ink • Substitute Goods – Things used instead of another Example - o.j. instead of apple juice, iPad instead of a laptop • Buyer Preferences Example – Advertising to make you prefer a product • Expectations Example – Fall Clearance Sales • Income Effect – Amount of money you have effects your ability. Example – If you get a raise, you spend may spend more money Inferior Goods are the exception to the rule. Going back to the movies… What are Complimentary Goods for a movie? (what goes with a movie?) Changes in the Demand Curve Price Demand Curve Quantity An increase in demand, shifts the curve right Price Demand Curve Quantity HELPFUL HINT… I = R, D = L Complementary Goods increase Demand and shift the curve right Complementary Goods This is why …. Best Buy tries to sell you ink with your new printer McDonalds asks you if you want fries with that Big Mac Starbucks asks you if want a pastry with that latte Other Examples? Complementary Goods Increasing Demand increases Price and Quantity Sold More money for them. What are Substitute Goods for a movie? (what instead of a movie?) An decrease in demand, shifts the curve left Price Demand Curve Quantity HELPFUL HINT… I = R, D = L Substitute Goods decrease Demand and shift the curve left Substitute Goods Examples DVD instead of a VCR Instant Streaming instead of a DVD McCafe instead of a Starbucks latte These decrease demand Substitute Goods A decrease in demand means less a lower price and fewer sold. Less money for the business. Buyer Preferences Examples Advertising Endorsements New features that you like SUPER BOWL ADS Expectations can effect demand If I expect prices to rise, I buy now before the increase in prices. If I expect prices to fall, I wait and buy when they fall. Example - Gasoline Key Point Determinants of Demand are non-price But they effect the price Determinants of Demand move the demand curve Shift of the curve vs. shift on the curve Shift of the curve Price Shift on the curve Demand Curve Quantity Shift of the curve • The entire curve moves • Change in demand • Reaction to determinant of demand Shift on the curve • Moves on the curve • Change in quantity demanded Easiest way to remember • Reaction to price this concept!!! Shift of the Curve vs. Shift on the Curve article Now demonstrate an increase in demand and a decrease in demand Price Increase Decrease Quantity Helpful hint…I = R, D = L Inferior Goods – Goods and Services for which demand increases as income decreases … demand decreases as income increases – The reverse of the income effect – Does not always mean cheap, badly made stuff – Examples: Honda, McDonalds Inferior Good questions 1. The law of demand states that (a) consumers will buy more when a price increases. (b) price will not influence demand. (c) consumers will buy less when a price decreases. (d) consumers will buy more when a price decreases. 2. If the price of a good rises and income stays the same, what is the effect on demand? (a) the prices of other goods drop (b) fewer goods are bought (c) more goods are bought (d) demand stays the same THREE MINUTE BREAK http://www.online-stopwatch.com/bombcountdown/ • Worksheets, Section 1 & 2 Elasticity of Demand I say “elasticity”, you think “sensitivity to price”. The basic concept of elasticity…. • When price increases, quantity demanded decreases (law of demand). Elasticity measures how much quantity demanded decreases (how sensitive to the price change). • Work both ways…price increase or decrease. Elastic – Demand is sensitive to change in price. A change in price causes a BIG change in quantity demanded Inelastic – Demanded is insensitive to change in price. A change in price causes a little change in quantity demanded. Inelastic P Qd P Qd Elastic P Qd P Qd Law of Demand still applies Elasticity Price Demand Curve, inelastic product Few substitutes Needs Inexpensive Stuff Example: Medicine Demand Curve, elastic product Many substitutes Wants Example: Gatorade Quantity Elasticity Price Demand Curve, inelastic product Few substitutes Need Example: Medicine Price Decreases Demand Curve, elastic product Many substitutes Want Example: Gatorade Quantity Elasticity Price Demand Curve, inelastic product Few substitutes Need Example: Medicine Price Increases Demand Curve, elastic product Many substitutes Want Example: Gatorade Quantity P INELASTIC P ELASTIC $300 $3 $2 $200 $1 $100 D 10 m Q D 100 200 500 Q Inelastic Elastic Few substitutes Necessity Inexpensive Revenue Test P ^, TR ^ and P TR Many substitutes Luxury / Want Expensive Revenue Test P ^, TR and P TR ^ One has few substitutes and one has many? One is expensive and the other is inexpensive P P $300 $3 $2 $200 $1 $100 P $3 $2 $1 REVENUE TEST D 10 m Insulin x Q = x 10m x 10m x 10m Q TR $30m $20m $10m D 100 200 500 Q Bicycles P x Q = TR $300 x 100 $30,000 $200 x 200 $40,000 $100 x 500 $50,000 • Homework – Worksheet…Chapter 4, Section 3 – Review Powerpoint for next class (online) – Read “Current Reading Assignment” (online) – Read Supply and Demand Case Study handouts
