Download Demand - Kenston Local Schools

Unit 1: Basic
Economic Concepts
1
Demand
2
DEMAND DEFINED
What is Demand?
Demand is the different quantities of goods
that consumers are willing and able to buy at
different prices.
(Ex: You are able to purchase diapers, but if you
aren’t willing to buy then there is NO demand)
What is the Law of Demand?
There is an INVERSE relationship between
price and quantity demanded
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Example of Demand
I am willing to sell several A’s in AP
Economics. How much will you pay?
Price
Quantity
Demanded
Demand
Schedule
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Why does the Law of Demand occur?
The law of demand is the result of three
separate behavior patterns that overlap:
1.The Substitution effect
2.The Income effect
3.The Law of Diminishing Marginal
Utility
We will define and explain each…
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Why does the Law of
Demand occur?
1. The Substitution Effect
• If the price goes up for a product, consumer
buy less of that product and more of
another substitute product (and vice versa)
2. The Income Effect
• If the price goes down for a product, the
purchasing power increases for consumers allowing them to purchase more.
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Why does the Law of Demand occur?
3. Law of Diminishing Marginal Utility
• Utility = Satisfaction
• We buy goods because we get utility from them
• The law of diminishing marginal utility states
that as you consume anything, the additional
satisfaction that you will receive will eventually
start to decrease
• In other words, the more you buy of ANY
GOOD the less satisfaction you get from each
new unit consumed.
Discussion Questions:
1. What does this have to do with the Law of Demand?
2. How does this effect the pricing of businesses?
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Can you see the Law of Diminishing Marginal
Utility in Disneyland’s pricing strategy?
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Graphing Demand
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The Demand Curve
• A demand curve is a graphical representation
of a demand schedule.
• The demand curve is downward sloping
showing the inverse relationship between price
(on the y-axis) and quantity demanded (on the
x-axis)
• When reading a demand curve, assume all
outside factors, such as income, are held
constant. (This is called ceteris paribus)
Let’s draw a new demand curve for milk…
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GRAPHING DEMAND
Demand
Schedule
Price
Quantity
Demanded
$5
10
$4
20
Price of Milk
Draw this large
in your notes
$5
4
3
2
$3
30
$2
50
$1
80
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10
20
30
40
50
60
Quantity of Milk
70
80
Q
12
GRAPHING DEMAND
Demand
Schedule
Price
Quantity
Demanded
$5
10
$4
20
Price of Milk
$5
4
3
2
$3
30
$2
50
$1
80
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Demand
10
20
30
40
50
60
Quantity of Milk
70
80
Q
13
Where do you get the Market Demand?
Billy
Jean
Other Individuals
Market
Price Q Demd
Price Q Demd
Price Q Demd
Price Q Demd
$5
$4
$3
$2
$1
$5
$4
$3
$2
$1
$5
$4
$3
$2
$1
$5
$4
$3
$2
$1
1
2
3
5
7
P
0
1
2
3
5
P
$3
P
$3
3
Q
$3
D
2
Q
10
20
30
50
80
P
$3
D
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17
25
42
68
D
25
Q
D
30
Q
Demand Review
1. What are the two key aspects of the definition of
demand?
2. What is the Law of Demand?
3. Give an example of the substitution effect
4. Give an example of the income effect
5. Give an example of the law of diminishing marginal
utility
6. Explain how the law of diminishing marginal utility
causes the law of demand
7. How do you determine the MARKET demand for a
particular good? (from reading)
8. Name 10 fast food places
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Shifts in Demand
• Ceteris paribus-“all other things held constant.”
• When the ceteris paribus assumption is
dropped, movement no longer occurs along the
demand curve. Rather, the entire demand
curve shifts.
• A shift means that at the same prices, more
people are willing and able to purchase that
good.
This is a change in demand, not a change in
quantity demanded
PRICE DOESN’T SHIFT THE CURVE
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Change in Demand
Demand
Schedule
Price
Quantity
Demanded
$5
10
$4
20
Price of Milk
What if milk
makes you
smarter?
$5
4
3
2
$3
30
$2
50
$1
80
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Demand
10
20
30
40
50
60
Quantity of Milk
70
80
Q
17
Change in Demand
Demand
Schedule
Price
Quantity
Demanded
$5
10
$4
20
Price of Milk
What if milk
makes you
smarter?
$5
4
3
2
$3
30
$2
50
$1
80
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Demand
10
20
30
40
50
60
Quantity of Milk
70
80
Q
18
Change in Demand
Demand
Schedule
Price
Quantity
Demanded
$5
10 30
$4
20 40
Price of Milk
$5
4
3
2
$3
30 50
$2
50 70
$1
80 100
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Demand
10
20
30
40
50
60
Quantity of Milk
70
80
Q
19
Change in Demand
Demand
Schedule
Price
Quantity
Demanded
$5
10 30
$4
20 40
Price of Milk
Increase in Demand
Prices didn’t change but
people want MORE Milk
$5
4
3
2
$3
30 50
$2
50 70
$1
80 100
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D1
1
Demand
10
20
30
40
50
60
Quantity of Milk
70
80
Q
20
Change in Demand
Demand
Schedule
Price
Quantity
Demanded
$5
10
$4
20
Price of Milk
What if milk
makes causes
baldness?
$5
4
3
2
$3
30
$2
50
$1
80
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Demand
10
20
30
40
50
60
Quantity of Milk
70
80
Q
21
Change in Demand
Demand
Schedule
Price
Quantity
Demanded
$5
10
$4
20
Price of Milk
What if milk
makes causes
baldness?
$5
4
3
2
$3
30
$2
50
$1
80
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Demand
10
20
30
40
50
60
Quantity of Milk
70
80
Q
22
Change in Demand
Demand
Schedule
Price
Quantity
Demanded
$5
10 0
$4
20 5
Price of Milk
$5
4
3
2
$3
30 20
$2
50 30
$1
80 60
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Demand
10
20
30
40
50
60
Quantity of Milk
70
80
Q
23
Change in Demand
Demand
Schedule
Price
Quantity
Demanded
$5
10 0
$4
20 5
Price of Milk
$5
Decrease in Demand
Prices didn’t change but
people want LESS Milk
4
3
2
$3
30 20
$2
50 30
$1
80 60
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D2
10
20
30
40
50
60
Quantity of Milk
Demand
70
80
Q
24
Change in Demand
Demand
Schedule
Price
Quantity
Demanded
$5
10
$4
20
Price of Milk
4
3
2
$3
30
$2
50
$1
80
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What happens to
the demand for milk if
the price of cereal
goes up?
$5
1
NOTHING!
The demand
stays the same
10
20
30
40
50
Demand
60
Quantity of Milk
70
80
Q
25
Change in Qd vs. Change in Demand
Price of Milk
P
$3
There are two ways to increase
quantity from 10 to 20
A
C
B
$2
1. A to B is a change
in quantity
demand (due to a
change in price)
2. A to C is a change
in demand (shift
in the curve)
D2
D1
10
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Quantity of Milk
Q Milk
What Causes a Shift in Demand?
5 Shifters (Determinates) of Demand:
1. Tastes and Preferences
2. Number of Consumers
3. Price of Related Goods
4. Income
5. Future Expectations
Changes in PRICE don’t shift the curve. It
only causes movement along the curve.
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Prices of Related Goods
The demand curve for one good can be affected by a
change in the price of ANOTHER related good.
1. Substitutes are goods used in place of one
another.
– Ex: If price of Pepsi falls, demand for coke will…
– If the price of one increases, the demand for the
other will increase (or vice versa)
2. Complements are two goods that are bought
and used together.
– Ex: If price of hot dogs falls, demand for hot dog
buns will...
– If the price of one increase, the demand for the
other will fall. (or vice versa)
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Substitutes or Complements?
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Substitutes
30
Substitutes
31
Substitutes
32
Substitutes
33
Substitutes
34
Substitutes
35
Substitutes
36
Substitutes
37
Complements
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Income
The incomes of consumer change the demand, but
how depends on the type of good.
1. Normal Goods
– Ex: Luxury cars, Sea Food, jewelry, homes
– As income increases, demand increases
– As income falls, demand falls
2. Inferior Goods
– Ex: Top Ramen, used cars, used clothes
– As income increases, demand falls
– As income falls, demand increases
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Inferior Goods
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Practice Questions
1. Which of the following will cause the
demand for milk to decrease?
A. Increase in the price of a substitute
B. A decrease in income assuming that milk
is a normal good
C. A decrease in the price of milk
D. An increase in the price of milk
E. A decrease in the price of a
complementary good
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Practice Questions
2. Which of the following will cause the
quantity demanded of milk to decrease?
A. Increase in the price of a substitute
B. A decrease in income assuming that milk
is a normal good
C. A decrease in the price of milk
D. An increase in the price of milk
E. A decrease in the price of a
complementary good
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Practice
Identify the determinant (shifter) then decide if
demand will increase or decrease
Shifter
Increase or
Decrease
Left or Right
1
2
3
4
5
6
7
8
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Practice
Identify the determinant (shifter) then decide if
demand will increase or decrease
Hamburgers (a normal good)
1. Population boom
2. Incomes fall due to recession
3. Price of tacos, a substitute, decreases
4. Price increases to $5 for hamburgers
5. New health craze- “No ground beef”
6. Hamburger restaurants announce that they
will significantly increase prices NEXT month
7. Price of fries, a complement, increases
8. Restaurants lower price of burgers to $.50
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