Download Chapter 4.1 Notes

Chapter 4.1: Demand
Bell ringer – Law of Demand
Write down the maximum you would pay for the following items:
Is your max above?
Cold 12 oz. can of
soda
Is your max above?
$1
$3
Sneakers
$100
$150
6” Hoagie
$5
$9.50
Large bag of
Doritos
$4.50
$6
Pack of gum
$1.50
$3
Chapter 4, Section 1
Copyright © Pearson Education, Inc.
Slide 2
“The most famous law in economics, and
the one that economists are most sure of,
is the law of demand. On this law is built
almost the whole edifice of economics”
-David Henderson
The Concise Encyclopedia of Economics
Chapter 4, Section 1
Copyright © Pearson Education, Inc.
Slide 3
Objectives
1. Explain the law of demand.
2. Describe how the substitution effect and
the income effect influence decisions.
3. Create a demand schedule for an
individual and a market.
4. Interpret a demand graph using demand
schedules.
Chapter 4, Section 1
Copyright © Pearson Education, Inc.
Slide 4
Understanding Demand
Have you ever gone shopping before? Has
the price been too high to pay for it?
In order to understand, take
the viewpoint:
Demand = Markets (us)
Supply = Sellers
Chapter 1, Opener
Demand
The desire to own
something and the ability
to pay for it
Copyright © Pearson Education, Inc.
Slide 5
Understanding Demand
Have you ever spent money before? Then
you get the law of demand.
Whether your income is $10
or $10 million, the price of a
good will strongly influence
your decision to buy.
Law of Demand
Consumers will buy more
of a good when its price is
lower and less when its
price is higher.
Common sense, right?
Chapter 1, Opener
Copyright © Pearson Education, Inc.
Slide 6
Inverse Relationship
Inverse relationship – as one goes up, the other goes
down.
Chapter 4, Section 1
Copyright © Pearson Education, Inc.
Slide 8
Law of Demand
• How does the law of demand affect the
quantity demanded?
– Price changes always affect the quantity
demanded because people buy less of a good
when the price goes up.
Chapter 4, Section 1
Copyright © Pearson Education, Inc.
Slide 9
Pizza - Yummy
Who would pay n for a slice??
$2.25
$4
$2.50
$2
$4.50
$5
$1
$3.25
$3.50
Chapter 4, Section 1
$4.25
Copyright © Pearson Education, Inc.
$3
Slide 10
Substitution Effect/Income
Effect
• The law of demand is the result of two
separate patterns of behavior we all
experience.
– Substitution Effect
– Income Effect
• They both describe two different ways a
consumer can change his or her spending
patterns
Chapter 4, Section 1
Copyright © Pearson Education, Inc.
Slide 11
Remember the pizza?
At what price do you throw in the towel
and get a 6 incher at Subway?
That’s the substitution effect!
Chapter 4, Section 1
Copyright © Pearson Education, Inc.
Slide 12
Understanding Demand
Page 88
Substitution effect
When consumers react to
an increase in a good’s
price by consuming less of
that good and more of a
substitute good.
Chapter 1, Opener
Copyright © Pearson Education, Inc.
Slide 13
The Income Effect
1 Gb thumb drive = $10
At that price, why
not buy two!
College
professor
requires you
to have a
thumb drive
for class:
4 Gb thumb drive = $10
Chapter 1, Opener
Copyright © Pearson Education, Inc.
Slide 14
The Income Effect
Later in the
semester, you
lose one and
have to buy
another one:
1 Gb thumb drive = $30
4 Gb thumb drive = $40
Chapter 1, Opener
Copyright © Pearson Education, Inc.
Slide 15
Income Effect
Income effect
The change in
consumption that results
when a price increase
causes your feelings to
change about the product
Chapter 1, Opener
Copyright © Pearson Education, Inc.
Slide 16
The Law of Demand in Action
• Checkpoint: What happens to demand for a good when
the price increases/decreases?
Because you feel
poorer and then
will spend less
elsewhere
Chapter 4, Section 1
?
Copyright © Pearson Education, Inc.
Slide 17
The Income Effect
• The income effect is the change in consumption
that results when a price increase causes
spending to change.
– Economists measure consumption in the amount of a
good that is bought, not the amount of money spent
on it.
– The income effect also operates when the price is
lowered. If the price of something drops, you feel
wealthier. If you buy more of a good as a result of a
lower price, that’s the income effect at work.
Chapter 4, Section 1
Copyright © Pearson Education, Inc.
Slide 18
Demand Schedules
• To have demand for a good, you must be
willing and able to buy it at a specified
price.
• A demand schedule is a table that lists
the quantity of a good that a person will
purchase at various prices in the market.
• Market demand schedule show the
quantities demanded at various prices by
ALL consumers in the market.
Chapter 4, Section 1
Copyright © Pearson Education, Inc.
Slide 19
Demand Schedules
• Demand schedules show that demand for a
good falls as the price rises.
– How does market demand change when the price
falls from $3 to $2 a slice?
Chapter 4, Section 1
Copyright © Pearson Education, Inc.
Slide 20
Reminder
• Demand is not what we WANT, it’s what we
can afford to BUY at the specified price.
Chapter 4, Section 1
Copyright © Pearson Education, Inc.
Slide 21
The Demand Graph
• A demand curve is a graphic
representation of a demand schedule.
– The vertical axis is always labeled with the
lowest possible prices at the bottom and the
highest prices at the top.
– The horizontal axis should be labeled with the
lowest possible quantity demanded at the left
and the highest possible quantity demanded
on the right.
Chapter 4, Section 1
Copyright © Pearson Education, Inc.
Slide 22
Demand Curves
Chapter 4, Section 1
Copyright © Pearson Education, Inc.
Slide 23
Demand Curves
• Ashley’s demand curve shows the number of
slices she is willing and able to buy at each
price, while the market demand curve shows
demand for pizza in an entire market.
– How are the demand curves similar?
Chapter 4, Section 1
Copyright © Pearson Education, Inc.
Slide 24
Demand Curve Survey
• Directions on my Wiki
Chapter 4, Section 1
Copyright © Pearson Education, Inc.
Slide 25
Review
• Now that you have learned how the law of
demand affects the quantity demanded, go
back and answer the Chapter Essential
Question.
– How do we decide what to buy?
Chapter 4, Section 1
Copyright © Pearson Education, Inc.
Slide 26