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DEMAND
HOW DO ECONOMISTS STUDY THE CONCEPT OF
DEMAND?
WHAT IS DEMAND?
• Write down the consumer good or
services you would like to have right
now.
• Demand is: THE DESIRE, ABILITY AND
WILLINGNESS TO BUY A PRODUCT
• PRESENTED IN BOTH SCHEDULE AND
GRAPH FORM
LAW OF DEMAND
 QUANTITY DEMANDED VARIES
INVERSELY WITH PRICE
 PRICE GOES UP….
QD GOES DOWN
 PRICE GOES DOWN…
QD GOES UP
WHY DO WE BUY?
 MARGINAL UTILITY – EXTRA
SATISFACTION ONE GETS FROM
ACQUIRING ONE MORE UNIT OF A
PRODUCT
 Krispy Kreme Donuts
 WHAT’S THE PROBLEM?
 DIMINISHING MARGINAL UTILITY – FOR ANY
GOOD OR SERVICE, THE MARGINAL UTILITY
DECREASES AS THE QUANTITY OF THE GOOD
INCREASES
 CHILI POWDER
 OH YEAH, AND donuts
 http://www.cleanvideosearch.com/medi
a/action/yt/watch?videoId=sB7XFPy_bZ
M
REVIEW
• 1. What three things must be present for Economists
to study Demand?
• 2. What is the Law of Demand?
• 3. How is Demand shown?
• 4. What other vocabulary did you learn today?
CHANGE IN QUANTITY
DEMANDED
• REFLECTED BY A MOVE ALONG THE
CURVE
• WHAT CAUSES IT?
• Income Effect
• Substitution Effect
INCOME EFFECT
• CHANGE IN PRICE ALTERS
CONSUMER’S REAL INCOME
• PRICE GOES DOWN, I FEEL LIKE I’VE
GOT MORE MONEY!
http://www.cleanvideosearch.com/
media/action/yt/watch?videoId=KiD
6Ozpv-xg
SUBSTITUTION EFFECT
• PRICE OF GOOD IS RELATIVELY LESS
EXPENSIVE THAN OTHER GOODS
• WHEN PRICES RISE ON A GOOD,
CONSUMERS WILL DEMAND LESS
BECAUSE OF OTHER ALTERNATIVES
OH, THIS IS SO IMPORTANT
• WHEN PRICE CHANGES, WE SEE A
CHANGE IN QUANTITY DEMANDED
ALONG THE CURVE
• BUT WHAT CAN CAUSE A CHANGE IN
DEMAND – A WHOLE NEW DEMAND
CURVE?
CHANGE IN DEMAND
 RESULTS IN AN ENTIRE NEW CURVE
 PEOPLE BUY DIFFERENT AMOUNTS OF
A GOOD EVEN WHEN PRICES STAY THE
SAME
 WHY?
 S.E.P.T.I.C.
SUBSTITUTE GOODS CHANGE
PRICES
EXPECTATIONS CHANGE
POPULATION CHANGES
TASTES CHANGE
INCOME CHANGES
COMPLEMENTARY GOODS
CHANGE PRICES
WRAP UP
• 1. What is the difference in change in quantity
demanded and change in demand?
• 2. What causes a change in quantity demanded?
• 3. What causes a change in demand?
• You have been a beautiful audience, drive safely!
HOW IS DEMAND SEEN IN YOUR LIFE?
• Name a product that you recently purchased
because it was on sale. Identify one substitute and
one complement for that product. What
happened to your demand for the substitute good
when the item you bought went on sale? (GRAPH
IT). What happened to your demand for the
complementary good when that item went on
sale? (GRAPH IT).
DEMAND VS. QUANTITY
DEMANDED
Demand
Description
What
changes
it?
What
does
it
look
like?
Quantity Demanded
DEMAND VS. QUANTITY
DEMANDED
Demand
Description
Quantity Demanded
the amount of a
Amount of a
good or service
good/service people
people are willing/able will buy at ONE
to buy at ALL possible price
prices
It is a POINT!!!!
It is a LINE, a series
of points

DEMAND VS. QUANTITY
DEMANDED
Demand
What
changes
it?
One
of 6
determinants from
SEPTIC
Quantity Demanded
ONLY
PRICE!
DEMAND VS. QUANTITY
DEMANDED
Demand
What
does
it
look
like?
(Increase)
Quantity Demanded
Price
Price (P)
P1
P2
D1
Quantity
(Q)
D2
D
Q1 Q2 Quantity
CHANGE IN DEMAND REVIEW
• Give six separate scenarios that would explain why
we would see a Change in Demand (SEPTIC) for
iphones and state whether your scenario would be
a shift to the right or a shift to the left
WHY IS UNDERSTANDING ELASTICITY
OF DEMAND IMPORTANT?
• The Law of Demand does not tell us
how much more or less (quantity
demanded) of a product people will
demand as prices change.
ELASTICITY OF DEMAND
• THE EXTENT TO WHICH A CHANGE
IN PRICE CAUSES A CHANGE IN
THE QUANTITY DEMANDED
• Name a product that you would
still buy regardless of price and a
product that you wouldn’t buy if
the price changed even if by a
little.
ELASTIC DEMAND
 SMALL CHANGE IN PRICE CAUSES
LARGE CHANGE IN QUANTITY
DEMANDED
 “FLATTER” DEMAND CURVE
 EXAMPLE: NEIGHBORING GAS
STATIONS (PENNY WARS)
INELASTIC DEMAND
 CHANGE IN PRICE CAUSES SMALLER
CHANGE IN QUANTITY DEMANDED
 MORE VERTICAL DEMAND CURVE
 EXAMPLES: INSULIN,
GAS AFTER KATRINA
TOTAL RECEIPTS TEST
• TR = PRICE OF PRODUCT X
QUANTITY SOLD
• $1000 = $100 x 10
• $500 = $50 x 10
 IF PRICE AND REVENUE MOVE IN
OPPOSITE DIRECTIONS, IT HAS ELASTIC
DEMAND
 IF PRICE AND REVENUE MOVE IN THE
SAME DIRECTION, IT IS INELASTIC
 IF THERE IS NOT CHANGE IN REVENUE,
IT IS CALLED UNIT ELASTIC
• PAGE 103 – FIGURE 4.5
• Complete Elasticity Overhead Activity
WHY IS ELASTICITY IMPORTANT?
 1. PRICING POLICY – GIVES
PRODUCERS AN IDEA OF HOW TO
CHANGE PRICES TO MAXIMIZE PROFITS
 2. TELLS GOV’T WHAT TO TAX – SIN
TAXES, EXCISE TAXES
REPORT: 'FAT TAX' COULD CURB NATION'S OBESITY
PROBLEM
20 PERCENT TAX WOULD BE PLACED ON UNHEALTHY FOODS
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INDIANAPOLIS -- Health experts have been trying to combat obesity in America for years and have
recently suggested a new way to solve the growing problem. A new study suggests that imposing a fat
tax on unhealthy food and drinks could help slim down expanding waistlines. According to reports,
more than 60 percent of Americans are overweight. Under the tax, a $4 cheeseburger would cost an
extra 80 cents, RTV6's Stacia Matthews reported.
Some Hoosiers found the proposed fat tax hard to swallow.
"I don't think we should tax people and the way they run their lives,” one man said.
Others said a fat tax is palatable.
"I'd pay 20 percent. It's worth it,” one woman said. "I would eat a lot more healthy just to save more
money.”
Researchers said a fat tax could drop obesity rates by 3.5 percent and prevent 2,700 heart-related
deaths a year. The study also urged subsidies for healthier foods and veggies to make them more
affordable. Dr. Eric Wright, who heads the Department of Public Health at the Indiana University School
of Medicine, said the fat tax falls right in line with other consumer products.
"We've applied tax to alcohol and tobacco and that has definitely shown through very many studies
that it actually decreased use. So, the logic has been applied to fatty foods and preliminary evidence
in Europe is that it’s very effective,” Wright said.
Researchers said Indiana spends $3.5 billion a year on obesity-related medical costs. "The reality is, with
two-thirds of the population being overweight or obese, that's what's driving up health care costs and
you can either choose to pay now, or you can pay later,” Wright said.
Critics of the tax said people who choose to healthier foods should receive tax breaks and incentives.
ELASTICITY
• HOW DO WE DETERMINE ELASTICITY?
• PAGE 106 - 107
DEMAND IS ELASTIC IF THE ANSWER
TO THE FOLLOWING QUESTIONS IS
YES:
CAN THE PURCHASE BE DELAYED?
ARE THERE SUBSTITUTE GOODS?
DOES THIS PURCHASE USE A LARGE
PORTION OF INCOME?