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Demand
Definition of Demand
I.
A.
The desire, willingness, and ability to purchase a
particular product at a particular price
Aggregate Demand
II.
A.
B.
Total quantity of products (goods & services)
demanded by all consumers at different price levels
in the market
also known as market demand
Demand Schedule
III.
A.
a table depicting alternative quantities of a
good/service demanded at different prices
B. Example:
Demand Schedule
P
$15
5
QD
4
10
Demand Curve:
IV.
A.
a graphic representation of the demand
schedule, or of the Law of Demand
To the new point
P
Results in movement along the demand curve
$15
From one point
on the curve
$5
D
4
10
Q
Law of Demand:
V.
A.
There is an inverse (hi) relationship between
price and the quantities demanded at those
prices
Or, as price increases, the quantity
demanded decreases … and vice versa
This causes movement along the demand
curve as individuals buy less
B.
C.
P
$7
5
3
0
D
10 12 14
Q
Reasons for the Law of Demand
VI.
A.
Law of diminishing marginal utility:
decreasing satisfaction or usefulness as
additional units of a product are acquired.
1.
Utility: the benefit or satisfaction/usefulness of a
product.
Marginal: added or extra.
Marginal utility: the added satisfaction from
acquiring/using one more unit of a product.
2.
3.
i.
4.
B.
Desert story
When price exceeds marginal utility, consumers
stop buying.
As prices increase, so does opportunity cost.
C.
D.
Income Effect: a drop in price gives buyers more real
income (purchasing power) even though actual
income remains unchanged. We feel richer, so buy
more.
Substitution Effect: change in price of a good makes
it relatively higher or lower than the prices of other
goods that act as substitutes.
A higher price means that a good is more expensive
relative to other similar goods, so we buy the other
goods. A lower price means we buy less of the
relatively more expensive “other” products and more
of the relatively cheaper good.
Prompt
► Describe
the differences between the
income effect and the substitution effect
► What
are the above “effects” on demand?
VII.


Two ways demand is
affected with two
different results
A change in price
causing a change in
the quantities
demanded, resulting
in movement along
the demand curve
A change in other
factors related to
demand, causing a
change or shift in
demand, resulting in
movement of the
demand curve itself
to the right or left
P
$10
D1
15
25
D2
Q
VIII.A Shift in the demand curve itself
indicates a change in demand so that the
curve itself shifts to the right or left due
to factors other than price of the product
A.
B.
Change in consumer income
Change in consumer preference/taste
Less
demand for
everything
people buy
=
+
C. Change in
related prices
1. Substitutes
(products bought
in place of other
products)
P
P
$1
$.79
$.75
D
35
50
D1
D2
Q
65
82
Q
2.
Complements (2 or more products
bought and used together)
$1.50
$2
5
$1
D1
D2
20
Prompt
1.
2.
3.
On your prompt paper, list any product (ie,
shoes, ice cream, DVD, etc.)
List two substitutes and two compliments
for the product listed
Explain how an increase in the price of
each would affect demand for the product
Complement or Substitute?
► Paper
plates and plastic cups
► Flashlight and batteries
► Hamburger and burrito
► Burrito and hot sauce
► Cat and dog
► Candy and chips
► Sugar and cake
► Taxi and subway
Printer
goes on
sale
Demand
increases
Flashlight
price
increases
Demand
for
batteries?
Demand for
Taco Bell
burritos?
Buy one
get one
half off
sale
Demand
decreases
Price
increases
Demand
will
decrease
D. Change in buyers’ expectations
Expect future price increase, demand more
now
2. Expect future price to decrease, demand
less now
3. Expect future conditions to change: if
expect cars in near future to run on water,
demand decreases now
1.
Demand for
plasma TVs?
Until
Friday
Demand
falls
A week
before Black
Friday?
E. Change in number of buyers/population
(NOT number of customers!)
When …
Demand will
decrease because
fewer people
means less
demand
Activities
► Changes
in Demand w/s
► Demand
Curve Contest!
Class Question:
► If,
as an entrepreneur, you wanted to
increase profits, would you raise prices for a
higher profit per item sold? Or should you
lower prices to sell more and make up in
volume what you lose in per-item-sold
profits?
► How do you know which would be more
profitable?
Elasticity of Demand (or price elasticity of
demand)
X.
A.
The extent to which a change in price causes
a change in the quantity demanded
B. In other words, elasticity
answers the question: How
much does the quantity
demanded change when price
is increased?
Why is this an important
question to entrepreneurs?
Note vertical
slant of the slope
P
$10
5
1.
Inelastic demand: When price
changes, there is a relatively
(or proportionally) smaller
change in the QD. (The “rubber
band” of demand doesn’t
stretch much when price
changes)
D
5 7
Q
2.
Elastic Demand: When price changes, there is a
relatively (or proportionally) larger change in the
QD. (The rubber band of price is very stretchy)
Note the horizontal slant
of the slope
P
$9
6
D
10
20
Q
3.
Unit Elastic Demand: A change in price causes a
proportionally equal change in QD. (Demand is just
as stretchy as price)
P
Note the 45 degree angle
$10
$5
D
15
30
Q
Task
► Draw
and label the following demand curves
with the correct elasticity of demand:
1.
3.
2.
P
P
$10
$2
$6
5
$1
P
5
D
D
4
8
D
Q
5
10
Q
4 5
Q
XI.
A.
B.
Two ways to “determine”
Elasticity
Determinants of Elasticity (suggestive)
Calculating total revenue/expenditure
(determinative)
XII.
Determinants of Demand Elasticity
A.
Urgency
1.
B.
If urgent, likely inelastic
Availability of adequate substitutes
1.
C.
If adequate subs, likely elastic: Trumps all others
Proportion of income
1.
If purchase requires large proportion, likely elastic
Demand Elasticity Chart
Yes aaaaaa Inelastic
Urgent?
No aaaaaa Elastic
Adequate
Subs?
Large Portion of
Income?
Yes aaaaa Elastic
No aaaaaa Inelastic
Yes aaaaaa Elastic
No aaaaaa Inelastic
Question:
► What
is the price elasticity of demand (unit,
elastic, or inelastic?) for CDs? Draw a demand
curve indicating its elasticity, and and explain why
Is the purchase urgent?
► Does the purchase require a large proportion of
income?
► Are there adequate substitutes available?
►
Elastic Demand
Challenge #1: Rule of Thumb
► For
a W$, be the first to describe a general rule
from the list below by creating demand curves
indicating likely elasticities for each of the
following:
► Food
► Meat
► Beef
► Hamburger
► Big
Mac
The Rule:
As you move from
general to specific,
price elasticity of
demand goes from
highly inelastic to
increasingly elastic
Food
Meat
Beef
Hamburger
Big Mac
XIII.
Calculating Total Revenue or Total
Expenditure
Total Revenue (TR): The amount a business
A.
receives in payments spent on a product at a
particular price.
1.
TR looks at the amount received
Total Expenditure (TE): The amount
B.
consumers spend on a product at a particular
price.
1.
TE looks at the amount spent
C.
P x Q = TR/TE, so that:
1. If price and TE move in opposite directions = Elastic and
prices should NOT be raised
1. PhTEi=Elastic
If price decreased from $6 to $5
P
Total
Revenue
$30
$50
Price
$6
$5
AD
5
10
Total Expenditure would have increased from $30 to $50
Q
Prompt:
► Assume
the product you sell has elastic
demand conditions. Should you raise or
lower prices?
► Why?
D. If when prices increase, TE increases also =
Inelastic, raise prices!
1.
PhTEh=Inelastic
Note that when price falls
from $10 to $5, TR falls also
P
$20
$15
$10
$5
AD
2 3
Q
E. If no change, doesn’t matter = unit elastic
1.
PhTE=No Change=Unit Elastic
There is no change in total revenue
P
$100
$100
TR $10
TR $5
AD
10
20
Q
So that when price changes, moving up or down
Challenge #2
► For
a W$, be the first to RAISE YOUR HAND
and answer correctly the questions below:
► What
is the elasticity of demand?
► How did you determine it?
P
$8
$4
D
35
70
Q
Questions
1.
2.
Create a DC that shows what happens to
the demand for tacos when the price of
burritos increases
What’s the demand elasticity of a college
education? Why?
7. Label the Curve below:
Recreate this demand
curve on your paper,
noting the vertical
angle of the slope
► Plot two prices and
two quantities
demanded at those
prices
► Calculate total revenue
► Indicate its elasticity
of demand
►
8.
Name the elasticity of demand for the
following:
1. Price increased 10% causing a 20% decrease
in the quantities demanded
2. Create a demand curve indicating its elasticity
► Answer
to #8:
Elastic Demand
P
10%
Change
In price
Therefore …
Q
Causing a relatively larger
change in the quantities
demanded (20%)
Challenge
► Bill’s
Barbequed Bat Barn raised the price of
its Barbequed Bat Bowls from $1.50 to
$3.00. The quantity of Bat Bowls demanded
dropped from 150 Bat Bowls a day to 100 a
day. What elasticity of demand were Bill’s
Bat Bowls and how can you tell? Should Bill
have raised the prices? Why? Create a
demand curve that indicates your
conclusions