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					Marche 17th,18th
 Collect stock data
 Lending Video?                  What is a subprime
 :No Notes, but write these       loan?What is a
  questions down                   foreclosed home?
 Basic 9,10                       What are the
 Lecture 11                       negative
 Workbook pages 39-42,            externalities?
  43-45
 on a separate sheet of
                                HOMEWORK:
  paper.
                                GOL Part #3 due

                                 3.19.08
http://www.responsiblelending.org/issues/mortga
ge/martin-eakes-video-on.html

     What defies logic when       Which ethnic groups will be
      it comes to home loans?       hardest hit?
                                   How much might subprime
     What storm is Martin          loans monthly increase by?
      Easkes referring to?         Whom does the Marti Easkes
     What “storm” is Martin        place blame on for
      Easkes referring to           foreclosures?
      currently?                   What are the negative
                                    externailities to the housing
     How many people who           market subprime fiasco?
      have subprime loans          What is Martin Easkes asking
      might go into                 lenders to do in the future?
      foreclosure?
Lecture #11:
   Demand Part 1 & 2
18. Lecture #11: Demand Part 1

    Just a reminder—visit
     http://econrhs.googlepages.com/ to
     access PowerPoints, worksheets, and
     other class materials!

    If you are absent you should check this
     web-site so you can stay caught up!
    What is Demand?

 Market         •   A place where people come
                    together to buy & sell goods or
                    services.
Remember            •   2 sides:
when taking
   Cornell              1.   a buying side--demand
 Notes you              2.   selling side--supply
  need to
 come up
with at least
3 questions
 per page!
 What is Demand? cont.

Demand   •   the willingness and ability of
             buyers to purchase different
             quantities of a good at different
             prices during a specific period.

             •   Willingness = a person’s want or
                 desire for a good
             •   Ability = having the money to pay
                 for a good
    What is Demand? cont.

•Example:   Betty doesn’t have the $60,000 to buy a
Porsche. If she did have the money, though, she
says that she would buy it. Betty has the willingness
but not the ability. Under these circumstances she
does not have a demand for the Porsche!
SPECIAL HOMEWORK
TONIGHT!!!
•Many  people believe that the more money a person
has, the more expensive version of a product that
person will buy.

•People are assuming that someone who has the ability
to buy something also has the willingness to buy it.

•Economists   don’t think this way—they know most
people try to find the best deal!
       Thinking like an Economist!
(Please note this is not on p. 91 of your textbook—even though
                    that is what the log says)
•Survey 5 people whether they buy the most expensive
items available when they can afford them, or look for
best buys even when they have more than enough
money for the most expensive items.
•Create the following chart on a separate piece of paper
Name of Person       Most expensive Item   Best Buy
EX: Betty            YES                   NO
EX: Sally            NO                    YES
EX: Fred             YES                   NO



TOTALS               2—YES 1—NO            2—NO 1—YES
    The Law of Demand

The law •       Tells us what happens to the quantity
  of
demand          demanded when the price changes.
        •       If P then Qd
        •       If P then Qd
            •     (Where P = price and Qd = Quantity demanded)

        •       When price goes up—the quantity
                demanded goes down
        •       When price goes down—the quantity
                demanded goes up
   The Law of Demand

Importance •   It shows us that consumers are
 of the law
 of demand     willing to purchase fewer goods as
               prices goes up.
           •   And it shows that consumers are
               willing to purchase more goods as
               the prices goes down!
   Quantity Demanded

 Quantity •   Different from demand
Demanded

          •   It is the number of units of a good
              purchased at a specific price.

          •   It is always a number
The Law of Diminishing Marginal Utility

 The Law of •    Diminishing = Decreasing
 Diminishing
             •
  Marginal
   Utility   •   Marginal = Additional

             •   Utility = Satisfaction

             •   States that as a person consumes
                 additional units of a good, eventually,
                 the utility gained from each additional
                 unit of the good decreases.
The Law of Diminishing Marginal Utility Experiment:
             We need 2 volunteers (a boy and a girl)



            Girl     Boy
                           10
  First                     9
  Taste                     8
 Second                     7
  Taste                     6
  Third                     5
  Taste                     4
  Fourth                    3
  Taste                     2

  Fifth                     1
  Taste                     0
                                First Taste




                                              Second


                                                       Taste




                                                               Fourth



                                                                        Fifth Taste
                                                       Third


                                                               Taste
                                               Taste

     Enjoyment level
    1 (low) – 10 (high)
The Law of Diminishing Marginal Utility
       The Law of Demand in
        Numbers & Pictures

Demand •   We can show how the law of
           demand works by:
           •   listing prices and quantities
               demanded,
           •   and by plotting those numbers in a
               graph.
           The Law of Demand in
            Numbers & Pictures

Demand     •      In Economics, the table is called
Schedule          a schedule.

           Demand Schedules
           Individual Demand Schedule            Market Demand Schedule
             Price of a     Quantity demanded     Price of a     Quantity demanded
           slice of pizza        per day        slice of pizza        per day

                $.50                5               $.50               300
               $1.00                4              $1.00               250
               $1.50                3              $1.50               200
               $2.00                2              $2.00               150
               $2.50                1              $2.50               100
               $3.00                0              $3.00                50
                   The Law of Demand in
                    Numbers & Pictures
Demand       •   We can look at individual or market demand curves.
Schedule
  cont.      •   Individual = one person’s demand for a good
             •   Market demand = the sum of all the individual
                 demand curves for a good
Demand Schedules

Individual Demand Schedule            Market Demand Schedule
  Price of a     Quantity demanded     Price of a     Quantity demanded
slice of pizza        per day        slice of pizza        per day

     $.50                5               $.50               300
    $1.00                4              $1.00               250
    $1.50                3              $1.50               200
    $2.00                2              $2.00               150
    $2.50                1              $2.50               100
    $3.00                0              $3.00                50
           The Law of Demand in
            Numbers & Pictures
Demand • The graph         Market Demand Curve
 Curve
       is a called a
       curve.                                         3.00




                       Price per slice (in dollars)
       •The curve                                     2.50

                                                      2.00
       always slopes
                                                      1.50
       downward
       from left to                                   1.00

       right!                                          .50

                                                        0
                                                             0   50    100 150 200 250 300 350
                                                                      Slices of pizza per day
               The Law of Demand in
                Numbers & Pictures
Practice
           •   Copy the following in your notebook
               and plot the demand curve:
               The Law of Demand in
                Numbers & Pictures
Practice
           •   Copy the following in your notebook
               and plot the demand curve:
             Review—True or False
1.   Both willingness and ability to purchase must
     be present for demand to exist.
         TRUE

2.   As price decreases, the quantity demanded
     decreases.
         FALSE

3.   The more utility you receive from a good, the
     higher the price you are willing to pay for that
     good.
         TRUE
Summary


    When completing your notes you
     need to write a 3-5 sentence
     summary of the lecture. This is a
     part of your notes grade!
CLASS WORK/HOMEWORK

   HOMEWORK REMINDER:

     Workbook pages 36-38 due Wed in class
     Thinking like an Economist (survey) due Wed
      11/1 & 11/2
     Basics #7 & Quiz are due Thurs 11/1 or Fri
      11/2.
20. Lecture #11: Demand Part 2
When Demand Changes, the Curve Shifts


 Demand          • Demand
                 can change
  Curve          • When
  Shifts         Demand
 Remember
                 goes up—the
 when taking     curve shifts
    Cornell      to the right
  Notes you
   need to
                 • When
                                      D2
  come up        Demand
 with at least   goes down—
 3 questions                     D3
  per page!
                 the curve
                 shifts to the
                 left
 Answer the following questions in your notebook:


                                             • In the graph, the demand
                                               curve in the middle, the
                                               one labeled D1, is the
                                               starting point. On this
  $1
                     C        A    B           curve, what is the quantity
                                        D2
                                               demanded at a price of
                                  D1           $1?
                         D3
       0           200    400     600
Quantity demanded of orange juice (quarts)   400 quarts of Orange Juice
 Answer the following questions in your notebook:

                                             • Suppose the demand for
                                               Orange Juice increases to
                                               600 quarts. People still
                                               want to pay $1 per quart,
                                               but now they want to buy
  $1
                     C        A    B           more at that price. What
                                        D2
                                               happened to the demand
                         D3
                                  D1           curve?
       0           200    400     600        • It shifts to the right and
Quantity demanded of orange juice (quarts)     becomes D2. When demand
                                               goes up, the demand curve
                                               shifts to the right!
 Answer the following questions in your notebook:



                                             • Now suppose that the
                                               demand for Orange Juice
                                               decreases to 200 quarts.
                                               What happens to the
  $1
                     C        A    B           demand curve?
                                        D2

                                  D1         • It shifts to the left and
                         D3
                                               becomes D3. When demand
       0           200    400     600
                                               goes down, the demand
Quantity demanded of orange juice (quarts)
                                               curve shifts to the left.
In your notebook brainstorm a list
answering the following question:
    Make a list of the most popular holiday
     gifts from last year.

    What are some of the reasons that the
     demand for these items was so high?

    Do you think the demand will be as high
     again this year? Why or why not?
What factors cause demand curves to shift?
   5    1. Income: As a person’s income changes they
factors      may buy more or less of a certain good.
           •  Normal Good— if a person’s income & demand
              change in the same direction.
              •   Ex: Now that Robert is making twice as much, he buys more
                  CDs.
          •   Inferior Good— if income & demand go in
              opposite directions.
              •   Ex: Now Robert doesn’t have to eat SPAM anymore he can
                  afford steak. That makes SPAM an inferior good to steak.
          •   Neutral Good— if demand does not change even
              though income does.
              •   Ex: Robert still needs the same amount of toilet paper,
                  toothpaste, & deodorant. These goods are neutral goods.
What factors cause demand curves to shift?

5 factors
            2. Preferences—changes in
              preferences cause changes
              in demand.
                  As gas prices
                   soar, fewer
                    SUVs are
                      being
                   purchased
                   while more
                   hybrids are
                   being sold
                   every day!
What factors cause demand curves to shift?
            3.     Prices of related goods:
                 •    When 2 goods are substitutes (a similar
5 factors             good), the demand for one moves in the
                      direction as the price of the other.
                     •   Ex: If the price of Coke goes you will probably buy
                         Pepsi instead. If the price of Coffee goes up you
                         may substitute a lower priced tea.
                 •   When 2 goods are complements (goods
                     used together), the demand for one moves in
                     the opposite direction of the price of the
                     other.
                     •   Ex: Tennis balls and Tennis rackets are
                         complements. If the price of tennis rackets
                         increase—fewer people will buy the rackets and
                         this will cause the demand for tennis balls to drop.
In your notebook recreate the following
chart. Fill out the chart as a class.
Brainstorm a list of     What would be a       What would be a
  goods that you        substitute good for   complement good
     demand:           each of these items:    for each of these
                                                     items:
What factors cause demand curves to shift?

            4. Number of Buyers--
               • An increase or decrease in the # of
5 factors        buyers can change demand
               • The more buyers the higher the
                 demand
                  •   Ex: High birthrate, increased
                      immigration
              •   Fewer buyers lower the demand
                  •   Ex: Natural disaster, high death rate
What factors cause demand curves to shift?



 5 factors
             5.   Future Price—
                  •   Buyers’ expectations of future
                      prices can cause them to buy now
                      or wait to buy.
                      •   Ex: waiting to buy a house because
                          you think the prices are going to
                          continue to go down!
What is Elasticity of Demand?
Elasticity   •   It measures how a price change
                 affects the quantity of a particular
                 good that people want to buy.
                 •   Elastic= the price change has a
                     significant impact on the quantity
                     demanded.
                 •   Inelastic= there is a minor change in
                     quantity demanded when the price
                     changes.
                 •   Unit-elastic= the impact of a price
                     change is neutral—it is neither major
                     nor minor.
What is Elasticity of Demand?

           Elasticity of Demand
Copy
            Elasticity is determined using the following formula:
the
formula!    Elasticity =
                           Percentage change in quantity demanded
                                   Percentage change in price

           To find the percentage change in quantity demanded or price, use the following formula:
           subtract the new number from the original number, and divide the result by the original
           number. Ignore any negative signs, and multiply by 100 to convert this number to a
           percentage:


                                      Original number – New number
            Percentage change =                                           x 100
                                               Original number
What is Elasticity of Demand?

Copy           Elasticity =
                              Percentage change in quantity demanded
                                    Percentage change in price
the
formula!
           •   If the answer is:
           •   = Elastic Demand (greater than 1)
           •   = Inelastic Demand (less than 1)
           •   = Unit-elastic demand (equal to 1)
What is Elasticity of Demand?

Practice   •   If Qd 15% and P 10%, then
               15/10 = 1.5 = Elastic demand

           •   If Qd 5% and P 10%, then 5/10
               = 0.5 = Inelastic demand

           •   If Qd 10% and P 10%, then
               10/10 = 1 = Unit-elastic demand
   What is Elasticity of Demand?
        Elastic Demand


                                                If demand is elastic, a small change in price
        $7                                      leads to a relatively large change in the quantity
                                                demanded. Follow this demand curve from left to
        $6                                      right.

        $5
                                                The price decreases from $4 to $3, a decrease        $4 – $3   x 100 = 25
                                                of 25 percent.
Price




                                                                                                       $4
        $4

        $3
                                      Demand    The quantity demanded increases from 10              10 – 20   x 100 = 100
                                                to 20. This is an increase of 100 percent.
        $2                                                                                             10

        $1
                                                Elasticity of demand is equal to 4.0.
                                                Elasticity is greater than 1, so demand is           100%      = 4.0
             0                                  elastic. In this example, a small decrease            25%
                 5   10   15     20   25   30
                                                in price caused a large increase in the
                          Quantity              quantity demanded.
   What is Elasticity of Demand?

        Inelastic Demand


                                                  If demand is inelastic, consumers are not very
        $7                                        responsive to changes in price. A decrease in
                                                  price will lead to only a small change in quantity
        $6                                        demanded, or perhaps no change at all. Follow
                                                  this demand curve from left to right as the price
        $5                                        decreases sharply from $6 to $2.
Price




        $4                                        The price decreases from $6 to $2, a decrease        $6 – $2   x 100 = 67
                                                  of about 67 percent.                                   $6
        $3
                               Demand                                                                  10 – 15
                                                  The quantity demanded increases from 10                        x 100 = 50
        $2
                                                  to 15, an increase of 50 percent.                      10
        $1
                                                  Elasticity of demand is about 0.75. The
                                                  elasticity is less than 1, so demand for this         50%
                                                                                                                 = 0.75
             0                                    good is inelastic. The increase in quantity           67%
                 5   10   15     20     25   30
                                                  demanded is small compared to the
                          Quantity                decrease in price.
 What determines Elasticity of Demand?
   4    1.   Number of substitutes:
factors
             •   When there are few substitutes for a good,
                 the quantity demanded in unlikely to
                 change.
                 •   The good will likely be inelastic.
                 •   Ex: Heart medicine—few substitutes—so even
                     if the price doubles the people who need it are
                     going to buy it.
             •   When there are many substitutes for a
                 good, the opposite is true.
                 •   The good tend to be elastic.
                 •   Ex: Soda—if Coke triples in price—you are
                     more likely to buy a cheaper brand.
What determines Elasticity of Demand?
4 factors 2.   Luxuries vs. Necessities:
               •   Demand for necessities tend to be
                   inelastic b/c people need them even if
                   prices rise.
                   •   Ex: necessities are goods that you need to
                       survive—Food, medicine, etc.


               •   Demand for luxuries tend to be elastic
                   b/c people will often do without those
                   goods if the price rises.
                   •   Ex: Sports Car, bling-bling, etc.
What determines Elasticity of Demand?
4 factors 3.   Percentage of income spent on the
               good.
               •   If a good requires a large % of a
                   person’s income, demand for it tends to
                   be elastic.
               •   Inelastic goods tend to require a small
                   % of a person’s income.
                   •   Ex: Claire has a monthly income of $2000. She
                       spends $10 (or ½% of her monthly income) on
                       magazines and $400 (or 20% of her monthly
                       income) on dinners at restaurants. If the price of
                       magazines & going out to restaurants double, what
                       will Claire be more likely to cut back on?
What determines Elasticity of Demand?
4 factors 4.       Time:
          •        When consumers has little time to
                   respond to price change, demand is
                   usually inelastic
               •     Ex: If the price of gas went up 50 cents today and your
                     tank was empty, you would probably still buy gas.

          •        When they have more time to
                   respond, demand is usually elastic
               •     Ex: If the price of gas continued to rise over the next 3
                     months, you may begin to carpool, or purchase a fuel
                     efficient car.
 Relationship between Elasticity & Revenue
Elasticity •   Elastic Demand & in increase in price
   &           lead to a decrease in Total Revenue
Revenue

           •   Elastic Demand & in decrease in price
               lead to a increase in Total Revenue

           •   Inelastic Demand & in increase in price
               lead to a increase in Total Revenue

           •   Inelastic Demand & in decrease in price
               lead to a decrease in Total Revenue
             Review—True or False
1.   When a demand curve shifts to the right, demand
     has decreased.
         FALSE

2.   Demand has increased when the demand curve
     shifts to the right.
         TRUE

3.   The prices of related goods affect the demand curve.
         TRUE

4.   A change in the number of buyers creates a change
     in the quantity demanded.
         TRUE
               Review—True or False
1.   Demand is always inelastic.
          FALSE

2.   Unit-elastic demand exists when the quantity demanded is
     less than the percentage change in price.
          FALSE

3.   Time affects the elasticity of demand.
          TRUE

4.   The demand for necessities is likely to be inelastic.
          TRUE

5.   It doesn’t matter if demand is elastic, inelastic, or unit-elastic.
          FALSE
Summary


    When completing your notes you
     need to write a 3-5 sentence
     summary of the lecture. This is a
     part of your notes grade!
CLASS WORK/HOMEWORK

   HOMEWORK REMINDER:
     Workbook pages 39-49 due Mon 10/22 or
      Tues 10/23.
     Basics #8 & Quiz are due Wed 10/24

     Part 3 of Project due Wed 10/24

     Demand Chapter 4 test on 10/25 or 10/26 has
      been canceled.

				
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