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									          Demand




Chapter Four Sections One and Two
   Macro vs Micro Economics

 Macroeconomics   = the whole
 picture

 Microeconomics  deals with
 behavior and decision making by
 small units such as individuals and
 firms.
              Demand

 Demand is the desire to own
 something and the ability to pay for it.
              Law of Demand
 The Law of Demand
  says
  When a good's price      •Price
    is lower, consumers
    will buy more
  When a good's price
    is higher, consumers
    will buy less
 The law of demand is
  the result of two                  •Demand
  patterns of behavior-
  substitution effect and
  income effect
            Substitution Effect
   When consumers react to an increase in
    price by consuming less of that good and
    more of another good, economists call this
    the substitution effect.
   For example, if the price of movie tickets
    rises then you'll tend to go to the movies
    less and substitute another activity for going
    to the movies.
               Income Effect
   Income is the change in consumption
    resulting from a change in real income.
    Real income is the income of an individual,
     organization, or country, after taking into
     consideration the effects of inflation on
     purchasing power.
   When prices overall go up, even if you have
    the same amount of money you can no
    longer do the same things. Instead of
    buying two slices of pizza, if the prices rise,
    you may buy only one or buy two and forgo
    something else.
            Demand Schedule
   Demand Schedules explain how much will
    be demanded at certain prices.
   Just because you want an object, doesn't
    mean that you can afford it. A demand
    schedule shows how many people both
    want an item and can afford it at different
    prices.
Demand Schedule
       Market Demand Schedule
   Market Demand Schedules show quantities
    demanded by all consumers in the market.
   This allows business owners to predict the
    total sale of an item if it is sold at different
    prices
   These can be created by surveying
    customers and adding up the number of
    people who say they'll buy an item at
    certain prices.
             Demand Graph

• If you plot the price and quantity demanded
  found on a demand schedule on a graph you will
  see the demand graph.
• The line you see is the demand curve.
• Prices will always be on the vertical axis
• Quantity demanded will always be on the
  horizontal axis
How are these two different?
             Reading a Curve
   Demand graphs assume that price and
    quantity purchased are the only things that
    are not constant. This means that we
    assume that other things like income, prices
    of similar goods, and quality of the product
    will not change.
   As price decreases, demand will always
    increase.
   Demand curves are only good at predicting
    how much people will buy at differing
    prices.
               Ceteris Paribus
   The demand curves in the last few slides
    assumed that nothing other than quantity
    and price changed.
   Economists call this ceteris paribus.
   Ceteris paribus is Latin for all other things
    are held constant
   Now we're going to talk about what
    happens when we take other factors into
    account.
               Accuracy
   Demand curves are accurate when the only
    things changing are price and quantity.
   However, there are other things that can
    change the quantity demanded.
   What are some examples you can think of?
         What Changes Demand?
   Recall the Definition.

 Taste          (This = Desire)
 Income         (This = Ability to Pay
C
S
Taste
  • As we grow up, hear
    information, learn
    more etc our opinions
    and feelings change

  • The way we want,
    desire, feel or like
    something is TASTE
INCOME

   • Due to our salary, pay
     checks, job
     opportunities we have
     more or less money to
     spend.

   • This change in Income
     changes our ability to
     buy
       COMPLIMENTARY ITEMS

• These items go
  together.

• For example if the cost
  of peanut butter goes
  way down, we desire
  more jelly.
                  SUBSTITUTES
• These items can be
  exchanged for the other.

• If the cost of peanut butter
  goes way up, we may buy
  more pizza for lunch.
  Pizza can be exchanged
  for PB and J sandwiches.
 This is why Dooley wants you to
             remember
 Taste
 Income
 Complimentary Items
 Substitutes

+ Population and Expectations
                 Expectations
   If a price on a good that you desire is going
    to be raised or lowered, this affects how you
    feel about buying that object.
    If you know the price is going to go up, then you
     feel that you need to purchase that item right
     then
    If you know the price is going to go down, you
     are more willing to wait until the price is
     lowered.
                Population
   The size and age of the population will
    make more items in demand in others
   How do you think that demand was
    changed by the Baby Boomers?
   How will demand for items change as the
    Baby Boomers begin to retire?
   How would demand for individual stores
    change if the population of a town
    increased or decreased?
Two more Oddities before we have some
            Graphing Fun
   If prices go up…sometimes the demand for
    inferior goods increases.

   This is because Inferior Goods can be
    exchanged for Luxury Items (Substitutes)

   IE: Kellogs cereal or Brand X cereal
One more Oddity before we have some
           Graphing Fun
                • When changing Demand
                  remember:


                • I NCREASE TO THE
                • R IGHT
                • D ECREASE TO
                  THE LEFT
Elasticity of Demand




 Chapter 4 Section Three
          Elasticity of Demand
 Elasticity of demand- the way that
  consumers respond to price changes
 Inelastic- demand for a good that goes
  unchanged even if prices increase
   Examples?
 Elastic-  demand for a good changes greatly
  if there is a price increase
   Examples?
         Calculating Elasticity
 Remember    that the law of demand says that
  whenever there is an increase in price, there
  will be a decrease in demand
 Price range helps to determine the elasticity
  of a good
   Demand    for a good at one price may be elastic
    but at another price the same good might be
    inelastic
Elasticity
      If the price of a
       magazine rose from
       $ .20 to $ .30. This is
       a 50% increase but
       the price still isn't
       truly high.
      If the price of a
       magazine rose from
       $4 to $6, demand for
       the price would go
       down
                        Formula
 Elasticity    is found by


 Elasticity   = Percentage change in quantity demanded
                      Percentage change in price

 Percentage     change= Original Number- New Number x100
                                Original Number
           Value of Elasticity
 If the elasticity of a good is less than 1, then
  we call this good inelastic.
 If the elasticity is greater than 1, then
  demand is elastic.
 If the elasticity of a good is 1, then we
  describe this as unitary elastic. This means
  that the percentage change of quantity
  demanded is exactly equal to the
  percentage change in the price of the good.
Elasticity...
        Ifthe price of a
         pizza goes up from
         $1 to $1.50, and the
         quantity of the pizza
         fell from 4 to 3.
        The change in price
         is ____
        The change in
         quantity demanded
         is ___
    Elasticity of Slice of Pizza
 Use the formula to figure out whether the
 price of pizza is elastic...
      Factors Affecting Elasticity
   Availability of Substitutes

   Relative Importance

   Necessities vs Luxuries
       Availability of Substitutes
   If there are few substitutes for a good, then
    even when its price rises greatly, you might
    still buy it. (Inelastic)
           Ex: Concert Ticket; Medicine
   A wide choice of substitutes can make
    demand elastic.
           Give some Examples…
          Relative Importance
 How   much of your budget you already
  spend on an item will help determine the
  elasticity of a product
 The more you spend on a item, the greater
  a difference in price will affect your budget.
  If the price goes up, then you will have to
  decide if you are going to spend more on
  that product or reduce how much you buy.
     Examples: Clothes; Shoelaces
            Needs v. Wants
 Whether  or not an item is considered to be a
  need or want will effect the elasticity.
 What items do you think are inelastic
  because they are needs?
 What items do you think are elastic because
  they are wants?
            Change over Time
   Consumers do not always react quickly to a
    change in price because it takes time to find
    substitutes
   Demand sometimes can be inelastic in the
    short run and become more elastic as time
    goes on.

        Ex: Gasoline
          Elasticity and Revenue
 Total revenue is defined as the amount of money
  the company receives by selling its goods
 The law of demand states that as prices rise
  there will be less demand, this means that by
  raising prices firms could stand to lose money
  rather than gain more
 Remember that elastic demand comes from one
  or more factors
   Availability of substitute goods
   Limited budget that doesn't allow for price   changes
   Perception of a good as a luxury good
       Total Revenue and Inelastic
                Demand
 Ifa good is inelastic, then demand won't
  change much because of prices.
 This means that prices going up will not
  cause the firm to lose as much demand for
  the product.
 The higher price will make up for the
  decrease in demand and the firm will make
  more money
  Elasticity and Pricing Policies
 Firms use elasticity of a good to figure out
 whether or not it would be helpful or harmful
 to their revenue to raise the price of a good.
     State whether the goods are
           elastic or inelastic
   Salt
   Inelastic
           Elastic or Inelastic?
   Matches
   Inelastic
          Elastic or Inelastic?
   Restaurant Meals
   Elastic
          Elastic or Inelastic?
   Toothpicks
   Inelastic
          Elastic or Inelastic?
   Chevrolet Automobiles
   Elastic
             Find the Elasticity
1.   An increase in the price of orange juice from
     $2.39/half gallon to $2.45/half gallon
     accompanied by a 2.5% decrease in sales.
2.   An increase in the price of gasoline from
     $0.99/gallon to $1.39/gallon is accompanied by a
     decrease in sales of 0.5%.
3.   A decrease in the price of a taco from $2.35 to
     $1.99 causes an increase in sales from 1,225
     tacos to 1,550 tacos.
4.   The price of a haircut at an exclusive shop
     increases by 12%, causing the number of
     haircuts to decrease from 40 per day to 27 per
     day.
   PRICE        QUANTITY
Initial   New   Initial   New   % change in   % change in Elasticity of
                                demand        price       Demand

25        30    100       40

40        70    120       90

200 220 80                64

50        75    150       135


      In each case tell me whether you would
      describe it as elastic, inelastic or unitary
      elastic
   Which of the following goods are likely to
    have elastic demand and which are likely to
    have inelastic demand?
    Home heating oil
    Pepsi
    Chocolate
    Water
    Heart Medication
    Oriental Rugs
1.   Yesterday, the price of envelopes was $3 a
     box, and Julie was willing to buy 10 boxes.
     Today, the price has gone up to $3.75 a box,
     and Julie is now willing to buy 8 boxes. Find
     the elasticity of demand.
2.   Suppose the price of a particular good
     increases from $95-$105. As a
     consequence, you decrease your purchases
     of the good from 21 units to 19 units. What is
     the elasticity of demand?
3.   Suppose the price of a good increases from
     $95-$105. As a result, your purchases of the
     good decrease from 41 to 39 units. What is
     the price elasticity of demand?

								
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