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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
 When a good's price
is higher, consumers
 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
   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,
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?
   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
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
    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
Ex: Concert Ticket; Medicine
   A wide choice of substitutes can make
demand elastic.
Give some Examples…
Relative Importance
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