ch. 4: demand. section 1: understanding demand consumers shape markets through their demands
TRANSCRIPT
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Ch. 4: Demand
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Section 1: Understanding Demand
• Consumers shape markets through their demands.
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Demand
• Demand: the desire to own something and ability/willingness to pay for it.
• Consumer demand dictates what is produced.
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Law of Demand
• Law of demand: when a good’s price is lower, consumers will buy more. When the price is higher, consumers will buy less.
Cost CostDemand Demand
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Substitution Effect
• Substitution effect is when consumers react to an increase in price by purchasing more alternative (cheaper) products.
• If pizza goes up in price, people buy more hamburgers and less pizza.
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Income Effect
• Income effect is when consumers demand less because of a change in real income.
• If all clothing prices rise, and your income does not, you will consume/demand less clothing.
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Demand Schedule
• Economists chart demand by creating a demand schedule: a table that lists demand levels at different prices.
Price of a slice of pizza Quantity of slices demanded
$.50 5
$1.00 4
$1.50 3
$2.00 2
$2.50 1
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Market Demand Schedule
• A market demand schedule charts demand levels for an entire economy.
Price of a slice of pizza Quantity of slices demanded
$.50 5 million
$1.00 4 million
$1.50 3 million
$2.00 2 million
$2.50 1 million
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Demand Curve• Demand curves plot the data from demand
schedules onto a graph.
0 2 3 4 50
0.5
1
1.5
2
2.5
3
3.5
Series 1Column2Column1
Slices of Pizza Demanded
$ Pr
ice
of P
izza
Slic
e
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Creating our own demand schedule
How much are you willing to pay for an ipad?
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Thinking about demand
• Why might the law of demand only apply in a free market economy?
• What about a centrally planned economy?
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Section 2: Shifts in the Demand Curve
• Demand Curves can change as the result of many different circumstances.
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Why does demand change?
Excluding price, what kind of circumstances, events, or environments might cause demand to shift?
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Why does demand change?
• Factors that can shift demand…– Economic projections– Popularity – Weather– Consumer taste– Advertising – Changes in income
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Ceteris Paribus• Ceteris paribus: Latin for, “all other things held
constant.”• Demand curves take only price into account, holding
all other things constant.– Many other factors, beside price, affect demand.
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Shifts along the curve
• Shifts along the curve happen as a result of price
0 2 3 4 50
0.5
1
1.5
2
2.5
3
3.5
Series 1Column2Column1
Slices of Pizza Demanded
$ Pr
ice
of P
izza
Slic
e
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Shifting the curve
• Factors beyond cost, however, can cause the entire curve to shift (greater or less demand at every price).
0 2 3 4 50
0.51
1.52
2.53
3.54
4.5
Series 1Column2Column1
Slices of Pizza Demanded
$ Pr
ice
of P
izza
Slic
e
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Curve Shifts
• The curve can shift out (right/up) with increased demand at all prices, or back (left/down) with decreased demand.
0 2 3 4 50
0.5
1
1.5
2
2.5
3
3.5
Series 1Column2Column1
Slices of Pizza Demanded
$ Pr
ice
of P
izza
Slic
e
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Types of goods
• Normal goods: goods consumers demand more of when their income increases
• Inferior goods: goods that consumers demand less of when their income increases– Examples?
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Changes in demand
• Thousands of simultaneous factors influence demand.– Consumer expectations: economic forecasts, perception of value
changes– Populations: Baby boomers– Consumer tastes and advertising: what is “in”?
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Related Goods
• Complements: two goods that are used together.• Substitutes: goods that are used in place of one another.
– Examples?
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Section 3: Elasticity of Demand
• Price changes affect demand for some goods/services more than others.
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Elasticity of demand
• Elasticity measures how consumers react to changes in price.
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Cost/Demand
What would you still demand, regardless of price change?
What would you quickly stop demanding, with even a small price change?
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Inelastic Demand
• Inelastic demand is relatively unresponsive to a change in price (demand does not stretch).
• Examples: food, fuel, electric, clothing, healthcare
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Elastic Demand
• Elastic demand is very sensitive to a change in price (demand stretches).
• Examples: nonessential products
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Demand Curve for Elastic Good
• An elastic curve is flatter, since demand is more responsive to cost.
0 2 3 4 50
0.5
1
1.5
2
2.5
Elastic DemandColumn2Column1
Slices of Pizza Demanded
$ Pr
ice
of P
izza
Slic
e
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Demand Curve for Inelastic Good
• An inelastic demand curve is steep, because the demand isn’t as responsive to cost
0 2 3 4 50
0.51
1.52
2.53
3.54
4.5
Elastic DemandInelastic DemandColumn1
Slices of Pizza Demanded
$ Pr
ice
of P
izza
Slic
e
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Necessities vs. Luxuries
• Is this good/service a necessity to survive, or a luxury?
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Availability of Substitutes
• Are there easy, available substitutes for this product?
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How elastic is the demand for…
• Rank the elasticity for the following things…
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Elasticity and Revenue
• Total Revenue: amount of money a company receives for selling their goods/services.
• Revenue is impacted by the elasticity of demand
Price of a slice of pizza
Quantity of slices demanded
Total Revenue
$.50 300 $150
$1.00 250 $250
$1.50 200 $300
$2.00 150 $300
$2.50 100 $250
$3.00 50 $150
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Elasticity of Revenue
• If demand is elastic, raising the price will decrease total revenue (and vice-versa).
• If demand is elastic, raising the price will increase total revenue (and vice-versa).
Price Revenue Price Revenue
Inelastic DemandElastic Demand