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UNIT 2
: HOW
MARKETS
WORK
ESSENTIAL Q
UESTION:
WHO B
ENEFITS F
ROM THE
FREE M
ARKET ECONOMY?
CH
. 4
: D
EM
AN
D
CH
. 5
: S
UP
PLY
CH
. 6
: P
RI C
ES
CH
. 7
MA
RK
ET
ST
RU
CT
UR
ES
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CHAPTER 4
: DEMAND
ES
SE
NT
I AL
QU
ES
TI O
N: H
OW
DO
WE
DE
CI D
E W
HA
T T
O B
UY
?
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Demand is BOTH
1. The desire to ___________________
2. The willingness (and ability) _____________________________________
The LAW OF DEMAND says that as _________increases, _________ Demanded decreases
OR, in other words, consumers will buy more of a good when its price is lower and less when its price is higher
This is the single most famous law in all of economics!
WHAT IS DEMAND?
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THE DEMAND CURVE We are ONLY looking at changes in ________ here!
Everything else is held constant
ceteris paribis: Latin phrase for ____________________________________________
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GRAPHING DEMAND
Practice Time!
Refer to “Market Forces of Supply & Demand (ch 4) PowerPoint)
This is a separate PowerPoint found on the blog
It’s the one with the ice cream example
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THE SUBSTITUTION AND INCOME EFFECTS
We know as economists that people respond to incentives in predictable ways…
If something (pizza?) gets too expensive, people will buy less of it and buy more of something else , thus making a substitution.
How does this affect the demand curve?
If prices rise, the law of demand tells us….
Why? Because we feel poorer! So we buy less overall.
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SECTION 2: SHIFTS IN THE DEMAND CURVE
Remember that a change (Δ) in price (P)means a change in quantity demanded (QD)
This is a movement ALONG THE CURVE, not a movement of the whole curve itself!
This is a really big deal!
To move the ENTIRE curve takes something MORE than just a change in price because the quantity demanded AT EVERY PRICE is changing!
In other words,
ΔQD ≠ΔD!!!!!
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WHAT COULD CAUSE THIS?W H A T M A K E S T H E D E M A N D C U R V E S H I F T T O T H E L E F T O R R I G H T ?
1. __________
2. ________________
3. _______________
4. ________________
5. ______& _________
6. A ________in the price of ____________ goods
a. ___________________
b. ___________________
Remember that it’s shifting left or right (not up and down), and this indicates an increase or decrease.
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WHAT ARE RELATED GOODS?
SUBST ITUTESGoods that are used in
place of one another
Hamburger instead of _________
________instead of red meat
Pop Tarts instead of _______
______ and ___________
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RELATED GOODS CONTINUED
C O M P L E M E N T S
Are goods that are bought and used together
Snowboard and ________
Hot dogs and _________
Spaghetti sauce and ____
Bathing suits and _______
Smart phones and ______
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SECTION 3: ELASTICITY OF DEMAND
One of the things economists can measure and predict is how responsive consumers will be to changes in price.
This is known as the ______ of_______
Being able to measure this will tell us how _____or ____consumers will change how much they buy if the price is increased or decreased.
Goods can be ______ or ____________.
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ELASTICITY CONTINUED
How can you tell if a good is elastic or inelastic?
Consider the following:
1. Can the purchase be ________________?
2. Are there adequate ___________________________________?
3. Does the purchase use a large _______________________________?
The more “yes” answers you get, the more ELASTIC demand is for the good/service.
The more “no” answers you get, then demand for the good/service is inelastic
Let’s think through some examples:
Fresh tomatoes A House
Gasoline when your tank is on E trip to the beach
Gasoline from a particular gas station toilet paper
Going to the doctor flowers for your yard
Insulin flowers on Valentine’s Day
Going to your uncle’s funeral in California Butter
A college degree table salt
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ELASTICITY CONTINUED
Other factors affecting elasticity:
1. Relative _____________________
• Clothing in a teenager’s budget
• Clothing in a stay-at-home-mom’s budget
• Shoelaces
2. Necessities vs. _______________________
Consumption of necessities doesn’t change much, even if prices change a lot
Will vary from person to person
3. Change _______________________
Some items take a while to change (cars, housing)
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ELASTICITY AND REVENUE
Does a company always make more money if they raise their prices on the good or service they sell?
How do businesses use the Elasticity of Demand
How much can they afford to raise or lower their prices?
At what point will they actually start to lose money?
See the charts on p.103 and p. 104
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