ch. 4 demand eq- what is consumer demand and how does it change according to price and external...
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Ch. 4 Demand EQ- WHAT IS CONSUMER DEMAND AND HOW DOES IT CHANGE ACCORDING TO PRICE AND EXTERNAL SHIFTER?
POPE- 2015
Basic Terms of Economics
Demand- the combination of the willingness (have motivation) and ability( have money) among consumers to purchase at a particular price
Law of Demand- there is an inverse (opposite) relationship between the price of a good and the quantity consumers are willing to purchase.
What helps explain this relationship? The availability of substitutes- goods that do similar functions-
explains this negative relationship
Basic Terms in Economics:
Ceteris paribus (Latin)- “all other things stay constant “
EXAMPLE: I will buy about $2,300 worth of gas in the year 2013-14, ceteris paribus.Meaning, if nothing in my current travel patterns changes, I
should only spend $2,300 on gas.
EXAMPLE: It can be predicted that if the price of beef decreases, ceteris paribus, the quantity of beef demanded by buyers will increase.
Meaning, if nothing in the market for beef changes, there is a inverse relationship between price and demand.
Q
$What does the graph show?
Inverse Relationship!
Law of Diminishing Utility
As consumption increases, additional benefit decreases. When benefits > costs: consumption continues
When benefits < costs: consumption ends
Simply put, too much of something is a bad thing. This is why the curve slopes downward.
Example: The 1st bottle of water satisfied your thirst.
The 2nd bottle of water made you feel full.
The 3rd bottle of water made you sick.
Utility(happiness)
Quantity Consumed
The Law of Diminishing Utility
A market demand schedule is a table that shows the quantity of a good people will demand at different prices.
CELL PHONE EXAMPLE
Consider the market for cell phones (Verizon). A market demand schedule lays out the amount of cell
phones that are demanded in the market for a spectrum of prices.
We can graph these points (price and the demand for them) to make a demand curve for cell phones.
Where do we get the data for our Demand Curve?From a “Market Demand Schedule”
Example of DemandI am willing to sell several A’s in AP Economics. How much will you
pay?Price Quantity Demanded
Demand Schedule
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Copyright ACDC Leadership 2015
Market Demand ScheduleCell Phone
Price(monthly bill)
Millions of Cell Phone Subscribers
$129 2.1 $109 3.5 $ 89 5.1 $ 69 7.6 $ 59 11.0 $ 49 16.0$ 39 24.1
Price(monthly bill)
Quantity(of Cell Phone Subscribers)
140
120
100
80
60
5 10 15 20 25 30
Assume this is for a unlimited minute & data package.
Notice that the
demand/price relationship
is more responsive at
certain price points.
Price(monthly bill)
Quantity(of Cell Phone Subscribers)
140
120
100
80
60
5 10 15 20 25 30
•Notice how the law of demand is reflected by the shape of the demand curve.• As the price of a good rises …
. . . consumers buy less.
Demand Curve
Market Demand Schedule
The slope of the demand curve at any quantity shows the maximum price that consumers are WILLING and ABLE to pay for that additional unit.Q: What happens
as prices ↑ & Q ↓?
A: utility diminishes
Demand Curve & Utility
Law of Diminishing Utility
Price(monthly bill)
Quantity(of Cell Phone Subscribers)
140
120
100
80
60
5 10 15 20 25 30
ELASTIC AND
INELASTIC DEMAND
The Demand & Price relationship is not the
same for every product.LAW OF DEMAND:
INVERSE RELATIONSHIP BETWEEN PRICE AND QUANTITY.
…but sometimes the relationship between PRICE and a change in DEMAND is not as strong for some goods.
: PRICE
STRONGER LAW RELATIONSHIP
: PRICE
WEAKER LAW RELATIONSHIP
MORE SUBSITITUTESLESS SUBSITITUTES
Elasticity of Demand
Elasticity is a measure of responsiveness between change in demand and a change in the price.
It tells how much demand changes when you change the price.
2 types of Elasticity Inelastic
Elastic
Elastic Demand
Elastic Demand- quantity demanded is sensitive. Easy to substitute a good that has elastic demand.
HAS MANY SUBSTITUTES. When price increase, demand decreases, business
revenue decreases
Example: price of a good with many substitutes, such as bottle water or soda
Inelastic Demand
Inelastic Demand: quantity demanded is not sensitive to price changes. Hard to find substitutes for the good. HAS FEW OR NO
SUBSTITUTES.
When price increases, business revenue increases
Example: needed medication for an illness, such as Chemo-Therapy & gas. Necessities are inelastic.
Elastic and Inelastic Demand Curves
5.00
1.00
5.00
1.00
Gasoline
Tacos
1 2 3 4 5 6 7 8 9 10
1 2 3 4 5 6 7 8 9 10
If the market price for gasoline was to rise from $1.00 to $5.00, the quantity demanded in the market decreases insignificantly (from 8 to 7 units). If the market price for tacos rises from $1.00 to $5.00, the quantity demanded in the market decreases significantly (from 8 to 1 unit). Taco demand is highly sensitive to price changes and can be described as elastic; gasoline demand is relatively insensitive to price changes and can be described as inelastic.
ELASTIC
INELASTIC
Elasticity Over Time
Short-run: Consumers don’t have enough time to adjust the price change in a short period of time Demand tends to be inelastic in the short-run
Long-run: Consumers have enough time to adjust to the price change in a short period of time Demand tends to be much more elastic in the long-run
“Changes in Quantity Demanded”
“Changes in Demand”
Versus
What will cause the demand curve to shift?
Changes in Demand vs. Changes in Quantity Demanded
Changes in Demand
Shifts of the entire demand curve
Changes in Quantity Demanded
Movement on the same demand curve due to price change
1 5
$ Price
Quantity
10
1.00
5.00
1 5 Quantity10
1.00
5.00
8.00
A shift to the right = increase in
demand
A shift to the left = decrease in
demand
$ Price
The Determinants of Demand
The only factors that can cause a demand curve to shift to the left (decrease) or right (increase)
1 5
$ Price
Quantity10
1.00
5.00
8.00
Position of the Demand Curve?
What specific things determine the position of the demand curve?
1. Price of Related Products
2. Outlook (consumer expectations)
3. Income
4. Number of Consumers
5. Tastes
These are called the Determinants of Demand
“P.O.I.N.T.”
Substitute Goods:– As price of one rises the demand for the
other rises
– As price of one falls demand for the other falls
1. PRICE OF RELATED GOODS
Example: Dr. Thunder and Dr. Pepper.
(assuming they taste the same)=$ D
THE DETERMINANTS OF DEMAND
“POINT”
“POINT”Complementary Goods: (they go well together)
– As the price of one rises the demand for the other falls
– As the price of one falls the demand for the other rises.
Example: Gas, SUVs, and tires.
+ =$
Which way will the Demand curve for Tires shift? A: Shift to the left
DEMANDDEMAND
1. PRICE OF RELATED GOODS
THE DETERMINANTS OF DEMAND
3. INCOME
1. PRICE OF RELATED GOODS
2. OUTLOOK OF THE FUTURE
Substitutes vs Complements
This could work in numerous ways. For example:You hear there is going to be a recession so you stop spending today –OR– you hear that a sale on some clothing is ending soon so you run to make a purchase today.
“POINT”
INCOME effects Superior and Inferior Goods in
different ways.
THE DETERMINANTS OF DEMAND
Superior Goods: As income rises, demand will increase (shift
right) As income falls, demand will decrease (shift
left)–Example: Expensive versus cheap cars
Vs.
Income Effects onSuperior and Inferior Goods
Inferior Goods: As income rises demand falls
As income falls demand rises
Example: Compact cars, MP3 Players, etc.
Income Effects onSuperior and Inferior Goods
5. TASTES (Affected by attitudes, quality, advertising, etc.)
4. NUMBER OF BUYERS
3. INCOME
1. PRICE OF RELATED GOODS
2. OUTLOOK OF THE FUTURE
Substitutes vs Complements
Superior vs Inferior Goods
This could work in numerous ways. For example:You hear there is going to be a recession so you stop spending today –OR– you hear that a sale on some clothing is ending soon so you run to make a purchase today.
THE DETERMINANTS OF DEMAND
“POINT”
Review (Grab a Marker Board) 1. A demand curve shows the inverse relationship between…
Price and quantity
2. What is the law of diminishing utility mean? As consumption increases, additional benefits decrease
3. What does elastic mean? Quantity demanded is sensitive
4. What does inelastic mean? Quantity demanded is not sensitive to price changes.
Review5. If demand increases then the curve shifts…
Right
6. If demand decreases then the curve shifts… Left
7. Changes in Quantity Demanded moves what? Moves price on the curve
8. Changes in Demand moves what? The curve