Understanding Demand: Factors and Elasticity

1. DEMAND Fold your piece of computer paper “hamburger” style and wait patiently for us to start!

2. Chapter 4 • Sec 1 – What is Demand? • Sec 2 – Factors Affecting Demand • Sec 3 – Elasticity of Demand

3. Objectives • Sec 1 • Describe and illustrate the concept of demand • Explain how demand and utility are related

4. I Intro to Demand • Demand – the desire, ability, and willingness to buy a product • The Product is NOT in demand if people are not willing to buy it.

5. Individual Demand Schedule and Individual Demand Curve • An individual demand schedule is a listing of the quantity demanded for a particular product at all prices that might prevail in the market. • An individual demand curve illustrates how the quantity that a person will demand varies depending on the price of a good or service • P 90/Fig 4.1

6. II Law of Demand • Law of Demand – states that the quantity demanded of a good or service varies inversely with its price. When price goes up, the Qd goes down; when price goes down, Qd goes up. • Think about that… When something is more expensive would you buy less or more of that product? When something is less expensive would you buy more or less of that product? Why?

7. The Market Demand Curve • You get the Market Demand Curve by adding together two or more individual demand schedules. • A market demand curve illustrates how the quantity that all interested persons (the market) will demand varies depending on the price of a good or service. • P 92/Fig 4.2

8. Why is price a consumer’s obstacle to buying?

9. III Demand and Marginal Utility • Marginal utility is the extra usefulness or satisfaction a person receives from getting or using one more unit of a product • The principle of diminishing marginal utility states that the satisfaction we gain from buying a product lessens as we buy more of the same product

10. Marginal Utility Contd. • This is why the demand curve is downward sloping, we are not willing to pay as much for the second, third, or fourth (and so on) as we did the first. • Assignment: • Choose either jeans, MP3 Players, or movies. Create an individual demand schedule and an individual demand curve for your chosen product. • Now find someone who chose the same product as you, create a market demand schedule and a market demand curve based on both of your data. (Example on page 92)

11. EQ: • Imagine you are working for a company that produces skinny jeans. All of a sudden; bell bottoms, leggings, and track suits become extremely trendy and Skinny Jeans are out! You are quickly losing profit and your company is in jeopardy of going out of business, putting you in a box under the highway. • Come up with 3 different ways to solve your company’s dilemma and keep your job!

12. Objectives Sec 2 • Explain what causes a change in quantity demanded • Describe the factors that could cause a change in demand

13. I Change in the Quantity Demanded • The change in quantity demanded shows a change in the amount of a product purchased when there is a change in price

14. Income Effect vs Substitution Effect • The income effect means that as prices drop, consumers are left with extra real income • The substitution effect means that price can cause consumers to substitute one product for another similar but cheaper item • P 96/FIG 4.3

15. Scenario: • Minimum wage has increased to $10 an hour. • Prices of MP3 players fell. • Powerful advertisements make MP3 players much more appealing. • What would happen to the demand for MP3 players? • Why?

16. II Change in Demand • A change in demand is when people buy different amounts of the product at the same prices • What do you think could cause a change in demand?

17. Causes for Change in Demand • A change in demand can be caused by a change in: • Income • Tastes • Price change of a related product (Substitutes/Compliments) • Consumer expectations • Number of buyers • P 98/FIG 4.4

18. A disease destroys much of the coffee crop in South America. • How might this affect the price of coffee? • What are some substitute products for coffee? How might this affect the demand for those substitute products? • What are some complimentary products for coffee? How might this affect the demand for those complimentary products?

19. Pair up!!! “Trendy”Activity

20. Objectives • Sec 3 • Analyze the elasticity of demand for a product • Explain why elasticity is a measure of responsiveness • Understand the factors that determine demand elasticity

21. I Demand Elasticity • Elasticity measures how sensitive consumers are to price changes

22. Demand Elasticity Elastic Demand: A change in price causes a relatively larger change in the Qd. Inelastic Demand: A change in price causes a relatively smaller change in the Qd. Unit Elastic Demand: A change in price causes proportional change in the Qd.

23. II The Total Expenditures Effect • Price times quantity demanded equals total expenditures • Changes in expenditures depend on the elasticity of a demand curve • Understanding the relationship between elasticity and profits can help producers effectively price their products • P 103/FIG 4.5

24. III Determinants of Demand Elasticity • Demand is elastic if the answer to the following questions are “yes.” • Can the purchase be delayed? • Are adequate substitutions available? • Does the purchase use a large portion of income? • P 106/FIG 4.6

25. Pair up! You own a resturant that is fully booked during the weekends. In mid-week, however, you rarely have enough bookings to stay open. To make more money during this slow period, you decide to cut dinner prices from $15 to only $10 on Wednesdays and Thursdays. • Create an ad poster for your dinner specials. • On separate paper, answer: • Do you think this action will increase your revenues? • Draw graphs similar to those in figure 4.5 on page 103 to illustrate your answer.