Economics Unit 2 How the Market Works!

1. Economics Unit 2How the Market Works! Chapter 4: Demand Chapter 5: Supply Chapter 6: Prices Chapter 7: Market Structures

2. Warm-Up #6 (1/30/19) • List 5 goods or services you have purchased in the last week. Include how much you spent on each & what led you to buy each one. • If you didn’t finish the videos yesterday on Google Classroom, do that now. • Please make sure you marked each assignment done in Google Classroom. • Keep your warm up out, we’ll be using this later in class.

3. Recap key ideas from last unit • We answered • What is economics? • What is a market? • What type of markets are there? What’s the next logical question we might ask about markets? -How do markets work?

4. Recap yesterday! What did we learn and how did it relate to what we learned last unit?

5. Brainstorm:What questions do we have about Demand? On a sheet of paper, work with your group to generate as many questions as you can about Demand. You have 5 minutes

6. What are the 3 questions every society must answer? • What goods & services should be produced? • How should goods & services be produced? • Who consumes these goods & services? Where does demand come in?

7. Essential Questions: • How does demand help societies determine WHAT, HOW, and FOR WHOM to produce? • What are the causes of a change in demand?

9. You will need to be able to access the Ch. 4 Reading on my website today Warm-up #7 (1/31/19) 1. True or False: The law of Demand states that, when the price of a product increases, the quantity demanded also increases. Similarly, when the price of a product decreases, the quantity demanded also decreases. 2. True or False: In economics, demand is simply considered the desire to own a product. 3. Make a list of things that you think could influence demand? Consider what influences your demand for a product that does not involve the change in price.

10. Warm-up #7 (1/31/19) 1. True or False: The law of Demand states that, when the price of a product increases, the quantity demanded also increases. Similarly, when the price of a product decreases, the quantity demanded also decreases. 2. True or False: In economics, demand is simply considered the desire to own a product. 3. Make a list of things that you think could influence demand? Consider what influences your demand for a product that does not involve the change in price. As price increases demand decreases & as price decreases demand increase. It’s the desire to own a product AND the ability to pay for it.

11. Reading: Chapter 4- Sections 1&2 • On my website chapter 4 Reading is posted under Unit 2. • As you read identify the information you think is key to understanding demand. • List the page # next to your notes. • As you read section 1&2 fill out the graphic organizer. • Column 1: What surprised me? • Column 2: What did the author think I already knew? • Column 3: What challenged, changed, or confirmed what ? Use the sentence stems to help you!

12. #3 What challenged, changed or confirmed what I knew? • P. 80. When I originally thought about the concept of the income effect, I assumed it would be about my actual/real income changing, which would impact my demand. But it’s actually about how prices impact my feeling about how much money I have. If prices go up I feel like I have less money, therefore I can’t buy as much as before. When prices go up I buy less of certain items, but don’t purchase a substitute. That’s the income effect.

13. 4.1 Understanding Demand: Vocab • Demand: the desire to own something and the ability to pay for it. • Law of demand: consumers buy more of a good when its price decreases and less when its price increases. • Substitution effect: when consumers react to an increase in a good’s price by consuming less of that good and more of other goods. • Income effect: the change in consumption resulting from a change in real income. • Demand schedule: a table that lists the quantity of a good a person will buy at different prices. • Market demand schedule: a table that lists the quantity of a good a person will buy at each different price. • Demand curve: A graphic representation of a demand schedule.

14. The Law of Demand 1. Substitution effect: when the price of a good increases, consumers will react by purchasing less of that good and more of another good. • This is impacted by two behavior patterns 2. Income effect: when the price of a good increases, consumers react by purchasing less of the same item due their money does not stretching as far as it did at the lower price.

15. Market Demand Schedules • Businesses use market demand schedules to predict the total sales of their product at different prices. • The market demand schedule includes the purchase decisions of all potential customers.

16. Demand Curve • The curve is only accurate as long as there are no changes other than the price that could affect the consumer’s decision (ceteris paribus)

17. 4.2 Shifts of the Demand Curve • Ceteris paribus: a Latin phrase meaning “all other things constant”. • Normal goods: a good that consumers demand more of when their incomes increase. • Inferior goods: a good that consumers demand less of when their incomes increase. • Compliments: two goods that are bought and used together. • Substitutes: goods used in place of another.

18. Change in Demand • Economists call a shift in the entire demand curve a “change in demand” • The curve shifts left when demand decreases & right when demand increases

19. Factors that cause demand to shift • Income: increase in income increases demand for normal goods & decreases the demand for inferior goods. • Consumer expectations: If consumers expect prices to rise in the future, immediate demand will increase; if they’ll fall in the future, immediate demand will decrease. • Population: Changes in the size of population. When a sector grows, then demand in certain products increases • Consumer Tastes & Advertising: Consumers can develop a desire for certain items & create demand for goods that weren’t previously in demand. Bad news about a product can also decrease demand. • Complements: goods that are purchased together. • Example: Printer & Ink Cartridges. • Substitutes: goods that are used in place of another. • Example: Sprite & 7-up, Breakfast tacos & Bagels, etc.

20. No Warm-up Today

21. Use the following demand schedule to graph your friend’s demand for restaurant meals at lunchtime during a two week period (label the curve D1) • On the above graph that you created, show what happens when the price of lunch increases from $4 to $5. Is this a change in demand or a change in the quantity demanded. C. Now suppose your friend suddenly wins the lottery & their demand for this product doubles. Show this new demand schedule below and then graph this new curve on the graph above. (Label it D2).

22. Use the following demand schedule to graph your friend’s demand for restaurant meals at lunchtime during a two week period (label the curve D1) • On the above graph that you created, show what happens when the price of lunch increases from $4 to $5. Is this a change in demand or a change in the quantity demanded. • The quantity demanded would decrease with a price increase Q2 P1 D2 D1 Q1 Q2 C. Now suppose your friend suddenly wins the lottery & their demand for this product doubles. Show this new demand schedule below and then graph this new curve on the graph above. (Label it D2). The demand changes based on the increase in income, which causes a shift in the curve. Add demand shifts but prices stay

24. Once you’re done with the Quiz… • Keep your study guide. • On your warm up sheet answer the following question: (Warm up #8): • What do you think business owners should consider when changing the prices of their products? • When you’re done, being working on 4.3 on your study guide. You can find the chapter on my website & a PowerPoint that you can use to help answer the questions. • When everyone has completed the quiz we’ll discuss elasticity (4.3)

25. 4.3 Elasticity • Elasticity of Demand: a measure of how consumers react to change in price. • Elastic: demand that is very sensitive to a change in price (greater than 1) • Inelastic: demand that is not very sensitive to a change in price (less than 1) • Unitary elastic: demand whose elasticity is exactly equal to 1 • Total Revenue: the total amount of money a firm receives by selling goods and services.

26. Why do we care about Elasticity? • Looks at the way consumers respond to price changes. • Elasticity dictates how drastically consumers will cut back or increase their demand for a good.

27. What can affect elasticity? • Substitutes • If there is a substitute available, the demand for a good is elastic. • If there is no substitute for a good, such as lifesaving medicine, the demand for the medicine is inelastic. • Relative Importance • If you already spend a large share of your income on a good, a price increase will force you to cut back on your consumption of that good by a significant amount (elastic).

28. What can affect elasticity? • Necessitates (inelastic) vs. Luxuries (elastic) • Changes over time: • Demand for a good may be inelastic in the short term because it takes time for consumers to change their shopping habits. • Example: In the 1970s there was a shortage of gas causing a high price increase. In the short term people just had to pay the higher prices & couldn’t really decrease their consumption, but eventually they changed their behavior (buying more fuel efficient cars, car pooling, moved closer to work).

29. Elasticity’s impact on revenue • Reduced total revenue: • When a company’s product is elastic, a price increase will cause consumers to buy less. • Increased total revenue: • When a company’s inelastic, a price increase won’t cause the consumer to buy less. They’ll continue to buy the product at the higher price.

30. How do we figure out if a product is elastic or inelastic or unitary? △= Change • % Change in Price P1 (original) – P2 (New) P1 (original) • % Change in Quantity demanded Q1 (original) – Q2 (New) Q1 (original) x 100 x 100