D E M A N D Chapter 4 Section 1 Understanding how Demand works!
D E M A N D • Objectives: • Explain the Law of Demand. • Understand how the substitutes effect and the income effect influence decisions. • Create a demand schedule for and individual and market. • Interpret a demand graph using demand schedules.
D E M A N D • Different ways to answer the 3 economic questions. • What to produce? • How much to produce? • Who gets what?
D E M A N D • United States…allocate most goods through a market system. • Interaction of buyers and sellers determine the prices of goods as well as the quantity that is produced.
D E M A N D • What is Demand????????
D E M A N D • What is Demand? • It is the desire to own something and the ability to pay for it.
D E M A N D • What is the Law of Demand??????
D E M A N D • What is the Law of Demand? • The Law of Demand says that when a good’s price is lower, consumers will buy more of it. • When price is higher, consumers will buy less of it.
D E M A N D • Law of Demand is a result of 2 patterns of behavior
D E M A N D • Law of Demand is a result of 2 patterns of behavior • Substitution Effect • Income Effect • 2 different ways consumers can change their spending patterns
D E M A N D • The Substitution Effect…. • When consumers react to an increase in a good’s price by consuming less of that good and more of other goods.
D E M A N D • Example: Pizza • Substitutes - - Tacos, Salads, etc • This will cause a drop in the amount of pizza demanded.
D E M A N D • Substitution Effect can also apply to a drop in prices. • IF pizza prices drop, more pizza will be bought than other substitutes
D E M A N D • The Income Effect…. • The change in consumption resulting from a change in real income. • Example: When prices of movie tickets, shoes, pizza increase… our limited budget won’t buy as much as it used to.
D E M A N D • You feel like you have less money than before. • Difference between Substitution and Income Effect is in Income Effect– you cut back on your purchases without substituting another product.
D E M A N D • Economists measure consumption in the amount of a good that is bought, not the amount of money spent to buy that good. • You are spending more and consuming less!
D E M A N D • In a sense…. The income effect leads to the law of demand!
D E M A N D • Demand Schedule… • A table that lists the quantity of a good a person will buy at each different price. • It explains how the price of any item affects the quantity demanded of that item.
D E M A N D • To have demand for a good…. • You must be willing and able to buy it at the specified price. • Want a Hummer H3, but do not have the means to pay for it or do not have the desire to pay for it.
D E M A N D • Market Demand Schedule…. • Shows the quantities demanded at each price by ALL consumers in the market. • Demand Graph….. • is a graphic representation of a demand schedule
D E M A N D • Demand Graph…. • Vertical Axis • Lowest possible price at the bottom and highest possible price at the top. • Horizontal Axis • Quantity Demanded with the lowest possible quantity at the left and the highest possible quantity at the right. • Demand Curve is always labeled with a D
D E M A N D Demand Graph
D E M A N D • The graph shows the relationship between the price of this good and the quantity that a person (or market) will purchase. • Demand Curve is always downward sloping to the RIGHT! • As price decreases…the quantity demanded increases.
D E M A N D • Prices of Related Goods • The demand for one good can be affected by a change in the demand for another good. • Two types • Complements • Substitutes
D E M A N D • Complements • Two goods that are bought and used together. • Example: • Camera and film • Surfboard and Surf-wax
D E M A N D • Substitutes: • Are goods used in place of one another. • Example: • Skis and Snowboards • Crayons and Markers
D E M A N D • An Independent Good • An item that is neither a substitute nor a complement. • Examples: • For a Coffee Cup = it could be a Table • For a Desk = it could be a Black Board
D E M A N D • Complete the assignment below and turn in for a grade. • Using the 7 examples on the next slide…. • Give an example of…. • A. a Substitute • B. a Complement • C. an Independent Good
D E M A N D • 1. Toothpaste • 2. Computers • 3. Pencil • 4. Coffee • 5. Dishwashing Soap • 6. Chalk Board • 7. Bicycle
D E M A N D • I need a NEW car!!!! • Why would you need a new car?
D E M A N D • I need a NEW car!!!! • Why would you need a new car? • To get around, go from place to place, take your friends somewhere. • Are there other ways of getting around besides a car?
D E M A N D • I need a NEW car!!!! • Why would you need a new car? • Are there other ways of getting around besides a car? • Bus, friends, parents’ car, parents give you a ride, bike, walk, jog, run, etc • SO.. You don’t need a new car… you need a mode of transportation
D E M A N D • Fire safety requires that there be two exits from each apartment unit. • Why do you need more than one exit?
D E M A N D • Fire safety requires that there be two exits from each apartment unit. • Why do you need more than one exit? If one is blocked • What other substitutes may be available for a unit to pass inspection?
D E M A N D • Fire safety requires that there be two exits from each apartment unit. • Why do you need more than one exit? • What other substitutes may be available for a unit to pass inspection? • Sprinkler system, fire extinguishers, etc
D E M A N D • Fire safety requires that there be two exits from each apartment unit. • Is a window or door on the 3rd story balcony really an exit? What would be the cost of using such an exit in an emergency? • What could be a substitute if one considers the cost too high?
D E M A N D • Demand Assignment: Due Monday • 1. Pick a product • 2. Pick 10 different price levels • 3. Pick 10 people to poll • 4. Create an Individual Demand Schedule for all 10 people • 5. Create a Market Demand Schedule • 6. Create a Market Demand Graph • Label all parts: V-Axis, H-Axis, Title, and Demand Curve