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Principles of Economics EL Dorado High School Spring, 2015 Mr. Ruiz

Principles of Economics EL Dorado High School Spring, 2015 Mr. Ruiz. Chapter 4 Demand. Retrieved from: http://info.rmxevo.com/blog/bid/334232/An-Important-Lesson-for-Northern-Virginia-Real-Estate. Explain the law of demand

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Principles of Economics EL Dorado High School Spring, 2015 Mr. Ruiz

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  1. Principles of EconomicsEL Dorado High SchoolSpring, 2015Mr. Ruiz Chapter 4 Demand Retrieved from: http://info.rmxevo.com/blog/bid/334232/An-Important-Lesson-for-Northern-Virginia-Real-Estate

  2. Explain the law of demand • Understand how the substitution effectand the income effectinfluence decisions • Create demand scheduleand interpret data using demand graph • Retrieved from: http://futures.tradingcharts.com/learning/law_of_demand.html Objectives

  3. Demand • Law of demand • Substitution effect • Income effect • Demand schedule • Market demand schedule • Demand curve • Retrieved from: http://www.africanmex.com/webpages/fundamental_analysis.html Terms you will need to know:

  4. DEMAND: The Desire to own something and the ability to pay for it • In a market system, the interaction ofbuyersand sellers determines the prices of most goods as well of what quantity of a good will be produced • Buyersdemand goods, and sellerssupply those goods. Retrieved from: http://activerain.trulia.com/blogsview/4294793/nashville-s-2014-housing-market-forecast--still-a-seller-s-market- Introduction

  5. What is the Law of Demand? Simply states that quantity demanded moves in the opposite direction of price (All other things constant or ceteris paribus). • As price rises, quantity demanded decreases • P rises Q decreases • As price falls, quantity demanded increases • P falls Q increases

  6. The Law of Demandis the result of (2) separate patterns that overlap. • Substitution effect: When consumers react to an increase in a good’s price by consuming less of that good and more of other goods. • Example: If the price of the pizza you eat for lunch increases, you will seek out alternative foods to such as burgers, tacos, etc. (Similarly, if the price of pizza falls, you will buy more pizza and less of other foods) • Income effect: The change in consumption resulting from a change in real income • Example: As prices increase you feel poorer because you can no longer afford the same things with the money you make. The income effect then means that you will simply cut back on consumption rather than just finding alternatives (think about water, electricity, etc.) • These two patterns describe two different ways consumers can change their spending patterns and explain why an increase in price decreases the quantity purchased. • Retrieved from: http://www.bestthinking.com/articles/economics/macroeconomics/the-relation-between-supply-and-demand What is the Law of Demand? (cont.)

  7. What is a Demand Schedule: • * A table that lists the quantity of a good a person will buy at each different price. • * (Basically, a graph that outlines the relationship between price and quantity demanded for a certain good.) • Types to consider: • Individual demand schedule: Places emphasis on the specific quantities an individual is willing and able to purchase at a specific price. • Market demand schedule: Lists the quantity of a good all consumers in a market will buy at each different price. • (Can be formed by surveying customers and adding up the quantities demanded by individual consumers at each price) • Retrieved From: http://www.harpercollege.edu/mhealy/eco212i/lectures/ch3-18.htm Demand Schedule:

  8. Individual and Market Demand Curves Retrieved from: http://www.policonomics.com/supply-and-demand/ Demand Graph (Curve)

  9. Chapter 4 Demand Section Two Shifts on the Demand Curve

  10. Ceteris paribus • Normal Good • Inferior Good • Complements • Substitutes • Retrieved from: https://www.onlinetexts.com Terms you will need to know:

  11. Ceteris Paribus • This is a Latin phrase that simply means, “ all otherthings held constant.” • When dealing with basic demand and supply curves the assumption that only price will affect the increase or decrease of a quantity • Decrease in quantity demanded: • Increase in price of goods • Increase in quantity demanded: • Decrease in price of goods • Remember: Under the idea of ceteris paribus, the change in Quantity (Q) is dependent on the Change in Price (P) Changes in demand First, you need to know:

  12. Other factors besides price can also cause the demand for a good to change. • Income: Simply, a change in income (either increase or decrease) can affect a consumer’s demand for goods. • Normal Good: A good that consumers demand more when their income increases • Inferior Good: A good that consumers demand less of when their income increases (generic brands) • Consumer Expectations: Current demand for a good is positively related to its expected future price • If you expect the price of an item to go up in a week your present demand will increase, if you expect it to go down in a week your present demand will decrease) • Population: Changes (increase/decrease) in population will affect the demand for certain goods. • Consumer Tastes and Advertisement: What is in style (fads in clothing , food, etc., ) What causes shifts in the Demand Curve?

  13. The demand curve for one good may be affected by the changes in demand of another good • Two types of related goods that interact this way: • Complements: Two goods that are bought and used together. • Skis & Ski boots ( an increase in the price of one will result in the decrease in demand for the other because one item is useless without the other) • Substitutes: Goods used in place of one another • Buying snowboards as a substitute for skis because the price of skis has increased. Retrieved from: http://www.ers.usda.gov/amber-waves/2013-february/substitute-and-complementary-foods-are-important-when-assessing-impacts-of-price-policies-on-dietary-quality.aspx#.VKb_5XtkaPQ Prices of Related Goods

  14. Chapter 4Demand Section Three Elasticity of demand

  15. Elasticity of Demand • Inelastic • Elastic • Total revenue Terms you will need to know: • Retrieved from: https://www.onlinetexts.com

  16. Are their certain products you could not do without? List three in your notes • How would your list change if the prices of each doubled or even quadrupled? • Are there some things in your list you can and cannot do without? Something to think about: Retrieved from: http://economiclolo.blogspot.com/2013/07/price-elasticity-of-demand.html

  17. Elasticity of demand: • A measure of how consumers react to a change in price.Two types to consider: • Inelastic: Demand that is not very sensitive to a change in price • Example: Something you will keep buying no matter the change in price • Elastic: Demand that is sensitive to a change in price • Example: Something you will buy less of in the event of a price increase Retrieved from: http://www.econs.com.sg/free-downloads/elasticity/ Elasticity of demand

  18. Total Revenue: The total amount of money a firm receives by selling goods or services. • Determined by two factors: • 1) The price of the goods; • 2) the quantity sold. Total Revenue Retrieved from: http://ingrimayne.com/econ/elasticity/RevEtDemand.html

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