Who are the two main actors in our economy?

1. Who are the two main actors in our economy? Consumers – Buy stuff Producers – Make stuff Now we are going to discuss Supply and Demand. This concept is the essence of our economic system – CAPITALI$M. Consumers – Create demand Producers – Create supply

2. Understanding Demand • What is the law of demand? • How do the substitution effect and income effect influence decisions? • What is a demand schedule? • What is a demand curve?

3. D S DRAW THIS IN YOUR NOTES $ Increasing amounts Q Increasing amounts

4. If you get a big raise, and you’re a good American, what would you do? Your store is selling a sweatshirt and it appears in a very popular movie. What do you think will happen to demand?

5. If you own a company and many companies are making a similar item so a consumer doesn’t have to buy your product. What could you do to increase interest (or demand) for your product?

6. Nature of Demand Demand – In economics it is the amount of a good or service that a consumer is willing and able to buy at various possible prices during a given time period. Quantity demanded - In economics it is the amount of a good or service that a consumer is willing and able to buy at each particular price during a given time period.

7. What Is the Law of Demand? DONT COPY THIS DOWN!!! The law of demand states that an increase in a good’s price causes a decrease in the quantity demanded and that a decrease in price causes an increase in the quantity demanded, if price is the only determining factor.

8. What Is the Law of Demand? Simplify it: The law of demand states that consumers buy more of a good when its price decreases and less when its price increases. Simplify it even more: P D P D

9. Law of Demand 3 economic concepts that can help explain the inverse effect that changes in price have on the quantity demanded. P D P D (Don’t write these down now we will cover each) Income Effect Substitution Effect Diminishing Marginal Utility

10. What Is the Law of Demand? • The law of demand is the result of three separate behavior patterns that overlap, the substitution effect , the income effect, and diminishing marginal utility. • These three effects describe different ways that a consumer can change his or her spending patterns for other goods. The law of demand states that consumers buy more of a good when its price decreases and less when its price increases.

11. The substitution effect occurs when consumers react to an increase in a good’s price by consuming less of that good and more of other goods. The Substitution Effect

12. Substitution Effect If the price of something you like goes up you change to a lower priced substitute. Fish Chicken $10.00 a pound – What are some alternatives?

13. Substitution Effect If the price of something you like goes up you change to a lower priced substitute. Chicken Noodle Soup Late 1970s popular – 1982 highest – late 1980s less popular – 1990 store brands

14. Income Effect Purchasing power The amount of an item that a dollar will buy How can your purchasing power increase? You get more money The price of what you want comes down

15. Income Effect Purchasing power The amount of an item that a dollar will buy How can your purchasing power decrease? You have less money The price of what you want goes up

16. Diminishing Marginal Utility (Diminishing means lessening or getting smaller) Utility – the usefulness of a product, or the amount of satisfaction that an individual receives from consuming a product. Simplify: The more you consume or use a product you will reach a point where you enjoy that product less

17. Diminishing Marginal Utility A product’s overall utility typically increases as more of the product is consumed. But you will eventually reach a point when it starts to diminish or lessen Simplify:

18. A demand schedule is a table that lists the quantity of a good a person will buy at each different price. Individual Demand Schedule Market Demand Schedule Price of a slice of pizza Quantity demanded per day Price of a slice of pizza Quantity demanded per day The Demand Schedule Demand Schedules $.50 $1.00 $1.50 $2.00 $2.50 $3.00 5 4 3 2 1 0 300 250 200 150 100 50 $.50 $1.00 $1.50 $2.00 $2.50 $3.00

19. A market demand schedule is a table that lists the quantity of a good all consumers in a market will buy at each different price. Individual Demand Schedule Market Demand Schedule Price of a slice of pizza Quantity demanded per day Price of a slice of pizza Quantity demanded per day Demand Schedules $.50 $1.00 $1.50 $2.00 $2.50 $3.00 5 4 3 2 1 0 300 250 200 150 100 50 $.50 $1.00 $1.50 $2.00 $2.50 $3.00

20. A Market Demand Schedule For Car Stereos Price Per Car Stereo Quantity Demanded $500 500 $400 1,000 +100% $300 1,500 +50% $200 2,500 +66% $100 5,000 +100%

21. Market Demand Curve 3.00 2.50 2.00 1.50 1.00 .50 0 Price per slice (in dollars) 200 250 350 300 0 50 100 150 Slices of pizza per day The Demand Curve • A demand curve is a graphical representation of a demand schedule. • When reading a demand curve, assume all outside factors, such as income, are held constant. Demand

22. DEMAND PRICE DEMAND PRICE

26. Section 1 Assessment 1. The law of demand states that (a) consumers will buy more when a price increases. (b) price will not influence demand. (c) consumers will buy less when a price decreases. (d) consumers will buy more when a price decreases. 2. If the price of a good rises and income stays the same, what is the effect on demand? (a) the prices of other goods drop (b) fewer goods are bought (c) more goods are bought (d) demand stays the same

27. Section 1 Assessment 1. The law of demand states that (a) consumers will buy more when a price increases. (b) price will not influence demand. (c) consumers will buy less when a price decreases. (d) consumers will buy more when a price decreases. 2. If the price of a good rises and income stays the same, what is the effect on demand? (a) the prices of other goods drop (b) fewer goods are bought (c) more goods are bought (d) demand stays the same

28. Shifts of the Demand Curve • What is the difference between a change in quantity demanded and a shift in the demand curve? • What factors can cause shifts in the demand curve? • How does the change in the price of one good affect the demand for a related good?

29. Shifts in Demand • Ceteris paribus is a Latin phrase economists use meaning “all other things held constant.” • A demand curve is accurate only as long as the ceteris paribus assumption is true. • When the ceteris paribus assumption is dropped, movement no longer occurs along the demand curve. Rather, the entire demand curve shifts.

30. Nature of Demand Quantity demanded - In economics it is the amount of a good or service that a consumer is willing and able to buy at each particular price during a given time period. A move along the curve is a change in Quantity Demanded A B

31. Nature of Demand Demand – In economics it is the amount of a good or service that a consumer is willing and able to buy at various possible prices during a given time period. When the entire curve shifts this a change in demand. DC2 DC3 DC1

32. Demand shifts on the Demand Curve Increase in demand shifts right 0 Q

33. Demand shifts on the Demand Curve Decrease in demand shifts left 0 Q

34. What Causes a Shift in Demand? Several factors, besides price, can lead to a change in demand. These are called the: “Non-price Determinants of Demand” • Consumer tastes and preferences • Prices of related goods • Consumer expectations • Income • Market Size

35. The non-price determinants of demand: Consumer Tastes and Preferences (Advertising) Does it really matter is a truck isblueor red?

36. The non-price determinants of demand: Prices of related goods Substitute goods – margarine and butter. If butter increases in price the demand for margarine will increase as people switch to the lower priced substitute Complementary goods – goods that are commonly used with each other. Can you think of an example?

37. The non-price determinants of demand: Consumer Expectations If many people think they might lose their jobs the overall demand in the economy will go down. If many people think they will be getting the chance for lots of overtime the overall demand in the economy will go up. If many people think the price of an item (say houses) is going to up they will increase the overall demand by purchasing more before the price increase. What if something goes on sale tomorrow?

38. The non-price determinants of demand: Income If you get a raise you will have more money to spend. If you lose your job your demand for all products that are not ‘needs’ will have to go down.

39. Income Continued The non-price determinants of demand: Income (con’t.) • Normal Goods-a good that consumers demand more of when their incomes increase. • Clothes • DVD’s • Inferior Goods-a good that consumers demand less of when their incomes increase. • Top Ramen • Powdered milk • Used books

40. The non-price determinants of demand: Market size/Population changes If there are a lot of people who need/want your product then the demand will be high.

41. Again, the non-price determinants of demand: • Consumer tastes and preferences • Prices of related goods • Substitute goods • Complementary goods • Consumer Expectations • Income • Normal goods • Inferior goods • Market Size

42. Section 2 Assessment 1. Which of the following does not cause a shift of an entire demand curve? (a) a change in price (b) a change in income (c) a change in consumer expectations (d) a change in the size of the population 2. Which of the following statements is accurate? (a) When two goods are complementary, increased demand for one will cause decreased demand for the other. (b) When two goods are complementary, increased demand for one will cause increased demand for the other. (c) If two goods are substitutes, increased demand for one will cause increased demand for the other. (d) A drop in the price of one good will cause increased demand for its substitute.

43. Section 2 Assessment 1. Which of the following does not cause a shift of an entire demand curve? (a) a change in price (b) a change in income (c) a change in consumer expectations (d) a change in the size of the population 2. Which of the following statements is accurate? (a) When two goods are complementary, increased demand for one will cause decreased demand for the other. (b) When two goods are complementary, increased demand for one will cause increased demand for the other. (c) If two goods are substitutes, increased demand for one will cause increased demand for the other. (d) A drop in the price of one good will cause increased demand for its substitute.

44. Section 2 Assessment 1. Which of the following does not cause a shift of an entire demand curve? (a) a change in price (b) a change in income (c) a change in consumer expectations (d) a change in the size of the population 2. Which of the following statements is accurate? (a) When two goods are complementary, increased demand for one will cause decreased demand for the other. (b) When two goods are complementary, increased demand for one will cause increased demand for the other. (c) If two goods are substitutes, increased demand for one will cause increased demand for the other. (d) A drop in the price of one good will cause increased demand for its substitute.

45. Whiteboardexercises • Whiteboard Exercises: • Bananas are found to cause cancer. What happens to the demand for bananas? • Shortage of steel, price of magnums increases, what happens to demand for magnums? • Gas prices will double next week, what happens to demand for gas this week? • Peanut Butter goes on sale. What happens to the demand for peanut butter? • What happens to demand for jelly? • Small Pox hits, 25% population dies. What happens to demand for caskets? • What happens to demand for all other goods?

46. Whiteboard exercises • Whiteboard Exercises: • Price of paint goes up. What happens to demand for paint? • What happens to demand for paintbrushes? • Joe wins the lotto, what happens to his demand for all normal goods? What effect is taking place? • What happens to his demand for inferior goods? • Eating hot cheetos with cream cheese causes weight loss and extends life expectancy. What happens to the demand for cheetos? • What happens to the demand for cream cheese? Why?

47. Whiteboard exercises Fill in the Blank/Short Answer: • Due to ________________you stop buying nail polish after the 120th bottle, even though the price is only $.25. • Bart prices sky-rocket, so due to the __________________ you start taking the ferry to work. • You get a raise and buy a new car instead of a used car. This is due to the ________________. A used car is then considered a ___________ good. • Mrs. Eugster gives you $1000. You buy more/less Ben and Jerry’s ice-cream. • Why does the law of demand only apply in a free market economy? • Are there goods that do not obey the law of demand?