Unit 2: Economics

1. Unit 2: Economics Supply, Demand and price

2. Topic 1: DEMAND • What is Demand? • What consumers are willing and able to buy at different prices. • (Ex: Bill Gates is able to purchase a Ferrari, but if he isn’t willing he has NO demand for one) • Law of Demand? • There is an INVERSE relationship between price and quantity demanded 2

3. LAW OF DEMAND As Price Falls… …Quantity Demanded Rises As Price Rises… …Quantity Demanded Falls Quantity Demanded Price 3

4. When price of item goes up, it takes more income to buy (purchasing power goes down) Why does the Law of Demand occur? The Income Effect 4

5. There is a decreasing amount of additional utility from consuming more of an item Why does the Law of Demand occur? Law of Diminishing Marginal Utility 5

6. Can you see the Law of Diminishing Marginal Utility in Disneyland’s pricing strategy?

7. Demand Schedule • Table that shows the amount demanded at each and every price

8. Where do you get the Market Demand? Billy Jean Other Individuals Market

9. Graphing Demand 9

10. The Demand Curve A demand curve is a graphical representation of a demand schedule. 10

11. GRAPHING DEMAND Demand Schedule Price of Cereal $5 4 3 2 1 o Q 10 20 30 40 50 60 70 80 Quantity of Cereal 11

12. GRAPHING DEMAND Demand Schedule Price of Cereal $5 4 3 2 1 Demand o Q 10 20 30 40 50 60 70 80 Quantity of Cereal 12

13. Change in Demand Demand Schedule What if cereal makes you smarter? Price of Cereal $5 4 3 2 1 Demand o Q 10 20 30 40 50 60 70 80 Quantity of Cereal 13

14. Change in Demand Demand Schedule Price of Cereal $5 4 3 2 1 Demand o Q 10 20 30 40 50 60 70 80 Quantity of Cereal 14

15. Change in Demand Demand Schedule Price of Cereal $5 4 3 2 1 Demand o Q 10 20 30 40 50 60 70 80 Quantity of Cereal 15

16. Change in Demand Demand Schedule Price of Cereal $5 4 3 2 1 Demand o Q 10 20 30 40 50 60 70 80 Quantity of Cereal 16

17. Change in Demand Demand Schedule Price of Cereal Increase in Demand Prices didn’t change but people want MORE cereal $5 4 3 2 1 D1 Demand o Q 10 20 30 40 50 60 70 80 Quantity of Cereal 17

18. Change in Demand Demand Schedule What if cereal causes baldness? Price of Cereal $5 4 3 2 1 Demand o Q 10 20 30 40 50 60 70 80 Quantity of Cereal 18

19. Change in Demand Demand Schedule Price of Cereal $5 4 3 2 1 Demand o Q 10 20 30 40 50 60 70 80 Quantity of Cereal 19

20. Change in Demand Demand Schedule Price of Cereal $5 4 3 2 1 Demand o Q 10 20 30 40 50 60 70 80 Quantity of Cereal 20

21. Change in Demand Demand Schedule Price of Cereal $5 4 3 2 1 Demand o Q 10 20 30 40 50 60 70 80 Quantity of Cereal 21

22. Change in Demand Demand Schedule Price of Cereal $5 4 3 2 1 Decrease in Demand Prices didn’t change but people want LESS cereal D2 Demand o Q 10 20 30 40 50 60 70 80 Quantity of Cereal 22

23. Changes in demand • When demand increases, the curve shifts to the right of the original curve (follows same slope of original) • example: price D1 D quantity

24. When demand decreases, curve shifts to the left of original curve • Example: D D1

25. Reasons for changes in demand: • Determinants of demand = things that SHIFT the D curve

26. 1. Change in income

27. 2. change in tastes or preferences influenced by fads, expert testimony, advertising, publicity, weather, holidays etc.

28. E.T. movies increases demand for Reese’s Pieces

29. Fewer Births in a Bad EconomyByCATHERINE RAMPELLAmerican birth rates have fallen noticeably in the last few years, a trend that seems to be tied to the poor economy, according to a new analysis from the Pew Research Center. 3. change in # of consumers

30. 4. change in expectations for the future

31. 5. change in demand of a substitute good

33. 6. change in demand of complementary good

34. Change in Quantity demanded vs. change in demand • Change in Demand = results in a new curve CAUSED BY A DETERMINANT • Change in Quantity demanded = movement along original curve CAUSED BY A CHANGE IN PRICE OF ITEM • Change in demand and change in Quantity demanded are NOT the same thing

35. Change in Quantity demanded vs. change in demand

36. Practice • Determine in the demand for hamburger curve will shift or not 36

37. 1. There is a population boom…. • 2. Incomes fall due to a recession… • 3. Price of hot dogs, a substitute good for hamburgers, goes down…

38. 4. A new health craze emerges: No ground beef…. • 5. Hamburger restaurants announce that they will increase the price of hamburgers NEXT month….

39. 6. The price of milkshakes, a complementary good for hamburgers, increases… • 7. The price of hamburgers increases…

40. THE LAW OF DEMAND SAYS... Consumers will buy more when prices go down and less when prices go up HOW MUCH MORE OR LESS? 40

41. Topic 2: Elasticity

42. Price Elasticity of Demand • Measurement of consumers responsiveness to a change in price. • Shows if product has elastic or inelastic demand

43. Inelastic Demand

44. INelastic =Price doesn’t have much of an impact on a person’s purchase Demand curve will be steep Inelastic Demand D • Examples of items with inelastic demand • Gasoline • Milk • Diapers

45. Why do some items have Inelastic demand??? • Few Substitutes are available • Item is a Necessity • Item takes up a small portion of income • Item is needed NOW rather than later

46. Elastic Demand

47. Elastic Demand price has a large impact on a person’s purchase of an item D An ELASTIC demand curve is flatter than an inelastic curve ! • Examples of goods with elastic demand • Soda • Boats • Gold

48. Why do some items have elastic demand • Many Substitutes are available • Item is not a necessity • Item is a large portion of income • Don’t need the item immediately

49. Used to determine if product is elastic or inelastic • TR = Price x Quantity Demanded Total Revenue Test

50. Elastic Demand- TR moves in OPPOSITE direction as price