Demand

1. Demand How does demand affect what producers are willing to supply to the market?

2. What Is the Law of Demand? • Law of demand= • Consumers buy more of a good when its price decreases • Less when its price increases. • Result of two separate behavior patterns that overlap, the substitution effect and the income effect. • These two effects describe different ways that a consumer can change his or her spending patterns for other goods.

3. Law in Action • Shlagor’sDemand for Krystal Cheeseburgers Price of a single KC Quantity Demanded $.25 12 $.50 10 $.75 6 $1.00 4 $1.50 3 $2.00 0 (Substitute other junk food!) Krystals will not go below $.25, it represents a price below cost of production

4. 3 Economic Concepts Important to Demand 1.Income effect - an increase or decrease in consumer purchasing power caused by a change in price. • Purchasing Power- the amount of income that people have to spend on goods and services. 2. Substitution Effect- consumer’s tendency to substitute a lower price good for a similar 1 that is priced higher. 3. Diminishing marginal utility- the usefulness of each unit consumed decreases with each additional unit.

5. A demand schedule is a table that lists the quantity of a good a person will buy at each different price. 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. The Demand Schedule

6. 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. • Notice it slopes downward – D for downward Demand

7. Shlagor’s Krystal Demand Curve

8. Shifts in Demand • The Law of Demand only works assuming “all other things are held constant.” • When this assumption is dropped, movement no longer occurs along the demand curve. Rather, the entire demand curveshifts.

9. Shifts of the Demand Curve • Determinants of demand: Factors other than price that influence the amount of demand for a good or service. • Shifts the curve to the right (increase) or the left (decrease)

10. What Causes a Shift in Demand? • 1. Income • -Changes in consumers incomes affect demand. • -Normal good: good that consumers demandmore of when their • incomes increase. • -Inferior good: good that consumers demand lessof when their • income increases. • 2. Consumer Expectations • Whether or not we expect a good to increase or decrease in price • in the future greatly affects our demand for that good today. • 3. Population • Changes in the size of the population also affects the demand for • most products. • 4. Consumer Tastes and Advertising • Advertising plays an important role in many trends and therefore • influencesdemand. Several factors can lead to a change in demand:

11. Complements are two goods that are bought and used together. Example: skis and ski boots Substitutes are goods used in place of one another. Example: skis & snowboards Prices of Related Goods The demand curve for one good can be affected by a change in the demand for another good.

12. Substitute Complement Substitute Complement Complement Substitute Complement

13. Fill in the answers to the following questions with (increase/decrease) or (complement/ substitutes. Exp. The price of Big Macs increasescausing a decrease in the Big Mac market. Therefore, the demand for Mc Fries decreases because the two items are complements.

14. The cost of Honda Accords decreases, causing ________ in the Honda market. Therefore, the demand for the Toyota Camry (assume they have about the same value) __________ because the two items are______________. • The cost of automobile maintenance increases, causing__________ in the maintenance field. Therefore, the demand for public transportation _______because it is____________.

15. The cost of Honda Accords decreases, causing increase in the Honda market. Therefore, the demand for the Toyota Camry (assume they have about the same value) decreases because the two items are _substitutes__. • The cost of automobile maintenance increases, causing _decrease_ in the maintenance field. Therefore, the demand for public transportation increases_ because it is _a substitute_.

16. 3. The price of movie theater tickets increases, causing ________ in the movie ticket market. Therefore, the demand for movie rentals_________ because the two items are _____________. 4. The price of CD players decreases, causing ____________ in the CD player market. Therefore, the demand for CDs __________ because they are ______________.

17. 3. The price of movie theater tickets increases, causing decrease in the movie ticket market. Therefore, the demand for movie rentals increases because the two items are substitutes. 4. The price of CD players decreases, causing __an increase_ in the CD player market. Therefore, the demand for CDs _increases__ because they are __complements.

18. Which way would a demand curve shift in the following scenarios?Write “left” or “right” and which determinant of demand caused the shift. 1. Papa John’s Pizza is offering $1 pizzas for students on Monday nights. 2. The government releases a report that Taco Bell’s meat is actually dog food. 3. Susan’s job at Six Flags ends in late October. 4. John has taken a second job. 5. Abercrombie opened a new store dedicated to pre-teens. 6. The local Pepsi plant has an explosion and has to close, what happens to the demand for Coke? 7. The price of jelly increases 200%, what happens to the demand for peanut butter?

19. Which way would a demand curve shift in the following scenarios?Write “left” or “right” and which determinant of demand caused the shift. 1. Papa John’s Pizza is offering $1 pizzas for students on Monday nights. Right 2. The government releases a report that Taco Bell’s meat is actually dog food. Left 3. Susan’s job at Six Flags ends in late October. Left 4. John has taken a second job. Right 5. Abercrombie opened a new store dedicated to pre-teens. Right 6. The local Pepsi plant has an explosion and has to close, what happens to the demand for Coke? Right 7. The price of jelly increases 200%, what happens to the demand for peanut butter? Left

20. DEMAND HEADLINES • Read the following eight newspaper headlines. In each case decide if the event will cause a change (shift) in the demand for beef in May. If so, determine if it is an increase (right shift) or a decrease (left shift) and tell which of the determinants of demand has caused the shift: • Prices of related goods • Income • Consumer Expectations • Population • Consumer Tastes and Advertising • NOTE: 1 Headline will not lead to a shift in demand instead it will indicate a change in quantity demanded (due to a change in price.)

21. HEADLINE 1: Price of beef to rise in June • Example: Demand (for beef in May) increases_ because of consumer expectations 2. HEADLINE 2: Millions of foreign immigrants swell the US population Demand _________ because _____________ 3. HEADLINE 3: Pork prices drop Demand _____ because ______________

22. HEADLINE 1: Price of beef to rise in June • Example: Demand (for beef in May) increases_ because of consumer expectations 2. HEADLINE 2: Millions of foreign immigrants swell the US population Demand increases because of population increase. 3. HEADLINE 3: Pork prices drop Demand decreasesbecause substitute price decreases.

23. 4. HEADLINE 4: Surgeon General warns that eating beef can be hazardous to your health Demand ________because____________ 5. HEADLINE 5: Beef prices fall; consumers buy more Demand ______ because _________________ 6. HEADLINE 6: Real income for Americans drops third month in a row Demand _____because ___________________

24. 4. HEADLINE 4: Surgeon General warns that eating beef can be hazardous to your health Demand decreases because consumer expectations change. 5. HEADLINE 5: Beef prices fall; consumers buy more Demand increasesbecause price of goods. 6. HEADLINE 6: Real income for Americans drops third month in a row Demand decrease because income changes.

25. Demand Elasticity • Elasticity describes the way in which consumers react to a change in a products price. • If a small price increase causes a dramatic change in demand the product is said to have Elastic Demand. (ex. Price of movie tickets goes up $1 & demand falls by half= movie tickets have elastic demand) • If there is little change in demand, despite a rise in price the product is said to have Inelastic Demand. (ex. The price of Bob’s medicine doubles, but Bob still buys it every week = Inelastic Demand)

26. Factors Affecting Demand Elasticity Availability of Substitutes • If there are few or no substitutes available for a good or service = inelastic demand. (Medicine, Gas, diapers, milk, cigarettes, etc.) • Other products have many substitutes & would have more Elastic Demand if the price increased. (Food items, Bottled water, Some medications*, etc.)

27. Additional Factors affecting DEMAND ELASTICITY • Expense of Product – more expensive items tend to be more elastic, these items take more of your budget & can be sacrificed. (Ex. Clothes, Air Travel, Video Games, etc.) • Less expensive products tend to be more inelastic, these items are cheap – so most people buy them regardless of a price change. (Ex. Socks, underwear, Shampoo, etc.) • Necessities vs. Luxuries- if the product is something you need vs. something you want. (Ex. Baby Diapers– necessary / inelastic demand Rolex Watches – luxury / elastic demand)

28. Time & Elasticity • Consumers often need time to adjust to price changes. • Demand can become more elastic over time. • Ex. Gas – Demand for gas after a price hike is inelastic, but after a few months or years consumers adjust & seek alternatives: public transportation, fuel efficient cars, etc.

29. Demand Elasticity – the Curves Elastic Demand Inelastic Demand Small Price Change greatly affects QD Little Change with Price Change

30. Elastic or Inelastic Demand: you decide • Product • Starbucks Coffee • New Car • Toothpaste • New Laptop • Water/Toilet resistant I-phone • Milk • Chick-fil-a chicken biscuits • Blood pressure medicine Elastic Elastic Inelastic Elastic Elastic Inelastic Elastic Inelastic