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Demand

Demand. Demand and Supply. Why do roses cost more on Valentine’s Day? Why do TV ads cost more during the Super Bowl ($2.7 million for 30 sec.) than during Nick at Nite reruns?

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Demand

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  1. Demand

  2. DemandandSupply Why do roses cost more on Valentine’s Day? Why do TV ads cost more during the Super Bowl ($2.7 million for 30 sec.) than during Nick at Nite reruns? Why do hotel rooms in Sun Valley, Idaho cost more in the winter than in the summer? Why do surgeons earn more than butchers? Why do pro basketball players earn more than pro hockey players? Why do economics majors earn more than most other majors? Why are some of you going to major in economics in college? The answer to these and other economics questions boil down to the workings of supply and demand – the subject of this chapter. “Econ, Econ”

  3. Individual Demand To Market Demand “JO” “Mo” “Bo” D D D2 D D 1 [Total] = $3 $3 + + $3 $3 $2 $2 $2 $2 26 40 35 30 115 115 45 39 100 From “individual” demand to “market” demand And, what if the price of this product decreases from $3 to $2? A point to point movement on the same “D” curve is a “Change in QD” And – what if this good prevents cancer, so we have an increase in “D” for it.

  4. P QD DEMAND SCHEDULE Consumers“willingness to buy” Price decreases; QD increases D $5 $4 $3 $2 $1 $5 4 3 2 1 10 20 35 55 80 0 10 20 35 55 80 Quantity Demanded …a specifiedtime period …other things being equal QD – how much will be purchased at a specific price [& date].

  5. Law of Demand [Change in QD] D Reasons For Downsloping “D” Curve 1. Income Effect –current buyers buy more. 2. Substitution Effect– new buyers now purchase. 3. Diminishing MarginalUtility - because buyers of successive units receive less marginal utility, they will buy more only when the price is lowered. [8GB] iPhone $399.00 [with 2 yr contract] Change in QD 1. Price change 2. Movement [up/down the demand curve] 3. Point to point [along the curve] Price QD $250.00 Inverserelationship QD1 QD2 “D” refers to the “whole curve”.[“all prices”] “QD” refers to a “point on the curve” based on a “particular price.”

  6. D Three Reasons Why the Law of Demand Exists P1 P2 QD1 QD1 • Income Effect • When things are expensive, money buys less • When things are cheap, money buys more • Substitution Effect • When apples are expensive and their substitutes (pears) are relatively cheap, I buy fewer apples and more pears • Diminishing Marginal Utility • Each additional unit of an item purchased gives less marginal utility (happy points) than the previous unit. Therefore, the only way I will buy more is if the price is lower. • Ex. When I’m hungry, I typically will buy2 breakfast tacos. The reason I don’t buy a third taco is because the marginal utility of the third taco is less than the price of the taco. But, if the price of the taco is less than the marginal utility of the taco, then I will buy the third taco

  7. Graphing The Demand Curve [Price Change, Point to Point Movement] Picture of Law of Demand

  8. Elasticor Inelastic(Total Receipts Test) $2 $1 Elastic Inelastic 20 30 40 50 Total Receipts Test 20 x $2 = $40 Total Receipts Test 20 x $2 = $40.00 50 x $1 = $50 30 x $1 = $30.00

  9. 11.Elasticity of D – the way price affects QD.12.Elastic- QDthat isvery responsive to price.13.Inelastic- achg in price has littleimpact on QD. • Elastic (flexible) Demand • Substitutes (butter) • Luxury(mink coat) • Expensive(car) • Has durability(refrigerator) • Lasts a long time (gas-guzzling car) • Inelastic (inflexible) Demand • No substitutes(milk) • Necessity(insulin) • Inexpensive(safety pin) • No durability(pencil) • Lasts only a short time(bread)

  10. Elastic Demand For Cassette Tapes . “TR” Test $2.50x100,000=$250,000 $1.50x600,000=$900,000 +$650,000 D -$1 Think of “responsiveness” as “flatness”.

  11. D “TR” Test $2 = $30 bil. $1 = $20 bil. -$10 bil. -$1 +25% QD

  12. Change in “Demand” [curve][“TIMER”] . Consumers change their minds at each and every price. Based on good or bad publicity about OJ. 16 oz. Orange juice = 220 calories 16 oz. Tomato juice = 78 calories

  13. Quantity Demandedvs.Demand Quantity Demanded [QD] is triggered by a price chg. The quantities of a good or service thatpeople will purchase at a specific priceat a given time. Demand [D] is triggered by “TIMER” [non-price]. A schedule of the total quantities of a good or service thatpurchasers will buy at different pricesat a given time. Demandis abunch of QD’s strung together.

  14. “Demand Shifters” [TIMER] 1. Taste [direct] 2. Income [normal-direct] [inferior-inverse] 3. Market Size [number of consumers-direct] 4. Expectations [of consumers about future *price-direct, about future availability-inverse, or about future income–direct. 5. Related Good *Prices [substitutes-direct] [complements-inverse] D D1 D1 D2 P1 D1 D3 D2 D2 P P P2 P QD2 Complement [inverse] QD1 Substitute [Direct] Bread Butter Bagels Change in “D” [curve] 1. Non price change[“TIMER”] 2. Whole “D” curve shifts [There is a change in “QD” but it is not caused by a change in “price.” [QD-”singleprice”; D-”all prices”] QD3 QD2 QD1

  15. Change in “Taste” D1 D2 D3 P Mini Skirts Hip Huggers Bell Bottoms QD1 Platforms QD3 QD2 1. An “Increase in Taste” shifts the D curve right a. The Nehru jacket came & went in 6 months. b. Jordache jean demand created by TV c. Leisure suits and bell bottoms. d. Technological change may cause consumer taste to change[slide rules].

  16. 1. "Change in Taste" for Dark Chocolate Increase in demand for dark chocolate after studies revealed that there werehealth benefitsfrom eating it. Scientists have discovered that smokers who ate dark chocolate had less hardening of the arteries and a lowered risk of blood clots. D2 D1 P

  17. Advertising Can Shift “D”[& also impact QD] D1 D2 $45 QD1 QD2

  18. 2. Change in Income [Normal-Direct; Inferior-Inverse] Spam D2 Steak D1 Less income results in more demand for spam; less demand for steak. More income results in more demand for steak; less demand for spam. P QD1 QD2

  19. 2. Change in Income Normal Good – goods whose demand variesdirectlywith income. Inferior Good – goods whose demand variesinverselywith income. Butter, filet, steel-belts, new clothing & new cars v. Margarine, spam, used tires, old clothing & old cars Demand For Steak Income Demand For Spam

  20. 3. Change in Market Size [Direct] [Number of Consumers] D2 D1 P More demand for both spam and steak. QD1 QD2

  21. 3. Market Size (direct) (# of consumers) can increase/decrease from economic decisions, advertising, and government political decisions (China). Ex: The large “baby boom” of 1946-64 increased the demand for baby supplies. An increase in life expectancy increased demand for for medical care, retirement communities, and nursing homes. Increase in # of consumers

  22. 4. Expectations [of consumers] [about future price, availibility, & income] If the iPod-Touch is expected to increase in price from $299 to $399. D2 D1 iPod-Touch P QD1 QD2

  23. 4. Consumer Expectations car Consumer expectationsabout future product price, future availability, & future income. Ex: When the Korean War broke out in the summer of 1950, newcar sales boomed(also washers and refrigerators) out of the expectation of a production stoppage like during WWII. None occurred but it was the expectation that affected new car demand.

  24. 5. Prices of Related Goods [Substitues-Direct; Complements-Inverse] D1 D2 D D1 P1 D2 P P P2 Complement [Inverse] QD1 QD2 Substitute [Direct] Gangsta Grills Chrysler 300s Toyotas MV X PQ

  25. There are three types of goods. • Independent goods – price change • of one hasno impacton the other. • Ex: fishhooks & pantyhose or salt & shoelaces • 2. Substitute goods(“competing goods”) • - price change of one affects the • demand of the other directly. • Ex: 7Up & Coke or Miller & Bud • 3. Complementary goods(“go together”) • - price change of one affects the • demand for the other inversely. 5. Prices of Related Goods D1 D2 QD2 QD1 Peanut butter & jelly D2 D1 Camera Film Cereal&milk Coffee & donuts QD1 QD2

  26. [Increasein price of one;increasein “D”of the other] Substitutes - Direct Demand for Dr Pepper Price Of 7UP D2 D1 D P P2 P1 QD QD QD2QD1

  27. [Decreasein price of one; increase in the “D” for the other] Complements - Inverse P1 P2 QD1QD2 D2 D1 Car Prices P QD QD Gasoline Demand No change in price I’m making more money without dropping my prices. They are so cheap that even dogs are buying cars

  28. Substitutes – Direct [Increase in price of one;increasein “D”of the other] Demand for Microsoft’s Zune D2 Price of iPod Video D1 D P P2 P1 QD QD QD2QD1 1977, Bill was arrested for running a stop sign and driving without a license.

  29. Substitutes - Direct Demand for Turkey Price Of Chicken D2 D1

  30. Although both monitor & laptop QDs changed, it is still a “Change in D” for those two, because the QD changes were not triggered by a change in price. The price of desktop computers did change so there is a “Change in QD”for desktop computers. D1 D2 D D1 P1 D2 P P P2 Complement [inverse] QD1 QD2 Substitute [Direct] Desktop Computers Laptops Monitor Prices of Related Goods

  31. Substitutes - Direct Price Of Windows Computers Demand for Apple Computers D2 D1

  32. . Substitute/ComplementRelationships “Substitutes” D1 D D2 P1 P Price Decreases Price Decreases P2 QD2 QD1 QD1 QD2 [DIRECT] Hamburgers Hot Dogs “Complements” D D2 D1 Demand Increases Price Decreases P1 P P2 QD1QD2 QD1 QD2 [inverse] Syrup Pancakes

  33. “TIMER” P Tastes[direct] Incomes -Normal[direct]& Inferior[inverse] Market Size(# ofconsumers)[direct] Expectations of consumers about [futureprice-direct;future income [direct];andavailability[inverse] Related Good Price Changes [substitutes-direct;complements-inverse] Helmets

  34. Change in QD [“Change in “price”] Increase in “QD” [caused by a “decrease in price”] Decrease in “QD” [caused by an “increase in price”] D D 1. Price change 2. Movement 3. Point to point [“Snap shot of 1 pt in time] P1 P2 P2 P1 QD1 QD2 QD2 QD1 Change in “D” [“TIMER”] D2 D1 D1 1. Non-price 2. Whole curve 3. Shift [“Time passes”] D2 P P “Decrease in D” “Increase in D” What could cause an “increase in Demand?” 5.Expectations of a shortage 1. Increase in taste 6. Expectations of a price increase 2 .Increase in income [normal good] 7. Expectations of positive future income 3. Decrease inincome [inferior good]8. Incr in price of a substitute for product “X” 4. Increase in market size[# of consumers] 9. Decr in price of acomplement of product “X”

  35. Change in D [curve] • [non-price change/shift/whole curve] • 5 Demand Shifters [“TIMER”] • 1. Taste [direct] • 2. Income [normal - direct] [inferior - inverse] • 3. Market Size [number of consumers-direct] • 4. Expectations [price, income, & availability] • 5. Related Good Price changes • [substitutes - direct] [complements - inverse] Change in QD [price change/movement/pt to pt] D2 D1 D3 D P1 P2 QD3QD1QD2 QD1 QD2 [“Moving” along thecrab demand curve” because of a crab price change] “Shifting the crab demand curve” +/- QD/D ___ ___ 1. Crab sales are affected by a drop in crab prices. ___ ___ 2. An increase in income causes the demand curve for crab to shift. + QD D +

  36. +/-D/QD Graph The Black Boldfaced Items ___ ___ 1. A population increase affects sales of Pepsi Colas. ___ ___ 2. Consumer incomes in the city of Plano decrease, with the result that jewelry sales are affected. ___ ___ 3. A camera store has a sale that features 25% off the price of all cameras. ___ ___ 4. Texas imposes a 15% luxury tax on the sale of sailboats. ___ ___ 5. A frost in Florida destroys 60% of the orange crop and increases expectationsabout a future price increase of oranges. ___ ___ 6. Consumers expect the prices of digital camerasto decreasenext month. ___ ___ 7. The sale of DVDs is affected by a 20% increase in the price of DVD players. ___ ___ 8. The sale of buns is affected by a 20% decrease in the price of hamburger meat. ___ ___ 9. The sale of Kangaroo meat in Europe [Roo Steak] is affected by a 25% increase in the price of beef. ___ ___ 10. Dunkin Donutslowers the price of donuts& experiences a change in sales. + D - D QD + - QD D + - D - D D D1 P2 P1 [Complements - INVERSE] DVD Players QD2 QD1 DVDs + D D1 D [Complements - INVERSE] P1 P2 Hamburger meat Buns + D QD1 QD2 D D1 [Substitutes -DIRECT] P2 P1 Beef Kangaroo meat QD2 QD1 + QD

  37. Change in QD D Change in QD Price Change Point to Point Movement P1 P2 QD1 QD2 D [INVERSE] P2 P1 What is not held constant in these two graphs? Price QD2QD1 “Change in Demand” D1 D2 D1 D2 P P Do not confuse these two with “Chg in QD” Q2 Q1 Q1 Q2 Change in Demand Non-Price Change Whole Curve Shift

  38. [D – “TIMER;QD – price change[inverse] __1.Which will cause an “Increase in D”for MP3 Player phones? a. increase in income c. increase in the price of MP3 Player phones b. decrease in income d. decrease in the price of MP3 Player phones ___2. Which will cause an“Increase in QD” for MP3 Player phones? a. decrease in income c. decrease in the price of MP3 Player phones b. increase in income d. increase in the price of MP3 Player phones ___3. Which will cause a“Decrease in D” for Projectors? a. increase in the price of projectors c. decrease in # of consumers b. decrease in the price of projectors d. increase in projector taste ___4. Which will cause a“Decrease in QD”for Projectors? a. increase in the price of projectors c. decrease in # of consumers b. decrease in the price of projectors d. increase in projector taste MP3 Player Phone [stereo sound,downloadable sound games and ring tones] A C C A

  39. QD & DPractice Quiz[Snickers] 1. What would cause an “increase in QD” for Snickers? a. increase in price of Snickers b. decrease in price of Snickers c. decrease in income d. increase in number of consumers 2. What would cause an “increase in D” for Snickers? a. increase in taste b. decrease in price of Snickers c. decrease in income d. increase in the price of Snickers 3. What would cause a “decrease in QD” for Snickers? a. increase in taste b. decrease in price of Snickers c. increase in price of Snickers 4. What would cause a “decrease in D” for Snickers? a. decrease in income b. increase in taste c. decrease in price of Snickers 5. An “increase in the price of Butterfingers would cause a(n) (increase/decrease) in (QD/D) for Snickers?

  40. NS 1-10 1. (Demand/Supply) is identified as quantities consumers are willing and able to buy at various prices during a given time period. 2. The law of demandsays thatprice & QD are (directly/inversely)related. 3. The most important variable influencing decisions to produce and purchase goods is (technique/price). (Price/income) is not held constant when moving along a stable demand curve. 4. Income effect-theincrease or decrease in purchasing power brought on by a change in (taste/market size/price). 5. Substitution effect – tendency to substitute a (higher/lower) -priced product for a more expensive product. 6. Diminishing marginal utility – utility, or (determination/anger/satisfation) decreases as more of the same product [Snickers] is consumed. 7. The law of demandrefers to a(movement/shift)along a demand curve. 8. Substituting chicken as the price of steak goes up is an example of the (income/substitution) effect. 9. When the price of caviar falls, the purchasing power of our money income rises & thus permits us to purchase more caviar. This is the (income/substitution) effect. 10. The demand(curve/schedule)is anumerical tabulationshowing QD at each price. The demand(curve/schedule)is agraphical representationof the law of demand.

  41. NS 11 - 20 11. Elasticity ofdemand–the way price affects(attitude/quantity/market size). 12. (Inelastic/Elastic) demand – demand that is very responsive to price. [A small price increase causes a large decrease in quantity demanded.] 13. (Inelastic/Elastic) demand-when a change in price has little impact on QD. 14. The 3-item test for elastic demand are substitutes, luxury items, and (inexpensive/expensive) items. 15. The 3-item testfor inelastic demand are no substitutes, necessities, and (inexpensive/expensive) items. 16. Expensive cars have (inelastic/elastic) demand. 17. Pepsi Cola has (inelastic/elastic) demand. 18. Insulin has (inelastic/elastic) demand. 19. The elastic demand curve is more (horizontal/vertical).[much change] 20. The inelastic demand curve is more (horizontal/vertical).[not much change]

  42. NS 21-26 21. With the invention of the calculator, the demand curve for the slide rule (increased/decreased). 22. When Forest Gump went to China & the U.S. followed by opening up relations with China, the demand curve for Coke (increased/decreased). 23. An increase in income would (increase/decrease) the demand for used clothing. [inferior good] 24. A decrease in income would (increase/decrease) the demand for lobster. [normal good] 25. A decrease in the price of product X[lumber] will (incr/decr) the demand for the complementaryproduct Y. [nails] 26. After Brooke Shields[15] did her national TV ads[“Nothing comes between me and my Calvin’s”], the “D” curve moved (right/left). $45

  43. NS 27-38 27. An increase in the price of Pepsi causes the demand curve for Coke to move to the (right/left). 28. If there is a sale on shirts, the demand curve for ties will move to the (right/left). 29. If a man’s workplace is about to close down, his demand curve for major purchases would move to the (right/left). 30. If a cure for lung cancer were found, the demand curve for cigarettes would move to the (right/left). 31. If the price of pancakes decreases, the demand for syrup, a complement, will (increase/decrease). 32. If the price of butter decreases, the demand formargarinewill (incr/decr). 33. A “change in QD” is caused by (price change/TIMER)[a “movement”] 34. A “change in D” is caused by (price change/TIMER) [a “shift”] e

  44. “Econ, Econ”. Let tell you about econ. The End

  45. 1. Madonna gave a concert at the AAC after doubling the ticket priceand experiencing a change in anticipated attendance. 2. A decrease in tastecauses the demandforlobster to shift. 3. A 20% increase in the price of Pepsiaffect the sale ofCoke. 4. Consumers expect the price of cell phones to increase 25% next month. 5. The sale ofFord F150sis affected when the U.S. begins trading with Cuba. 6. New autos decrease in price by 20% & the sale of gasoline is affected. 7. Victoria’s Secret increases the price of its thongs by 40% and experiences a change in the volume of sales. 8. Britney Spears triples the price of her album, “Oops, I flunked Econ Again,”and sales are affected. 9. A drought in Texas destroys 40% of the state’s peaches & increases consumer expectations about a future price increase of peaches. 10. A 15% decrease in the price of motorcyclesaffect the sale ofhelmets. Taste [direct] Income [normal-direct] [inferior-inverse] Market Size [# of consumers-direct] Expectations [price-direct] [income-direct] [availability-inverse] Related Good Price Changes [subs-direct] [complements-inverse] 1.–QD 2. –D 3. +D 4.+D 5.+D 6.+D 7.–QD 8.–QD 9.+D 10.+D

  46. 1. Christina gave a concert at the AAC after loweringthe ticket priceand experiencing a change in anticipated attendance. 2. An increase in tastecauses the demand curve forlobster to shift. 3. The sale of cokeis affected by a20% decrease in the price of Pepsi. 4. Consumers expect the price of XBOX to decrease 25% next month. 5. The sale ofDr Pepperis affected when the U.S. goes to war with China. 6. New SUVs decrease in price by 30% & the sale of gasoline is affected. 7. Victoria’s Secret decreases the price of its teddies by 50% and experiences a change in the volume of sales. 8. The Spice Girls lower the price of their album, “Oops, We Actually Passed Econ,”and sales are affected. 9. A freeze in California destroys 70% of the state’s oranges and increases consumer expectations about a future price increase of oranges. 10. A 50% increase in the price of breadaffect the sale ofbagels. Taste [direct] Income [normal-direct] [inferior-inverse] Market Size [# of consumers-direct] Expectations [price-direct] [income-direct] [availability-inverse] Related Good Price Changes[subs-direct] [complements-inverse] 1.+QD 2.+D 3. -D 4.-D 5. -D 6.+D 7.+QD 8.+QD 9.+D 10.+D

  47. Review of Demand

  48. Law of Demand [Change in QD] D Reasons For Downsloping “D” Curve 1. Income Effect –current buyers buy more. 2. Substitution Effect– new buyers now purchase. 3. Diminishing MarginalUtility - because buyers of successive units receive less marginal utility, they will buy more only when the price is lowered. [8GB] iPhone $399.00 [with 2 yr contract] Change in QD 1. Price change 2. Movement [up/down the demand curve] 3. Point to point [along the curve] Price QD $250.00 Inverserelationship QD1 QD2 “D” refers to the “whole curve”.[“all prices”] “QD” refers to a “point on the curve” based on a “particular price.”

  49. “Demand Shifters”[“TIMER”] 1. Taste [direct] 2. Income [normal-direct] [inferior-inverse] 3. Market Size [number of consumers-direct] 4. Expectations [of consumers about future price-direct, about future availability-inverse, or about future income–direct. 5. Related Good Prices [substitutes-direct] [complements-inverse] D D1 D1 D2 D3 P1 D1 D3 D2 P P P2 P Complement [inverse] QD1QD2 Substitute [Direct] PS3 Games for PS3 XBOX Changes in “D” [curve] 1. Non price change [“TIMER”] 2. Whole “D” curve shifts [There is a change in “QD” but it is not caused by a change in “price.” [QD-“singe price”; D-”all prices”] QD3 QD2 QD1

  50. 1."Change in Taste" [Direct] A decrease in taste forvideos results in a decrease in demand. An increase in taste for DVDs results in an increase in demand. D2 D1 D3 P QD3 QD1 QD2

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