Chapter 4 Notes Demand What is the quantity

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Chapter 4 Notes Demand

Chapter 4 Notes Demand

�What is the quantity demanded and price at points A, B? �Based on the

�What is the quantity demanded and price at points A, B? �Based on the graph, what is the relationship between

What is Demand? �Demand is the desire, ability, and willingness to buy a product

What is Demand? �Demand is the desire, ability, and willingness to buy a product or service. �Why is understanding Demand necessary for a companies success? �Companies need to know what people need or want to buy �How much consumers would pay for a product �For whom the advertising should be targeted---who are the customers.

What is the relationship between the price of an item and the quantity demanded?

What is the relationship between the price of an item and the quantity demanded? �Demand depends on two variables: the price of a product and the quantity available at a given point in time. �In general, when the price of a product goes down, people are willing to buy, or demand, more of it. When the price goes up, they are willing to buy less. �A demand curve shows the quantity of a product demanded at each price that might prevail in the market.

Fill in the chart Decrease Increases

Fill in the chart Decrease Increases

Create the graph using the demand schedule provided.

Create the graph using the demand schedule provided.

Answer the question �How do people react to a change in the price of

Answer the question �How do people react to a change in the price of an item? How does this illustrate the concept of demand? �People usually buy more if the price decreases or buy less if it increases. Demand is the desire, ability, and willingness to buy a product; all of these tend to increase as the price decreases. However, there are exceptions.

Review �What 3 characteristics must be satisfied for demand to be present? �Desire, Ability,

Review �What 3 characteristics must be satisfied for demand to be present? �Desire, Ability, and willingness to buy a product �What is the table called that is used to create a demand curve? �Demand Schedule �Price and demand have a ______ relationship? �Inverse

Why do economists think of demand as a “law”? �The Law of Demand states

Why do economists think of demand as a “law”? �The Law of Demand states that the quantity demanded of a product varies inversely with its price. �The Law of Demand is called a “law” because it has proven true after repeated studies and tests, �A market demand curve shows the quantities of a product demanded by everyone

Individual and Market Demand Curves

Individual and Market Demand Curves

How does the principle of diminishing marginal utility explain the price we would be

How does the principle of diminishing marginal utility explain the price we would be willing to pay for another unit of a good or service? �Marginal utility is the extra satisfaction gained from one more unit of good �Utility declines with each additional unit �Because of diminishing marginal utility, 2 nd, 3 rd, and 4 th unit is not worth as much as the 1 st.

ESSENTIAL QUESTION: What are the causes of a change in demand? �What factors in

ESSENTIAL QUESTION: What are the causes of a change in demand? �What factors in your own life have an effect of you interest in acquiring a particular product?

What is the effect of a change in price on quantity demanded? �A change

What is the effect of a change in price on quantity demanded? �A change in the quantity demanded is represented on a demand curve as movement along the curve. �The income effect: a change in quantity demanded because of a change in price that makes consumers feel richer or poorer. �Substitution effect: consumers substitute an alternative, less expensive product, reducing demand for the original �Complements: products that increase the use of other products, increasing its complementary product

Which direction does the curve move when quantity decreases? Increase?

Which direction does the curve move when quantity decreases? Increase?

Does the curve move left or right? �Consumer income decreases. �Minimum wage increases. �Consumer

Does the curve move left or right? �Consumer income decreases. �Minimum wage increases. �Consumer lose interest in a product �An ad campaign fails to secure new customers �The price of a substitute product decreases �A new substitute product reaches the market �More consumers purchase a steady number of complementary products �Consumers anticipate new technology entering the market �Consumers fear a future shortage of a product.

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Review �Elaborate on why the substitution effect decreases the demand for some products. �How

Review �Elaborate on why the substitution effect decreases the demand for some products. �How would you use the effect of compliments to explain an increase in demand for hot dog buns?

Get into a group with 3 people �Come up with as many examples of

Get into a group with 3 people �Come up with as many examples of substitutes as possible for each item. �We will play a game just like Categories. �When a team is knocked out the game starts over. �Winner gets candy.

Brainstorm substitutes for the tops 3 and compliments for the bottom 3

Brainstorm substitutes for the tops 3 and compliments for the bottom 3

Substitutes

Substitutes

Substitutes

Substitutes

Substitutes

Substitutes

Compliments

Compliments

Compliments

Compliments

Compliments

Compliments

Learning Targets �I can explain the causes of a change in demand. �I will

Learning Targets �I can explain the causes of a change in demand. �I will do this by summarizing the three cases of demand elasticity and applying the total expenditures test to determine the elasticity of a product.

How do we measure three cases of demand elasticity? �Demand elasticity is the extent

How do we measure three cases of demand elasticity? �Demand elasticity is the extent to which a change in price causes a change in the quantity demanded. �Its elastic when a change in price causes a larger change in quantity demanded. �Its inelastic when a change in price causes a smaller change in quantity demanded. �Its unit elastic when a change in price causes a proportional change in quantity demanded.

How does the total expenditures test help determine demand elasticity? �We will look at

How does the total expenditures test help determine demand elasticity? �We will look at three different methods to determine the elasticity of a product �The total expenditures test compares the direction of a price change to the direction of change in total revenue or total expenditures. �Rise over run �Vertical vs horizontal

Elastic Demand

Elastic Demand

Inelastic Demand

Inelastic Demand

Unit Elastic Demand

Unit Elastic Demand

Ways to determine if a product is elastic or inelastic. �Demand is usually inelastic

Ways to determine if a product is elastic or inelastic. �Demand is usually inelastic if consumers cannot postpone the purchase of a product. �When acceptable substitutes are available for a product, demand becomes more elastic. �Demand for purchases that require a large portion of income is generally more elastic than the demand for purchases that require a smaller amount of income

Elastic vs Inelastic YES YES NO NO NO YES YES NO YES ELASTIC INELASTIC

Elastic vs Inelastic YES YES NO NO NO YES YES NO YES ELASTIC INELASTIC

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Use Total Expenditure Method to determine what type of elasticity exists. QUANTITY DEMANDED 6

Use Total Expenditure Method to determine what type of elasticity exists. QUANTITY DEMANDED 6 5 A 4 B 3 QUANTITY DEMANDED 2 1 0 0 1 2 3 4

Recap and Clean up �What is the only factor that truly changes the quantity

Recap and Clean up �What is the only factor that truly changes the quantity of demand? �Price �What 3 things from last class can influence a change in demand? �Income Effect, Substitution Effect, and Compliments �What measures the extent of change in demand? �Elasticity �What are three types of elasticity? �Elastic, Inelastic, and Unit Elastic �What are three ways that we can determine elasticity? �Total Expenditure, Rise over Run, and Vertical vs Horizontal