Chapter 4 Notes Demand What is the quantity
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Chapter 4 Notes Demand
�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 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? �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
Create the graph using the demand schedule provided.
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, 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 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
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 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 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?
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 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 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
Substitutes
Substitutes
Substitutes
Compliments
Compliments
Compliments
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 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 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
Inelastic Demand
Unit Elastic Demand
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
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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 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
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