Economics WarmUp Vocabulary pg 102 Law of Demand

Economics Warm-Up Vocabulary (pg. 102): Law of Demand, Market Demand curve Assessment Questions (Pg. 106): #3

List the last 3 things you bought (good or service) and how much you paid for them. Write down two things you took into account before making the purchase.

Demand is the desire to own something and the ability to pay for it. • Why do we study demand before supply?

A demand curve is a graphic representation of a demand schedule.

Limits of a Demand Curve • Demand curves are only accurate for specific market conditions • They only take into account price

Behaviors that Affect the Law of Demand • Substitution Effect: when consumers react to an increase in a good’s price by consuming less of that good and more of other goods – The price of pizza rises, so your order less pizza and more Chinese takeout.

Behaviors that Affect the Law of Demand • Income Effect: the change in consumption due to a change in income – The price of pizza rises, so you order out less.

Law of Demand?

A demand schedule is a table that lists the quantity of good that a person will purchase at a certain price.

A market demand schedule shows how much consumers in a certain market will buy.

Ceteris Paribus • “All other things held constant” • Demand curves are accurate as long as there are no other changes than PRICE • Price causes movement ALONG the demand curve • Other factors cause the demand curve to SHIFT

A shift in a demand curve is not the same as moving along a demand curve.

Normal v. Inferior Goods • Most goods are normal goods- goods we demand more of when our income increases – Ex. new cars, HDTV • Inferior goods are those you would buy in smaller quantities if income increased – Ex. generic products, used cars

What causes a shift? Income Consumer Expectations • Inferior goods are purchased when income drops • Expectations of higher or lower prices in the future can cause demand to increase or decrease

What causes a shift? Population Consumer Taste/Advertising • Rise in population creates higher demand for housing, food, utilities, etc. • Advertising & publicity often play a role in creating fads & social trends

Complements v. Substitutes • Complements are two goods that are bought and used together – Examples? • Substitutes are goods used in place of one another – Examples?

We can sum up these factors as: • • • T R I P E Tastes & preferences Related goods Income Population Expected pricing Complete demand scenarios worksheet on your own.

Elasticity of demand measures a consumers’ sensitivity to changes in price. Dictates how buyers will cut back or increase demand for a good when the price changes

Understanding elasticity can help business owners decide how much to charge.

Inelasticity- demand will stay the same regardless of price

Elastic- demand for a good is very sensitive to price changes

Elastic or inelastic? How do you know?

Elasticity of Demand Formula To find % change: Original number – new number _____________ Original number X 100 (Drop any negatives. )

Practice: Percent Change • Consumers decrease demand from 50 units to 35 units • Consumers increase demand from 100 units to 120 units • Price increases from $1. 50 to $2. 75 • Price decreases from $10. 00 to $4. 00

Elasticity & the Law of Demand • The LOD implies that elasticity will always be a positive number, so the negative sign in dropped.

The elasticity of demand for a good varies at different price levels. • Demand can be highly elastic at one price point and inelastic at another • If the price a magazine rises 50%, from 20 cents to 30 cents, most people would still buy it. • If the same magazine rose 50% from $4. 00 to $6. 00, demand would be more elastic.

Values of Elasticity • If elasticity of demand is less than 1 - inelastic • If EOD is greater than 1 - elastic • If elasticity equals 1, unitary elastic

Unitary Demand • The percentage change in quantity demanded is exactly equal to the percentage change in price • Assume the elasticity of demand for a magazine at $2 is unitary. When the price rises by 50% to $3, the store will sell exactly half as many as it did before.

Example- Pizza Slices • The price of pizza rises from $1. 00 to $1. 50 – What percent increase is this? • If the price rises, demand falls from 4 to 3 slices. – What percent decrease is this? • What is the elasticity of demand? • Is demand for pizza elastic or inelastic? • What does this mean? Price $. 50 $1. 00 $1. 50 $2. 00 $2. 50 $3. 00 Quantity Demanded 5 4 3 2 1 0

Check your answer: • There is a 50% price increase • There is a 25% decrease in demand • EOD is. 5 • This is inelastic- price increase has a relatively small affect on the number of slices purchased

In your notes… How elastic are you? • Make a list of 3 non-essential goods/services you buy on a regular basis. Write down at what price you would STOP purchasing the item because you think it’s too expensive. • Make a list of 3 products you would buy no matter what the price.

Factors that Affect Elasticity • What is essential to me? • What goods must I have, even if the price rises greatly?

Looking at your list: • The products you would buy no matter what the cost are more inelastic. – They are necessities to you. – There are no good substitutes. • The products that you would stop buying at a certain point are more elastic. – They are not necessities. – There may be substitute goods.

Inelasticity means that your demand will stay the same regardless of price Elastic means that your demand for a good is very sensitive to price changes

Next Up: Factors that Affect Elasticity

Availability of Substitutes • Less substitutes=less elastic • If there are few substitutes, you still might purchase a good/service, even if the price rises – Concert tickets – Life-saving medicine/treatments – Certain foods

Relative Importance • Is it worth it? • How much of your budget can you spend on a particular good/service? • If you already spend a large portion of your budget on a certain good, even a small price increase can change your spending.

Necessities v. Luxuries • Necessities are goods people always buy, even if the price increases • Inelastic • Will people still buy milk, bread, etc. if the price goes up? • Luxuries: the quantity consumed can easily be adjusted because they are not needed • Luxuries are elastic • If the price of steak goes up drastically, many households would cut back or use a substitute item.

Change Over Time • It is difficult to react quickly to price increases, so at first, demand may be more inelastic. • Demand can become elastic over time because people may find substitutes

Increases in the price of gas can encourage people to change habits over time. Perhaps they begin taking public transit, re-locate to live closer to work, or purchase a fuel-efficient car.

Let’s look at salt. • A 2 lb canister of salt costs about $1. • If the price doubled, people would still buy just as much salt because: – It’s not a big part of their budget. – There are no close substitutes. – It’s seen as a necessity by many.

And now ground beef. • Ground beef currently averages about $4 a pound. • If the price doubled to $8, people would likely: – Cut back on beef of stop eating it – Substitute chicken, pork, or turkey if the price was better

Elasticity & Revenue • When goods are more elastic, businesses can actually lose revenue by raising their prices. • Understanding elasticity can help them determine how to price items to maximize demand, therefore, maximizing profit

Would the coffee shop make more money by charging $3 or $4?

Practice EOD • Suppose the price of a medium coffee at Panera decreases from $4 to $3 and the quantity demanded increases from 10 to 20. – What is the EOD? – Is this elastic or inelastic?

Answer • Price decrease is 25% • Quantity increase is 100% • EOD is 4, which is elastic. A small decrease in price caused a large increase in demand.