Transcript Chapter 4
BELL WORK
Grab folders, and new
papers
3 hole punch
Complete pgs.
33, 64-65
Copy chart on pg. 85
UNIT 2: HOW MARKETS WORK
Chapter 4: Demand
Chapter 5: Supply
Chapter 6: Prices
Chapter 7: Market Structure
CHAPTER 4 SECTION 1
“How do we decide what to buy?”
Objectives
Explain Law of Demand
How substitution/income effects influence decisions
Make demand schedule for individual/market
Understand demand graph using demand schedules
Key Terms:
http://www.pearsonsuccessnet.com/snpapp/iText/produc
ts/0-13-3698335/Flash/Ch04/Econ_OnlineLectureNotes_ch4_s1.swf
INTRODUCTION
How does the law of demand affect qty.
demanded?
Price changes always affect qty. demanded b/c people
buy less of a good when prices go up
By understanding demand schedules/curves you can
analyze how consumers react to changes in price.
DEMAND
Demand is the desire to own something w/ability
to pay for it
Law of Demand:
Price is down consumers buy more
Price is up, consumers buy less
Result of substitution/income effect
Together they explain why increases in price decreased
purchasing
SUBSTITUTION EFFECT
When a consumer
reacts to rise in price
of a good…
By…..
Consuming less of that
good and more of a
substitute good
Can also apply to drops
in pricing
INCOME EFFECT
Change in consumption that results when a price
increase causes real income to decline
Consumption measured in amount of good bought,
not price
Can make you feel “richer/poorer”
Causes a person spend more/same as before but qty.
is less.
Phone Apps: Example
Apps go up to $5 per, you may still buy an app or 2 but
now you buy less than when they were $0.99.
Vice-versa is true as well; you will buy more or feel
“wealthier” if they are less and your demand is higher
DEMAND SCHEDULES: FIGURE 4.2 PG.89
Explains how the price of an item affects the qty.
demanded of that item
To have DEMAND you have to be willing/able to
buy it at a certain price.
Schedule is a table that lists the qty a person will
purchase at various prices
INDIVIDUAL VS. MARKET SCHEDULES
Individual
Qty. demanded at
various prices by an
idividual
Predicts individual qty.
a person is willing to
buy at prices
Shows Law of Demand
Market
Qtys. demanded at
various prices by all
consumers
Predict total sales @
diff. prices
Shows Law of Demand
DEMAND GRAPH
Graphic representation of demand schedule
Vertical axis ALWAYS labeled lowest to highest
prices
Horizontal axis SHOULD be labeled lowest to highest
possible qty. demanded
ALL demand curves/schedules reflect Law of
Demand
Limits
Only accurate for one very specific set of conditions
Cannot predict changing market conditions
LESSON CLOSING
Review
W/Partner: Think of a good that fits the
schedules/curves we just talked about.
Create an individual/market schedule for that good
Pg. 90
Describe if it fits substitution or income effect more.
#11
Workbook
Complete pages 34-35, and 15
CHAPTER 4 SECTION 2
Bell Work: 1st 10 Minutes of class
Review
W/Partner: Think of a good that fits the
schedules/curves we just talked about.
Create an individual/market schedule for that good
Describe if it fits substitution or income effect more.
Pg. 90
#11
Workbook
Complete pages 34-35, and 15
CHAPTER 4 SECTION2
“Why does the demand curve shift?”
Objectives
Difference in change in qty. demanded and shift in
demand curve
Know factors that create changes in demand/cause
shift in curve
Example(s) of how a change in demand in good for
one good can affect demand for a related good
Key terms
http://www.pearsonsuccessnet.com/snpapp/iText/products/0-13369833-5/Flash/Ch04/Econ_OnlineLectureNotes_ch4_s2.swf
INTRODUCTION
Why does the demand curve shift?
Caused by more than just price increases/decreases
Other factors
Income
Consumer expectations
Population
Demographics
Consumer tastes/advertising
CHANGES IN DEMAND
Demand Schedule takes into account only price
change
Doesn’t consider effects of news reports or many
other factors that change daily
Demand curves are accurate only as long as price is
the only change that affects the consumers decision
Drop cp and allow other factors to change, curve is no
longer followed and a shift is produced
Or only as long as ceteris paribus is true
Shift= @ every price, consumers buy a different quantity
than before; shifts entire demand curve
Heat wave/Summer Examples
What are people going to want more then?
GRAPHING CHANGES IN DEMAND
WHEN FACTORS OTHER THAN PRICE CAUSE DEMAND TO FALL,
THE CURVE SHIFTS TO THE LEFT
Which graph would represent the price of a book going up $1?
CHANGE IN DEMAND FACTORS
Several factors can lead to a change in demand,
rather than simply change the qty. demanded
Income
Most items we purchase are “normal goods”
As income rises we buy more of them
Rise= shift to Right, Fall= shift to left
Consumer Expectations
Current demand is positively related to its expected
future price
If you expect price to rise, current demand will rise
Vice-versa w/ price drop, wait till its lower
CHANGE IN DEMAND FACTORS
Population
Size of population will also affect the demand for
most products
Can have a particularly strong effect on certain goods
Computers, technology, BABY BOOM?
Demographics
Race, age, gender, and occupation of a population
Help businesses classify potential consumers
Influence packaging, pricing, and advertising
Example: Hispanics now largest minority, more advertising
Advertising/Consumer Tastes
Can play important role in trends of purchasing
Spend $$ hoping to influence buyers
COMPLEMENTS AND SUBSTITUTES
Demand curve for one good can also shift b/c
response to change in demand of another good
Two types of related goods that interact this way
Complements: Goods that are bought/used together
Substitutes: Goods used in place of one another
LESSON CLOSING
Group Read Case-Study of Nebraska: pg 93
Watch Case Study:
Fill out 2 Charts from Section 1 & 2
Finish 34-36
Start on activities on pg. 15, 23 in workbooks
Use labtops to log on to pearson success net and
look at resources for Chapter 4 1 and 2
Action Graphs, Economics and you, visual glossary
CHAPTER 4 SECTION 3
Complete Two Bubble charts from Section 1 and 2
Copy down Concept Chart for S.3
Pre-Read Section 3:
CHAPTER 4 SECTION 3
“What factors affect elasticity of Demand?”
Objectives
How to calculate elasticity of demand
Factors that effect elasticity
How firms use elasticity and revenue to make decisions
Key Terms
http://www.pearsonsuccessnet.com/snpapp/iText/products
/0-13-3698335/Flash/Ch04/Econ_OnlineLectureNotes_ch4_s3.swf
INTRODUCTION
What factors affect elasticity of demand?
Economists have figures a way to calculate how
consumers will react to changes in price
Original price and how much you want a particular
good are both factors that determine your demand for
a product
CONSUMER RESPONSE
Elasticity of demand is the way that consumers
respond to price changes
It measures how drastically buyers will cut back or
increase their demand for a good as price rises/falls
Your demand for a good that you will keep buying despite a
price change is inelastic
If you buy much less of a good after a small price increase,
your demand for the good is elastic
ELASTIC DEMAND
Elastic Demand comes from one or more of these
factors
Availability of substitute goods
Limited budget that doesn’t allow for price changes
Perception of good as a luxury item
Calculating Elasticity of Demand
% change in qty demanded of good divided by %
change in price of good
Law of demand implies that result will always be
negative
Look at figure 4.5; answer 2 ?s
MEASURING ELASTICITY
If elasticity is less
than 1 it is
INELASTIC
If elasticity is greater
than 1 it is ELASTIC
If it is equal it is
unitary elastic
FACTORS AFFECTING ELASTICITY
Availability of substitutes
Few substitutes
Price increase may not result in less demand
Can make good inelastic
GAS!!
Wide variety of substitutes
Price increase can result in less demand as substitutes are
used.
Good is Elastic
Brand-names, food goods, designer clothing, etc.
OTHER FACTORS FOR ELASTICITY
Relative importance
How much of your budget you are willing to spend on
a good
Necessities v. Luxuries
Whether or not good is considered a necessity or
luxury affects elasticity of demand for good
Some people deem their phone a necessity now, others a
luxury
Change over time
Can’t always react quickly to price increase
Often caused by time to find substitutes
Demand is then INELASTIC short-term but eventually
ELASTIC
Ex.: Gas guzzling SUVs are now being replaced.
HOW FIRMS USE ELASTICITY/REVENUE
Elasticity=important to economics b/c helps
measure how consumers respond to changes for
different product
Elasticity of demand determines how a change in
price will affect income/revenue of a firm (figure 4.6)
Law of demand states that an increase in price
will decrease qty demanded
Elastic demand; you can raise the price by __% and
demand could decrease by larger %= reduced revenue
Vice-versa: Can decrease price by __% and demand
could increase by larger %= increased revenue
Look/Answer 4.6 on 103
ELASTICITY AND REVENUE CONT’D
Demand =Inelastic
Consumers don’t respond much to price change
EX: if price increases, qty demand will decrease but
less than price increase
Results in higher revenues (GAS)
Elasticity of Demand determines effect of a price
change on total revenue
Why will revenue fall if firm raises price of elastic
good?
Demand decreases by a larger % than price increases,
decrease in revenue
What happens to revenue when price decrease, but
demand is inelastic?
Decreases
LESSON CLOSING
Test Friday
Project Day tomorrow
Study-Guide Day Tomorrow/Thursday
Closing options
Work on projects w/partner
Workbook work due on Friday. w/ test
33-40, 15, 23, 28