Demand I. Definition of Demand A.The desire, willingness, and ability to purchase a particular product at a particular price II. Aggregate Demand A.Total quantity of products (goods & services) demanded by all consumers at different price levels in the market B.also known as market demand III. Demand Schedule A.a table depicting alternative quantities of a good/service demanded at different prices B.Example: Demand Schedule PQD $ IV. Demand Curve: A.a graphic representation of the demand schedule, or of the Law of Demand P Q $5 10 $15 4 D Results in movement along the demand curve From one point on the curve To the new point V. Law of Demand: A.There is an inverse ( ) relationship between price and the quantities demanded at those prices B.Or, as price increases, the quantity demanded decreases and vice versa C.This causes movement along the demand curve as individuals buy less 3 5 $7 P Q D VI. Reasons for the Law of Demand A.Law of diminishing marginal utility: decreasing satisfaction or usefulness as additional units of a product are acquired. 1.Utility: the benefit or satisfaction/usefulness of a product. 2.Marginal: added or extra. 3.Marginal utility: the added satisfaction from acquiring/using one more unit of a product. i.Desert story 4.When price exceeds marginal utility, consumers stop buying. B.As prices increase, so does opportunity cost. C.Income Effect: a drop in price gives buyers more real income (purchasing power) even though actual income remains unchanged. We feel richer, so buy more. D.Substitution Effect: change in price of a good makes it relatively higher or lower than the prices of other goods that act as substitutes. A higher price means that a good is more expensive relative to other similar goods, so we buy the other goods. A lower price means we buy less of the relatively more expensive other products and more of the relatively cheaper good. A higher price means that a good is more expensive relative to other similar goods, so we buy the other goods. A lower price means we buy less of the relatively more expensive other products and more of the relatively cheaper good. Prompt Describe the differences between the income effect and the substitution effect What are the above effects on demand? VII. Two ways demand is affected with two different results A change in price causing a change in the quantities demanded, resulting in movement along the demand curve A change in other factors related to demand, causing a change or shift in demand, resulting in movement of the demand curve itself to the right or left P Q D1 $10 D2 1525 VIII.A Shift in the demand curve itself indicates a change in demand so that the curve itself shifts to the right or left due to factors other than price of the product A.Change in consumer income B.Change in consumer preference/taste = Less demand for everything people buy + C.Change in related prices 1.Substitutes (products bought in place of other products) $ P Q D $1 35 P Q D1 $ D2 2. Complements (2 or more products bought and used together) $1 $2 $ D1 5 D2 Prompt 1. On your prompt paper, list any product (ie, shoes, ice cream, DVD, etc.) 2. List two substitutes and two compliments for the product listed 3. Explain how an increase in the price of each would affect demand for the product Complement or Substitute? Paper plates and plastic cups Flashlight and batteries Hamburger and burrito Burrito and hot sauce Cat and dog Candy and chips Sugar and cake Taxi and subway Printer goes on sale Demand increases Flashlight price increases Demand for batteries? Buy one get one half off sale Demand for Taco Bell burritos? Demand decreases Price increases Demand will decrease D.Change in buyers expectations 1. Expect future price increase, demand more now 2. Expect future price to decrease, demand less now 3. Expect future conditions to change: if expect cars in near future to run on water, demand decreases now Demand for plasma TVs? A week before Black Friday? Demand falls Until Friday E.Change in number of buyers/population (NOT number of customers!) When Demand will decrease because fewer people means less demand Activities Changes in Demand w/s Demand Curve Contest! Class Question: If, as an entrepreneur, you wanted to increase profits, would you raise prices for a higher profit per item sold? Or should you lower prices to sell more and make up in volume what you lose in per-item-sold profits? How do you know which would be more profitable? X. Elasticity of Demand (or price elasticity of demand) A.The extent to which a change in price causes a change in the quantity demanded B.In other words, elasticity answers the question: How much does the quantity demanded change when price is increased? Why is this an important question to entrepreneurs? 1. Inelastic demand: When price changes, there is a relatively (or proportionally) smaller change in the QD. (The rubber band of demand doesnt stretch much when price changes) P Q D $ Note vertical slant of the slope 2. Elastic Demand: When price changes, there is a relatively (or proportionally) larger change in the QD. (The rubber band of price is very stretchy) $ P Q D Note the horizontal slant of the slope 3. Unit Elastic Demand: A change in price causes a proportionally equal change in QD. (Demand is just as stretchy as price) P Q D $10 $ Note the 45 degree angle Task Draw and label the following demand curves with the correct elasticity of demand: 1. P Q D $1 $ P Q D 5 $ D Q 5 $ P XI.Two ways to determine Elasticity A. Determinants of Elasticity (suggestive) B. Calculating total revenue/expenditure (determinative) XII. Determinants of Demand Elasticity A.Urgency 1. If urgent, likely inelastic B.Availability of adequate substitutes 1. If adequate subs, likely elastic: Trumps all others C.Proportion of income 1. If purchase requires large proportion, likely elastic Demand Elasticity Chart Urgent? Yes No InelasticElastic Adequate Subs? Yes No ElasticInelastic Large Portion of Income? Yes No ElasticInelastic Question: What is the price elasticity of demand (unit, elastic, or inelastic?) for CDs? Draw a demand curve indicating its elasticity, and and explain why Is the purchase urgent? Does the purchase require a large proportion of income? Are there adequate substitutes available? Elastic Demand Challenge #1: Rule of Thumb For a W$, be the first to describe a general rule from the list below by creating demand curves indicating likely elasticities for each of the following: Food Meat Beef Hamburger Big Mac The Rule: As you move from general to specific, price elasticity of demand goes from highly inelastic to increasingly elastic Food Meat Beef Hamburger Big Mac XIII. Calculating Total Revenue or Total Expenditure A.Total Revenue (TR): The amount a business receives in payments spent on a product at a particular price. 1. TR looks at the amount received B.Total Expenditure (TE): The amount consumers spend on a product at a particular price. 1. TE looks at the amount spent C. P x Q = TR/TE, so that: 1.If price and TE move in opposite directions = Elastic and prices should NOT be raised 1. P TE =Elastic $5 $6 510 P Q AD $50 $30 Price Total Revenue If price decreased from $6 to $5 Total Expenditure would have increased from $30 to $50 Prompt: Assume the product you sell has elastic demand conditions. Should you raise or lower prices? Why? D.If when prices increase, TE increases also = Inelastic, raise prices! 1. P TE =Inelastic P AD Q 23 $5 $10 $15 $20 Note that when price falls from $10 to $5, TR falls also E.If no change, doesnt matter = unit elastic 1. P TE=No Change=Unit Elastic P Q AD $5 $ TR $100 TR $100 So that when price changes, moving up or down There is no change in total revenue Challenge #2 For a W$, be the first to RAISE YOUR HAND and answer correctly the questions below: What is the elasticity of demand? How did you determine it? $ 8 $ P Q D Questions 1. Create a DC that shows what happens to the demand for tacos when the price of burritos increases 2. Whats the demand elasticity of a college education? Why? 7.Label the Curve below: Recreate this demand curve on your paper, noting the vertical angle of the slope Plot two prices and two quantities demanded at those prices Calculate total revenue Indicate its elasticity of demand 8. Name the elasticity of demand for the following: 1.Price increased 10% causing a 20% decrease in the quantities demanded 2.Create a demand curve indicating its elasticity Answer to #8: P Q 10% Change In price Causing a relatively larger change in the quantities demanded (20%) Therefore Elastic Demand Challenge Bills Barbequed Bat Barn raised the price of its Barbequed Bat Bowls from $1.50 to $3.00. The quantity of Bat Bowls demanded dropped from 150 Bat Bowls a day to 100 a day. What elasticity of demand were Bills Bat Bowls and how can you tell? Should Bill have raised the prices? Why? Create a demand curve that indicates your conclusions