Economics Notes: Economics Notes: DemandDemand11-12-1411-12-14

RankRank the following in order of importance the following in order of importance when determining your demand for a when determining your demand for a good.good.

a.a.The price of the goodThe price of the good

b.b.The brand the item isThe brand the item is

c.c.How new the good is (just hit the market)How new the good is (just hit the market)

d.d.How limited the good is (how many there How limited the good is (how many there are)are)

Back to ECONOMICS for the Back to ECONOMICS for the next few weeksnext few weeks

This unit will focus on two of the This unit will focus on two of the MAIN concepts of EconomicsMAIN concepts of Economics

SUPPLY and DEMANDSUPPLY and DEMAND

We will start today with We will start today with Demand

DemandDemand The desire to own something and the The desire to own something and the

ability to pay for itability to pay for it

Economists / Companies study Economists / Companies study demand to help set pricesdemand to help set prices

Law of DemandLaw of Demand As Prices Increase, Demand As Prices Increase, Demand

DecreasesDecreases As Prices Decrease, Demand As Prices Decrease, Demand

IncreasesIncreases

Law of Demand (example)Law of Demand (example)

Would you buy a slice of pizza for lunch Would you buy a slice of pizza for lunch today and how many would you buy if it today and how many would you buy if it cost…cost…

50 cents50 cents $1$1 $2.50$2.50 $5$5

Substitution EffectSubstitution Effect – an increase in the price of a good causes consumers to buy something else.

*an increase in the price of pizza leads to an increase in the buying of

tacos Income EffectIncome Effect – how a change in income

can change the amount we purchase.-rising prices make us feel poorer = can’t

afford to buy as much.-when prices decrease, we feel

wealthier and thus buy more

Market Demand ScheduleMarket Demand Schedule and and Demand CurveDemand Curve (Graph)(Graph)

Lists the quantity of a good that a Lists the quantity of a good that a person would buy at different pricesperson would buy at different prices

Get an Economics Book Get an Economics Book Turn to Turn to pg. 78pg. 78: : What is causing the What is causing the

price of the CD at Andrea’s store to price of the CD at Andrea’s store to decrease?decrease?

Turn to Turn to pg. 80pg. 80: : How does the How does the Income EffectIncome Effect impact consumption? impact consumption?

-What about the -What about the Substitution EffectSubstitution Effect??

Pg. 83 in bookPg. 83 in book

Answer 4,5,6 in notesAnswer 4,5,6 in notes Show me when doneShow me when done Be prepared to discuss at end of Be prepared to discuss at end of

classclass

Start of Class Start of Class (5-10 min.)(5-10 min.)

Complete worksheetComplete worksheet that reviews that reviews some of yesterday’s concepts on some of yesterday’s concepts on demanddemand

Remember demand (as well as supply) Remember demand (as well as supply) are huge concepts in Economicsare huge concepts in Economics

We must learn to really understand themWe must learn to really understand them

Notes: Notes: Shift in DemandShift in Demand 11-13-1411-13-14

Graph out the following Market Demand Graph out the following Market Demand ScheduleSchedule

Shifts in Demand: Shifts in Demand: How can the original How can the original demand line shift?demand line shift?

Demand Curve is accurate so long as the Demand Curve is accurate so long as the only thing that changes is the price.only thing that changes is the price.

Only 2 things on demand line: Price & Quantity

When we change other factors, we get a When we change other factors, we get a shift in the demand.shift in the demand.

Reading the shift…Reading the shift…

1. shift 1. shift rightright means an increase in means an increase in demand.demand.

2. shift 2. shift leftleft means a decrease in demand. means a decrease in demand.

What Causes the ShiftWhat Causes the Shift1.1. IncomeIncome – some goods are wanted more – some goods are wanted more

when you have a higher income (when you have a higher income (normal normal goodsgoods) other goods are wanted less when ) other goods are wanted less when you have a lower income (you have a lower income (inferior goodsinferior goods).).

2.2. Consumer ExpectationsConsumer Expectations – perception that – perception that there will be an increase in the there will be an increase in the futurefuture price price of good can lead to an increase in demand of good can lead to an increase in demand nownow

3.3. PopulationPopulation – an increase in population – an increase in population leads to an increase in demandleads to an increase in demand

4.4. Consumer Tastes & AdvertisingConsumer Tastes & Advertising

Related GoodsRelated GoodsDemand curve for one good can be affected Demand curve for one good can be affected

by the change in demand for another by the change in demand for another good.good.

ComplementsComplements – goods bought and used – goods bought and used togethertogether… peanut butter and jelly… peanut butter and jelly..*increase ski boot prices = decrease ski *increase ski boot prices = decrease ski salessales

SubstitutesSubstitutes - goods used in place of - goods used in place of each other… each other… pen and pencilpen and pencil*increase in pizza prices = increase in burger *increase in pizza prices = increase in burger salessales

Assignment: Worksheet

Notes: Notes: Elasticity of Demand Elasticity of Demand 11-14-1411-14-14

Explain the difference between Explain the difference between goods that are considered a goods that are considered a ““necessitynecessity” (gas) and goods ” (gas) and goods that are “that are “luxuriesluxuries” (steak).” (steak).

-How does price effect -How does price effect each?each?

Elasticity of DemandElasticity of Demand

How consumers react to a change in How consumers react to a change in price.price.

1.1. Inelastic GoodsInelastic Goods – goods that you keep – goods that you keep buying regardless of price (necessity).buying regardless of price (necessity).

2.2. Elastic GoodsElastic Goods – goods that you buy – goods that you buy more/less of due to price (luxuries).more/less of due to price (luxuries).

Elastic or Inelastic (examples)Elastic or Inelastic (examples)

GasGas ShrimpShrimp Clothes from Banana RepublicClothes from Banana Republic Medicine to heal a condition you Medicine to heal a condition you

havehave SteakSteak Electricity (RG&E)Electricity (RG&E)

Factors Affecting ElasticityFactors Affecting Elasticity1.1. Availability of Substitutes…medicine Availability of Substitutes…medicine

(generic?)(generic?)

2.2. Relative Importance – how important is the Relative Importance – how important is the goodgood

3.3. Necessity vs. Luxury…something you Necessity vs. Luxury…something you always buy vs. a good that you can reduce always buy vs. a good that you can reduce your demand for. (water vs. steak)your demand for. (water vs. steak)

Total Revenue = price of good Total Revenue = price of good xx quantity sold quantity sold..

(Money a company receives by selling its goods(Money a company receives by selling its goods))

Elastic RevenueElastic Revenue

Price Increase = Price Increase = Revenue DecreaseRevenue Decrease

Price Decrease = Price Decrease = Revenue IncreaseRevenue Increase

Inelastic RevenueInelastic Revenue

Price Increase = Price Increase = Revenue IncreaseRevenue Increase

Price Decrease = Price Decrease = Revenue DecreaseRevenue Decrease

Notes: Notes: SupplySupply11-18-1311-18-13

If you were running a company and If you were running a company and just found out that consumers were just found out that consumers were willing to pay twice as much for your willing to pay twice as much for your product…product…

What would you do with production? What would you do with production? Price?Price?

With Supply…With Supply…

You have to think like a business You have to think like a business owner (the supplier) owner (the supplier) not the not the consumer (buyer)consumer (buyer)

So things might seem opposite!!!So things might seem opposite!!!

Law Of SupplyLaw Of Supply As Price Increases, Supply As Price Increases, Supply

IncreasesIncreases

As Price Decreases, Supply As Price Decreases, Supply DecreasesDecreases

This is done to This is done to maximize profitmaximize profitHigher prices = more productionHigher prices = more production

This does not allow for the maximizing of profit.This does not allow for the maximizing of profit.

Take a minute to explain…Take a minute to explain…

How are the laws of supply How are the laws of supply and the laws of demand and the laws of demand different from each other?different from each other?

ExampleExampleYou want to start a business.You want to start a business.

Scenario A:Scenario A:Pizza prices continue to rise but the cost of Pizza prices continue to rise but the cost of making the pizza remains the same.making the pizza remains the same.

Is it a smart investment to open a pizza shop?Is it a smart investment to open a pizza shop?

Scenario B:Scenario B:The price of pizza falls over the last monthThe price of pizza falls over the last month

Is it a smart investment to open a pizza shop?Is it a smart investment to open a pizza shop?

Supply ScheduleSupply ScheduleChart/Table that lists how Chart/Table that lists how muchmuch of a good of a good

a supplier will offer at different prices.a supplier will offer at different prices.

Market Supply ScheduleMarket Supply Schedule – chart that lists – chart that lists how much of a good how much of a good allall suppliers will suppliers will offer at different prices.offer at different prices.

The Supply CurveThe Supply Curve Graphs out the data (points) on the Graphs out the data (points) on the

supply schedule - supply schedule - how does it look different how does it look different than the demand curve?than the demand curve?

Elasticity of SupplyElasticity of Supply

Supply is Supply is inelasticinelastic in in short runshort run, but , but elasticelastic in the in the long runlong run.. Orange growers can not increase Orange growers can not increase

production quickly when prices rise…production quickly when prices rise…have to buy more landhave to buy more land

Small increase in price will lead to a Small increase in price will lead to a large increase in the supply.large increase in the supply.

Work TimeWork Time

Complete sheet that reviews this Complete sheet that reviews this section in the book pgs. 101-106section in the book pgs. 101-106

Answer Answer (paper): (paper): Review Key TermsReview Key Terms11-19-1311-19-13

What is the Law of Demand?What is the Law of Demand? What is elasticity of demand? What is elasticity of demand?

Example?Example? What is inelasticity of demand? What is inelasticity of demand?

ExampleExample

What is the Law of Supply?What is the Law of Supply? What is elasticity of supply? Example?What is elasticity of supply? Example? What is inelasticity of supply? What is inelasticity of supply?

Example?Example?

Cost of ProductionCost of Production(materials and labor)(materials and labor)

Labor and OutputLabor and OutputMarginal Production of Labor (MPL) – Marginal Production of Labor (MPL) – change change in output from hiring one more in output from hiring one more workerworker

1. 1. Increasing Marginal ReturnIncreasing Marginal Return – MPL – MPL increases as # of workers increasesincreases as # of workers increases

2. 2. Decreasing Marginal Return Decreasing Marginal Return – MPL – MPL decreases as # of workers increasesdecreases as # of workers increases

3. 3. Negative Marginal Return Negative Marginal Return – decrease in – decrease in output as # of workers increasesoutput as # of workers increases

Law of Law of Diminishing Diminishing

Marginal ReturnsMarginal Returns

Production Production decreases as decreases as the number of the number of workers workers increasesincreases

Work: this room is now a factoryWork: this room is now a factoryPractice: Law of Diminishing ReturnsPractice: Law of Diminishing Returns

Land (table is the factory, or land)Land (table is the factory, or land) Labor (need a student volunteer)Labor (need a student volunteer) Materials (construction paper; 2 scissors; 2 Materials (construction paper; 2 scissors; 2

staplers)staplers) Recorder (someone to record the results)Recorder (someone to record the results)Goal: to make paper chain links w/ Goal: to make paper chain links w/

materialsmaterials

Question: Question: What is the right amount of What is the right amount of workers to hire to achieve maximum workers to hire to achieve maximum

production?production?

Negative Marginal Returns

Increasing MarginalReturns

Decreasing MarginalReturns

Notes: Notes: Cost of Production Cost of Production 11-24-1411-24-14

What begins to happen to production What begins to happen to production costs? Why does this happen? costs? Why does this happen?

TodayToday: We will focus on : We will focus on production costs to any production costs to any

businessbusiness

Production CostsProduction Costsa.a. Fixed Cost Fixed Cost – costs that do not change – costs that do not change

regardless of production. regardless of production.

b.b. Variable Cost Variable Cost – costs that increase or – costs that increase or decrease depending on quantity decrease depending on quantity produced.produced.

c.c. Total cost Total cost = Fixed Cost + Variable = Fixed Cost + Variable CostCost

d.d. Marginal Cost Marginal Cost – cost of producing one – cost of producing one more good. (Subtract previous total more good. (Subtract previous total cost from current total cost.)cost from current total cost.)

Selling OutputSelling Outputa.a. Marginal revenue – additional income from selling Marginal revenue – additional income from selling

one more unit of a good one more unit of a good Total Revenue = marginal revenue X quantity soldTotal Revenue = marginal revenue X quantity sold

b.b. Profit = Total Revenue – Total CostProfit = Total Revenue – Total Cost

c.c. Responding to Price Change – Increase in price leads Responding to Price Change – Increase in price leads to an increase in production to maximize profit…and to an increase in production to maximize profit…and visa versa visa versa

Shutdown DecisionShutdown DecisionAs market price decreases, factories stay open until

revenue is less than operating cost…then they shut down.

Profit decrease does not lead to a shutdown.

Work TimeWork Time

Pg. 122 (1 – 7) in Economics book.Pg. 122 (1 – 7) in Economics book.

Supply and Demand Question:Supply and Demand Question:

Are athletes paid too much?Are athletes paid too much? http://www.forbes.com/athletes/list/ http://sportsillustrated.cnn.com/specials/fortun

ate50-2013/ http://www.forbes.com/teams/jacksonville-jagu

ars/

Read pg. 121 in Economics book:Read pg. 121 in Economics book: Answer Questions 1 and 2 after readingAnswer Questions 1 and 2 after reading Class Debate on the question at topClass Debate on the question at top

Notes: Notes: Shifts in SupplyShifts in Supply11-25-1411-25-14

How can government How can government actually change your actually change your

supply?supply?Think about:Think about:How government influences the sale of How government influences the sale of cigarettes or alcoholcigarettes or alcoholHow government has helped farmers over How government has helped farmers over the yearsthe years

Supply can be shifted in 3 waysSupply can be shifted in 3 ways

Supply increases – supply Supply increases – supply curve shifts leftcurve shifts left

Supply decreases – supply Supply decreases – supply curve shifts rightcurve shifts right

Opposite direction of a Opposite direction of a demand shiftdemand shift

Changes in SupplyChanges in SupplyI. I. Input CostsInput Costsa. Effects of Rising costs – increase costs leads to decrease

supplyb. Technology- can lower costs and lead to an increase in

supply at all price levels.

II. II. Government InfluenceGovernment Influencea. Subsidies – a govt payment that supports a business or

industry (farms, developing industry…)b. Taxes – decrease supply with an excise tax (tax

production or good) - used to discourage the sale of harmful goods

c. Regulation – govt intervention that affects prices, quantity or quality of a good/service. (airlines, healthcare…)

III. III. Other InfluencesOther Influencesa. Number of suppliers – large number of suppliers

leads to a large amount of surplus

b. Future expectations of prices – high future prices leads to high supply in the future and low supply now (even though demand might be greatest now)

c. Global markets – change in another countries market can effect ours