Anything
New?
Review Law of Demand
Worksheet
Current Reading
Quiz
Demand
Open Note
Homework
Review Powerpoint for next class (online)
Read “Current Reading Assignment” (online)

Review Law of Demand
LAW OF DEMAND
As Price Falls…
…Quantity Demanded Rises
As Price Rises…
…Quantity Demanded Falls
Price
Quantity
Demanded
“Quantity demanded” means willing AND
able to buy the good or service
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Law of Demand can be represented in a “Demand
Schedule”
A Demand Schedule is a table that relates Price (the
driver) to Quantity demanded (the responder)
P
$6
8
10
12
14
Qd
This is a
Demand
Schedule
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The Law of Demand can be
represented graphically
Price
Demand Curve
Quantity
Why does the demand curve go “high to low”?
Because when price is high, quantity demanded is low
And when price is low, quantity demanded is high.
Determinants of Demand
1.
2.
3.
4.
5.
Complimentary Goods – increase demand
Substitute Goods – decrease demand
Buyer Preferences
Expectations
Income – increase demand
(except “inferior goods”)
These affect our Demand Schedule and
move our Demand Curve
Price
Increase
Decrease
Quantity
Helpful hint…I = R, D = L
Current Reading
Demand
How does this effect the …
1.
2.
3.
Potato farmer
Tomato farmer
Owner of Carls Jr.
Elasticity of Demand
I say “elasticity”, you think “sensitivity to
price”.
Inelastic
P
Qd
P
Qd
Elastic
P
Qd
P
Qd
Law of Demand
still applies
Elasticity
Price
Demand Curve, inelastic product
Few substitutes
Inexpensive stuff
Needs
Example: Medicine
Demand Curve, elastic product
Many substitutes
Wants
Example: Gatorade
Quantity
Elasticity
Price
Demand Curve, inelastic product
Few substitutes
Inexpensive Stuff
Needs
Example: Medicine
Price
Decreases
Demand Curve, elastic product
Many substitutes
Wants
Example: Gatorade
Quantity
Law of Demand
still applies
Elasticity
Price
Demand Curve, inelastic product
Few substitutes
Need
Example: Medicine
Price
Increases
Demand Curve, elastic product
Many substitutes
Want
Example: Gatorade
Quantity
Law of Demand
still applies
THREE MINUTE BREAK
http://www.online-stopwatch.com/bombcountdown/
Measuring Elasticity
The Revenue Test
Revenue = Price x Quantity
The Revenue Test
Revenue = Price x Quantity
R = P x Q
The Revenue Test
If Price increases and Revenue increases,
then the product is inelastic.
If Price decreases and Revenue decreases,
then the product is inelastic.
The Revenue Test
If Price increases and Revenue increases,
then the product is inelastic.
If Price decreases and Revenue
decreases, then the product is inelastic.
A Direct Relationship!!!
The Revenue Test
If Price increases and Revenue increases,
then the product is inelastic.
If Price decreases and Revenue
decreases, then the product is inelastic.
WHY?
The Revenue Test
If Price increases and Revenue increases, then
the product is inelastic.
If Price decreases and Revenue decreases, then
the product is inelastic.
WHY? Because buyers are insensitive to the
price change and do not purchase
significantly less or more.
The Revenue Test …works
both ways
If Price decreases and Revenue increases, then
the product is elastic.
If Price increases and Revenue decreases, then
the product is elastic.
WHY? Because buyers are sensitive to the
price change and purchase significantly less
or more.
New Stuff
R = P x Q
If P increases but Q decreases only
slightly (buyers are insensitive to the
price change), then R increases.
New Stuff
R = P x Q
But if P increases and Q decreases a
lot (buyers are sensitive to the price
change), then R decreases.
How do businesses use this?
How do businesses use this?
Businesses want to position their
goods and services as inelastic.
WHY?
How do businesses use this?
Businesses want to position their
goods and services as inelastic.
WHY?
So businesses can raise prices and
increase revenue.
How do businesses use this?
Businesses want to position their goods and
services as inelastic.
HOW?
By creating products with …
Few substitutes
Considered a need
Examples?
Interactive
http://www.reffonomics.com/TRB/chapter
5/elastictytestyourknowledgea.swf
Worksheet

Quiz
 Law of Demand
 Open note
Revenue Test
If Will buys 10 bottles of Gatorade at
$1.00 but 8 bottles when the price is
$2.00, what can we concluded about
Will’s elasticity of demand? (is it elastic
or inelastic?)
Ways to improve your grade…
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Print Powerpoints before class
Review Power before class
Pay attention
Review Powerpoints / Notes right after class
Review material with me at lunch, break,
etc.
HOMEWORK