Bell Ringer How much would you be willing to pay for the following items? 1.A gallon of gas 2.Big Mac 3.Samsung Galaxy S6 4.Car Chapter 4, Section 1 Bell Ringer How much would you be willing to pay for the following items? 1. A gallon of gas - $1.60 2. Big Mac - $3.99 3. Samsung Galaxy S6 - $299 4. Honda Accord - $24,000 Chapter 4, Section 1 Objectives 1. 2. Chapter 4, Section 1 Explain the law of demand. Interpret and create a demand curve. The Law of Demand Demand is the desire to own something and the ability to pay for it. The law of demand states that when a good’s price is lower, consumers will buy more of it. When the price is higher, consumers will buy less of it. Chapter 4, Section 1 The Law of Demand Law of Demand D P D INVERSE RELATIONSHIP Chapter 4, Section 1 P The Law of Demand How does the law of demand affect the quantity demanded? Price changes always affect the quantity demanded because people buy less of a good when the price goes up. By analyzing demand schedules and demand curves, you can see how consumers react to changes in price. Chapter 4, Section 1 The Demand Curve A demand curve is a graphic representation of a demand schedule. The vertical axis is always price. Lowest prices at the bottom and the highest prices at the top. The horizontal axis is quantity demanded. Lowest quantity at the left and the highest quantity demanded on the right. Chapter 4, Section 1 Chapter 4, Section 1 Price of Energy Drink Quantity Demanded/Day Price of “Supplements” Quantity Demanded/Day $1.00 35 $10.00 70 $1.50 30 $15.00 60 $2.00 25 $20.00 50 $2.50 20 $25.00 40 $3.00 15 $30.00 30 $3.50 10 $35.00 20 $4.00 5 $40.00 10 Chapter 4, Section 1 Mr. Lange’s One Stop Nutrition Shop Textbook Assignment Working by yourself or with a partner, answer questions 2, 3, 9, and 11 on page 90. We will be discussing the answers together as a class. Chapter 4, Section 1 Bell Ringer Why do businesses put items on sale? How is a sale like predicting the future for a business owner? Chapter 4, Section 1 Objectives 1. 2. Describe how prices influence quantity demanded. Explain how certain events shift the demand curve, including the use of credit. Chapter 4, Section 1 Candy Bar Auction Suggested Price Chapter 4, Section 1 Qd Candy Bar Demand Curve Chapter 4, Section 1 Questions Did anyone choose to not bid on the candy bar? Why not? What goes through your mind before a bid is made? Why does a higher price reduce the number of items demanded? Chapter 4, Section 1 Candy Bar Auction Suggested Price Chapter 4, Section 1 Qd Candy Bar Shift in Demand Chapter 4, Section 1 Question How did your buying decision change after you had the I.O.U. option? Chapter 4, Section 1 Closure Quiz a. b. c. d. The law of demand states: There is a direct relationship between price and quantity demanded. The graph of a demand curve is an upward sloping line. People usually buy less goods and services when their prices rise. People’s behavior in the marketplace is unpredictable Chapter 4, Section 1 Closure Quiz a. b. c. d. When the price of an item changes, people will usually: Determine how the change influences how can spend their money. Disregard most small changes in price. Assume the item will be on sale later and buy less. None of the above. Chapter 4, Section 1 Closure Quiz a. b. c. d. Which of the following will typically NOT affect the demand of an item? Future expectations Number of buyers Quantity available Higher income Chapter 4, Section 1 What happens to the demand… 1. 2. 3. 4. 5. for ice cream when the price of ice cream drops? for cars when people get a tax refund? for umbrellas after the first monsoon? for hot dogs when the price of hot dog buns rises? for gasoline today when people expect prices to fall tomorrow? Chapter 4, Section 1 Bell Ringer Have you ever had to substitute a good or service you normally buy with something else? What was the good/service? Why did you have to buy a substitute? Chapter 4, Section 1 Objectives 1. 2. 3. Define determinants of demand. Explain how these determinants affect demand. Give an example of how a change in demand for one good can affect demand for a related good. Chapter 4, Section 1 Introduction A demand curve is accurate only as long as the ceteris paribus assumption—that all other things are held constant—is true. When we drop the ceteris paribus rule and allow other factors to change, we no longer move along the demand curve. Instead, the entire demand curve shifts. Chapter 4, Section 1 Determinants of Demand Preferences Number of consumers Income Effect Normal goods Inferior goods Substitution Effect Chapter 4, Section 1 Preferences As people prefer to buy something, what happens to the demand for that item? As people stop preferring to buy something, what happens to the demand for that item? Chapter 4, Section 1 Number of Consumers The number of consumers can change for a multitude of reasons (population changes, weather, road conditions, etc.) If the number of consumers increases, the demand for the good/service increases (and vice versa). Chapter 4, Section 1 Number of Consumers EXAMPLE Samsung can sell 12 million phones at a price of $300 per phone If the number of consumers increases by two million, then the company can sell 14 million phones at a price of $300/phone This changes the demand curve Chapter 4, Section 1 Consumer Expectations The current demand for a good is directly related to its expected future price. If you expect the price to rise, your current demand will rise, which means you will buy the good sooner. If you expect the price to drop, your current demand will fall, and you will wait for the lower price. Chapter 4, Section 1 The Substitution Effect The substitution effect takes place when a consumer reacts to a rise in the price of one good by consuming less of that good and more of a substitute good. Chapter 4, Section 1 Chapter 4, Section 1 Chapter 4, Section 1 Complements and Substitutes The demand curve for one good can also shift in response to a change in demand for another good. Complements are two goods that are bought and used together. Substitutes are goods that are used in place of one another. Chapter 4, Section 1 Chapter 4, Section 1 Normal vs. Inferior Goods Normal goods goods/services for which demand increases when real income increases Inferior goods goods/services for which demand increases when real income decreases VS. Chapter 4, Section 1 Chapter 4, Section 1 The Income Effect When the price of something goes up, you feel poorer. When the price of something goes down, you feel wealthier. Chapter 4, Section 1 Pop Quiz 1. What does it mean when you have demand for a good or service? Chapter 4, Section 1 Pop Quiz 2. a. People will buy more of a good when its price falls and less when its price rises, according to the ____________________ b. This is an example of an __________ relationship Chapter 4, Section 1 Pop Quiz 3. True or False: When the price of a good/service changes, so does the demand for that item. Chapter 4, Section 1 Pop Quiz 4. a. When the price of gasoline goes up, the demand for new automobiles goes up/down. b. This is because gasoline and automobiles are ____________ of each other. Chapter 4, Section 1 Pop Quiz 5. a. When the price of Nutella goes up, the demand for peanut butter goes up/down. b. This is because Nutella and peanut butter are _____________ for each other. Chapter 4, Section 1 Closure 5 COMPLEMENTS 5 SUBSTITUTES Chapter 4, Section 1 Bell Ringer How many advertisements do you think the average American sees in a day? Have you seen an ad so far today? What was it for? Where did you see it? Chapter 4, Section 1 Bell Ringer How many advertisements do you think the average American sees in a day? Answer: 5,000 – 10,000 Chapter 4, Section 1 Source Demographics Demographics are the characteristics of populations, such as age, race, gender, income, and education level. Businesses use this data to classify potential customers. Demographics also have a strong influence on packaging, pricing, and advertising. What would be your demographic information? Chapter 4, Section 1 Demographics Mr. Lange’s demographic information: 33 years old $40,000+ White Master’s degree Male Heterosexual Divorced Politic independent Father Rents home Teacher Religion - Unaffiliated Chapter 4, Section 1 Advertising Advertising is a factor that shifts the demand curve because it plays an important role in many trends. Companies spend much of their overall budget on advertising in the hope that it will increase the demand for the goods they sell. Chapter 4, Section 1 In 2013, Coca-Cola spent approximately $3.3 billion on advertising worldwide. What did this buy them? 3.1% of all beverages consumed around the world (not including water) are Coca-Cola products The Coca-Cola logo is recognized by 94% of the world's population Coca-Cola is the second-most understood term in the world, behind “okay.” Chapter 4, Section 1 Source “If Soda Commercials Were Honest” Chapter 4, Section 1 Advertising Why is the effect of advertising on overall demand unpredictable? Chapter 4, Section 1 Advertising Top viewed commercial from Super Bowl 2016: Mountain Dew – “Puppymonkeybaby” https://www.youtube.com/watch?v=ql7uY36-LwA Who is the target population/demographic? What symbols/imagery help show this? Chapter 4, Section 1 “Mad Men” Project Objective: Each design team will work together to create a print advertisement that will attract the most customers from their target population. Chapter 4, Section 1 “Mad Men” Project 1. Your design team (3-4 members) will create the packaging and advertising for a random product and random target population. 2. First, discuss the target buyers with the other members of your group. What is a member of this population looking for in your product? What kinds of images and words are going to make such a buyer want to buy the product? Brainstorm together and make a list of words and images that you think would appeal to your target population. Chapter 4, Section 1 “Mad Men” Project 3. Create an advertisement for your original product. Work with your team to decide on the product’s shape, pictures, colors, and layout. Your advertisement must include copy (a slogan or description), a distinct packaging design for your product, and lots of color. 4. When your product/ad is finished, you will present it to the class. Chapter 4, Section 1 Bell Ringer Predict how people’s buying habits would change under the following circumstances (ceteris paribus): The price of gas increases from $1.60/gallon to $4.50/gallon The price of a haircut increases from $15 to $40 The price of cell phone service increases from $50/month to $80/month The price of milk increases from $3/gallon to $8/gallon Chapter 4, Section 1 Objectives 1. 2. 3. Describe the difference between elastic and inelastic demand. Identify factors that affect elasticity. Explain how firms use elasticity and revenue to make decisions. Chapter 4, Section 1 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 when the price rises or falls. If you will keep buying a good despite a price increase, your demand for that good is inelastic. If you buy much less of a good after a small price increase, your demand for that good is elastic. Chapter 4, Section 1 Bell Ringer • • In your notes, generate a list of five goods/services with elastic and inelastic demand. Try to come up with at least one good/service with perfectly elastic and inelastic demand. Elastic or Inelastic? Chapter 4, Section 1 Introduction Elasticity of demand is determined by one or more of these factors: The availability of substitute goods A limited budget that does not allow for price changes The perception of a good as a luxury item. Chapter 4, Section 1 Factors Affecting Elasticity Availability of Substitutes If there are a few substitutes for a good, then even when its price rises greatly, you might still buy it. A lack of substitutes can make demand inelastic; a wide choice of substitute goods can make demand elastic. Chapter 4, Section 1 Other examples? Other Factors Relative Importance A second factor in determining a good’s elasticity of demand is how much of your budget you spend on a good. Think of this as the income effect on a case-bycase basis Necessities vs. Luxuries Whether a person considers a good to be a necessity or a luxury has a great impact on a person’s elasticity of demand for that good. Chapter 4, Section 1 Total Revenue and Elastic Demand The law of demand states that an increase in price will decrease the quantity demanded. When a good has elastic demand, raising the price of each unit by a small percentage will decrease the quantity sold by a large percentage. The quantity sold will drop enough to reduce the firm’s total revenue. $8.99/ month Chapter 4, Section 1 $4.99/gal Total Revenue and Inelastic Demand $399.99 Chapter 4, Section 1 If demand is inelastic, consumers’ demand is not very responsive to price changes. Therefore, raising the price of each unit will not significantly decrease the quantity sold. This will result in higher total revenues. $69,900 Chapter 4, Section 1 Elastic/Inelastic Review https://www.youtube.com/watch?v=HHcblIxiAAk Chapter 4, Section 1 Analyzing Elasticity of Demand Some of the goods and services people consume have no adequate or available substitutes; others have many. Some are daily expenses, while others are things people spend money on only occasionally. Some are necessities—things people must have—and others are luxuries that meet wants, not needs. All these factors can have an effect on whether the price of a good or service is elastic or inelastic for a consumer. Chapter 4, Section 1 Analyzing Elasticity of Demand Good or Service 1. Starbucks coffee 2. Bottled water 3. Gasoline 4. Nutella 5. Professional hair cut 6. Milk 7. Netflix 8. Braces (orthodontics) 9. Beats headphones 10. Playstation 4 Chapter 4, Section 1 Substitutes Necessity or Luxury? Elastic or Inelastic? Explanation Key Terms elasticity of demand: a measure of how consumers respond to price changes inelastic: describes demand that is not sensitive to price changes elastic: describes demand that is very sensitive to a change in price Chapter 4, Section 1