4/16/2014 DEMAND Aim: What does the law of demand say about prices? BRAINSTORM List 3 things that you consider to be in high demand in your life Why are these in high Demand? Law of Demand Law of Demand – When prices are lower, people buy more, when prices are higher, people buy less. Everyone has a set income, no matter what it is, the price of the good will determine how much they buy. Example How many slices of pizza would you buy if they cost $1? What about $3 What about $10 As the price gets higher, the amount that is demanded gets lower. Elements of the Law of Demand Certain elements can effect the law of demand a) Substitution effect – When consumers react to an increase in a good’s price by consuming less of that good and more of others. (when it gets too expensive, get something else) Substitution Effect Income effect Income effect- A change in consumption resulting in a change of income. (If the price rises, don’t use it anymore) Income Effect Movie tickets increase from $8 each to $14. Result: You don’t take your date to the movies! Demand Schedule Make up a demand curve The substitution effect and the income effect describe two ways that a consumer can change his or her spending patterns These spending patterns can be predicted in two ways. One is a demand curve The This other is a Demand Schedule is an accurate way to determine what is the most productive price to sell an item. Ceteris Paribus When we look at the amount of pizza being sold, we assume that nothing except price will effect the amount bought or sold. This is an example of “ceteris paribus” Ceteris paribus - the Latin phrase that means all other things are constant This does not take outside elements of demand into account (example : what effect would low carb dieting have on the pizza industry?) This would cause a significant change in demand. What can cause a shift in demand? Income a consumers income can effect their demand for goods. If they get a bigger income, they have the ability to purchase more goods. Most items that we purchase are normal goods Normal goods – goods that consumers demand more of when their incomes increase Inferior goods – a good that consumers demand less of when their incomes increase a) Examples Normal Goods Lift tickets Inferior Goods Macaroni & Cheese Used Cars Related Goods The demand for one good can be effected by the demand for another good. Compliments – are two goods that are bought and used together Substitutes – are goods used in place for one another Questions What is an example of something you consider an inferior good? Why? What is one good that could be considered a compliment for another? What are two goods that can be considered substitutes What is an income effect? What is an example of an income effect?