CHAPTER FOUR: DEMAND 12th Grade Economics Chapter Four: Demand 1. 2. 3. What is Demand? Factors Affecting Demand Elasticity of Demand Familiarize yourself with all the key terms from this chapter. Chapter Four: Demand ACOS: 3. Analyze graphs to determine changes in supply and demand and their effect on equilibrium price and quality. 4.1 What is Demand? After reading the section, create a six-tab Foldable. Cut the first tab off and write “4.1 What is Demand?” Write demand, demand schedule, demand curve, the Law of Demand, and market demand curve on the remaining tabs (one term per tab). Define each term AND provide an example/illustration for each. 4.1 What is Demand? Daily Objectives: Describe and illustrate the concept of demand. Explain how demand and utility are related. 4.1 What is Demand? Basics of Demand Demand and Marginal Utility Guided Practice Create a five tab book for the vocabulary words from 4.1. Provide the definition of each word and an example. Basics of Demand Demand is “the desire, ability, and willingness to buy a product.”-89. Demand is a microeconomic concept. Microeconomics is “the area of economics that deals with behavior and decision making by small units such as individuals and firms.” Basics of Demand A demand schedule shows the various quantities of a product demanded at different prices at a given time. When the information from a demand schedule is plotted on a graph, it is called a demand curve. Guided Practice Notice the shape and direction of the demand curve. How does the price effect the quantity demanded? Basics of Demand The Law of Demand states that “the quantity demanded at each and every price varies inversely with its price.” The more something costs, the people demand less. The less something costs, the people demand more. Be sure to note the quantity demanded (not demand itself) is affected. Basics of Demand A market demand curve combines the various individual demand curves into one. Demand and Marginal Utility Remember utility is the amount of usefulness or satisfaction person gets from the use of a product. Marginal utility is “the extra usefulness or satisfaction a person gets from acquiring or using one more of a product.” -93. Example: A second hamburger may also help satisfy your hunger. Demand and Marginal Utility The principle of diminishing marginal utility states that the utility of a product decreases with each additional unit of a product. Example: A tenth copy of the same newspaper offers little utility over the first. Guided Practice Name other examples where the principle of diminishing marginal utility applies. Guided Practice For what does the P stand? For what does the Q stand? Which curve is the demand curve? Guided Practice Create a market demand curve using the demand schedule on the left. 4.2 Factors Affecting Demand After reading the section, create a horizontal, three-tab Foldable with a small space at the bottom. Write income, tastes & expectations, and price of related goods on the three tabs (one per tab). Explain how each factor changes demand inside each tab. Chapter Four: Demand ACOS: 3. Analyze graphs to determine changes in supply and demand and their effect on equilibrium price and quality. 4.2 Factors Affecting Demand Daily Objectives: Explain what causes a change in quantity demanded. Describe the factors that could cause a change in demand. 4.2 Factors Affecting Demand Changes in Quantity Demanded Changes in Demand Changes in Quantity Demanded A change in the quantity demanded is usually a result of the income effect or the substitution effect. A change in the quantity demanded is represented by movement along the demand curve in response to a change in price. Figure 4.3 A Change in Quantity Demanded Changes in Quantity Demanded The income effect is the “change in quantity demanded because of a change in price that alters consumers’ real income.” When prices fall, consumers have greater purchasing power. When prices rise, consumers have less purchasing power. The quantity demanded reflects the extra real income. Changes in Quantity Demanded The substitution effect allows consumers to replace costly items with cheaper items that are similar. (ex: DVD vs. VHS) Changes in Demand Changes in demand cause the demand curve itself to move. The curve shifts to the right to show an increase in demand. It shifts to the left to show a decrease. Changes in Demand Change in Quantity Demanded Figure 4.4 Figure 4.3 A Change in Demand A Change in Quantity Demanded Change in Demand Changes in Demand Figure 4.4 A Change in Demand Changes in Demand Demand is influenced by six factors: Consumer income (ex: eating from the dollar menu vs. Texas Roadhouse) Consumer Tastes (ex: fuel efficient cars vs. bigger cars; 8 tracks vs. C.D.’s.) Changes in Demand Substitutes (ex: butter vs. margarine) Complements (ex: peanut butter and jelly; laptops and software) Changes in Demand Change in Expectations (ex: PS2 vs. PS3) Number of Consumers (ex: baby boomers) Changes in Demand The prices of the substitutes or complements influence demand of the related products. Figure 4.4 A Change in Demand 4.3 Elasticity of Demand Read this section. 4.3 Elasticity of Demand Daily Objectives: Explain why elasticity is a measure of responsiveness. Analyze the elasticity of demand for a product. Understand the factors that determine demand. 4.3 Elasticity of Demand Elasticity Total Expenditures Test Determinants of Demand Elasticity Elasticity Elasticity measures how sensitive consumers are to price changes. Demand is elastic when a change in price causes a LARGE change in demand. Figure 4.5 The Total Expenditures Test for D e 4.5Elasticity Total Expenditures Test for Demand Elasticity Demand is inelastic when a change in price causes a SMALL change in demand. Elasticity Demand is unit elastic when a change in price causes a PROPORTIONAL change in demand. Guided Practice What are examples of items for which an increase in price would cause you or your family to reconsider buying them? Total Expenditures Test Price times quantity demanded equals expenditures. Changes in expenditures depend on the elasticity of the demand curve. If the change in price and expenditures move in the opposite directions on the curve, demand is elastic. If they move in the same direction, demand is inelastic. If there is no change in expenditures, demand is unit elastic. Understanding elasticity helps producers effectively price their products. Guided Practice Create a three-tabbed Foldable about demand elasticity. Elastic Demand Unit Elastic Demand Inelastic Demand Guided Practice What are examples of items for which a drop in price would NOT encourage you to buy more of an item? Determinants of Demand Elasticity Demand is elastic if the answer to the following questions are “yes.” Can the purchase be delayed? Some purchases cannot be delayed, regardless of price changes. (ex: medicine) Are adequate substitutions available? Price changes can cause consumers to substitute one product for a similar product. (beef vs. chicken) Does the purchase use a large portion of income? Demand elasticity can increase when a product commands a large portion of a consumer’s income. All three answers do not necessarily have to be “yes” or “no.” Guided Practice What are some things you buy for which price is not an issue? Independent Practice Use your textbook to copy AND answer questions 1-6 under the “Reviewing the Facts” section on page 110. Reviewing the Facts 1. Describe a demand schedule and a demand curve. How are they alike? A demand schedule is a list that shows the quantities demanded for a product at all prices that prevail in the market. A demand curve shows the same data in graphic form. Reviewing the Facts 2. Explain how the principle of diminishing marginal utility is related to the downward-sloping demand curve. Diminishing marginal utility states that as we use more of a product, we are not willing to pay as much for it. People will not pay as much for the second and third product as they did for the first, therefore the demand is downward sloping. Reviewing the Facts 3. Describe the difference between the income effect and the substitution effect. The income effect is the change in quantity demanded due to a change in price that alters consumers’ real income. The substitution effect is the change in quantity demanded due to the change in the relative price of the product. Reviewing the Facts 4. Identify the five factors that can cause a change in market demand. The five factors that can cause a change in market demand are: consumer income consumer tastes substitutes and complements change in expectations number of consumers Reviewing the Facts 5. Describe the difference between elastic demand and inelastic demand. When demand is elastic, there is a relatively large change in quantity demanded when the price changes, giving the demand curve a flat slope. The change in quantity demanded is much smaller for inelastic demand, making the slope of the demand curve steeper. Reviewing the Facts 6. Explain how the total expenditures test can be used to determine demand elasticity. By observing the change in total expenditures when the price changes, you can determine demand elasticity. If expenditures and price move in opposite directions, demand is elastic, If they move in the same direction, demand is inelastic. If expenditures do not change, demand is unit elastic.