Economics Chapter 4

Chapter 4 Section 1 Notes:  What is Demand?

The Law of Demand

• Key Concepts
• A free enterprise system is dependent on cooperation between producers and consumers.  To make a profit, producers provide products at the highest possible prices.  Consumers serve their own interests by purchasing products at the lowest possible price.  The forces of supply and demand establish the price that best serves both producers and consumers.
• Demand:  The desire/willingness to buy some good or service and the ability to pay for it.
• It is important to note:
• Not only is it important to be willing to buy, but also have the ability to buy.
• You may want many things, BUT you may not be able to afford them.  Therefore, you have no actual demand.
• Example:  Fancy Car
• Raise your hand if you would like a fancy sports car.
• Are you able to afford a fancy sports car?
• At some future date you may be both willing and able to buy a fancy sports car, but right now you do NOT have a DEMAND for fancy sports car (you have want right now
• A want, but no ability to afford ≠ demand
• A want, with ability to afford = demand
• Price is one of the major factors that influence demand.
•

Law of demand:  States that when prices go down, quantity demanded increases.  When prices go up quantity demanded decreases:

Price and Demand:  Let’s Practice:

• You have \$50 and want some CDs.  If the price of CDs rose from \$5 each to \$10 how would your quantity demanded of CDs change?
• Do the math!
• \$50 ÷ \$5 = ___________ CDs
• \$50 ÷ \$10 =__________ CDs
• As the price went DOWN demand went UP (\$50 ÷ \$5 = 10 CDs)
• As the price went UP demand went DOWN (\$50 ÷ \$10 = 5 CDs)

Demand Schedules – Use Candy to illustrate:  Need 5 volunteers who have a DEMAND (THIS IS PAGE 4 of the ALTERNATIVE LESSON)

• Create the chart on the chalkboard/overhead then continue with definitions

Student 1

Student 2

Student 3

Student 4

Student 5

•
1.

\$0.20

 As PRICE goes DOWN

\$0.30

\$0.40

\$0.50

• Key Concepts
• Demand Schedule:  A table that shows how much of a good or service an individual consumer is willing and able to purchase at each price in the market.
• A demand schedule shows the law of demand in chart form.
• Market Demand Schedule:  Shows how much of a good or service all consumers are willing and able to buy at each price in the market.
• REVIEW:  What is the difference between a demand schedule and a market demand schedule?
• A DEMAND SCHDULE shows the relationship between demand and a price for an INDIVIDUAL CONSUMER
• A MARKET DEMAND SCHEDULE shows the relationship for ALL CONSUMERS in a particular market.

Demand Curves

• CREATE a DEMAND CURVE FROM DEMAND SCHEDULE CREATED IN CLASS
• Key Concepts
• Demand Curve:  a graph that shows how much of good or service an individual will buy at each price.
• It displays the data from an individual demand schedule.
• To create, simply transfer data from table to graph.
• How does a demand curve related to a demand schedule?
• A demand curve is the representation on a line graph of the information from the demand schedule.
• What do the points on the demand curve represent?
• They reflect the quantity demanded at each price.

Chapter 4 Section 2:  What Factors Affect Demand?

• Key Concepts
• Utility:   Satisfaction from using a good or service.
• Law of diminishing marginal utility:  the marginal benefit from using each additional unit of a good or service during a given time period tends to decline as each is used.
• Creates a downward slope of the demand curve.
• Why do consumers demand more goods and services at lower prices and fewer at higher prices?
• Income effect:  the change in the amount that consumers will buy because the purchasing power of their income changes.
• Example:
• You have \$20 and you want to buy some books.

This book cost \$19.99                             These books cost \$9.99 each

Are you more likely to buy one book for \$19.99 or two books for \$9.99?

• Some people would rather buy the two books because they are getting more for their money.

• Substitution Effect:  the pattern of behavior that occurs when consumers react to change in the price of a  good or service by buying a substitute product.
• Example:  Which would you rather buy:

One book for \$10                                  Or a \$4 magazine

Are you more likely to buy the book or the magazine?

• Some would choose the magazine as it could represent a better relative value.

QUESTION:  Pretend you go to the mall to buy a pair of jeans you think are \$40.  When you get to the store you discover the jeans are on sale so you buy 2 pairs instead.  Is this an example of income effect or substitution effect?  Why?

• Income effect because the lower price increased purchasing power.

QUESTION:  What do the income and substitution effect have in common?

• They both explain why people tend to buy more goods and services at lower prices and fewer goods and services at higher prices.

Change in Quantity Demanded

• Key Concepts
• Change in quantity demanded:  an increase or decrease in the amount demanded because of a change in price.

 Price per DVD (\$) \$30 \$25 \$20 \$15 \$10 \$5 \$0 0 1 2 3 4 5 6 7 Quantity Demanded of DVDs
• Each change in quantity demanded is shown by a new point on the demand curve.
• It does NOT shift the demand curve

As you move RIGHT along the curve the QUANTITY DEMANDED INCREASES.

As you move LEFT along the curve the QUANTITY DEMANDED DECREASES

QUESTION:

What is the change in quantity demanded when the price drops from \$20 to \$10?

Quantity demanded changes from 2 to 4 SO the change in quantity demanded is 2.

EXIT TICKET:  Why do increases or decreases in quantity demanded not shift the position of the demand curve?

Monday October 17

• Today’s Goal:  What Factors Affect Demand?
• Learning Targets:
• I can determine a change in quantity demanded.
• I can explain the difference between change in quality demanded and change in demand.
• I can determine a change in demand.
• I can analyze what factors can cause change in demand.
• Bell Work:
• What happens to quantity demanded when price increases?
• What happens to quantity demanded when price decreases?
• Discuss Bell work:

Law of demand:  States that when prices go down, quantity demanded increases.  When prices go up quantity demanded decreases

• Quantity demanded goes DOWN when price INCREASES
• Quantity demanded goes UP when price DECREASES
• Review Material from Friday
• Go over Demand Curves and how to create one.
• Finish Notes from Friday
• Chapter 4 Section 1 Review.
• Have students work on review in class.

Tuesday October 18

• Today’s Goal:  What Factors Affect Demand?
• Learning Targets:
• I can determine a change in quantity demanded.
• I can explain the difference between change in quality demanded and change in demand.
• I can determine a change in demand.
• I can analyze what factors can cause change in demand.
• Bell Work:
• Take out homework.
• On the scrap piece of paper given to you by Mrs. Kroll write your name and fold in half once.
• Go over homework
• Demonstration:  Law of Diminishing Marginal Utility:

Chapter 4 Section 2:  What Factors Affect Demand?

• Key Concepts
• Utility:   Satisfaction from using a good or service.
• Law of diminishing marginal utility:  the marginal benefit from using each additional unit of a good or service during a given time period tends to decline as each is used.
• Creates a downward slope of the demand curve.
• Why do consumers demand more goods and services at lower prices and fewer at higher prices?
• Income effect:  the change in the amount that consumers will buy because the purchasing power of their income changes.
• Example:
• You have \$20 and you want to buy some books.

This book cost \$19.99                             These books cost \$9.99 each

Are you more likely to buy one book for \$19.99 or two books for \$9.99?

• Some people would rather buy the two books because they are getting more for their money.

• Substitution Effect:  the pattern of behavior that occurs when consumers react to change in the price of a  good or service by buying a substitute product.
• Example:  Which would you rather buy:

One book for \$10                                               Or a \$4 magazine

Are you more likely to buy the book or the magazine?

• Some would choose the magazine as it could represent a better relative value.

QUESTION:  Pretend you go to the mall to buy a pair of jeans you think are \$40.  When you get to the store you discover the jeans are on sale so you buy 2 pairs instead.  Is this an example of income effect or substitution effect?  Why?

• Income effect because the lower price increased purchasing power.

QUESTION:  What do the income and substitution effect have in common?

• They both explain why people tend to buy more goods and services at lower prices and fewer goods and services at higher prices.

Change in Quantity Demanded

• Key Concepts
• Change in quantity demanded:  an increase or decrease in the amount demanded because of a change in price.

 Price per DVD (\$) \$30 \$25 \$20 \$15 \$10 \$5 \$0 0 1 2 3 4 5 6 7 Quantity Demanded of DVDs
• Each change in quantity demanded is shown by a new point on the demand curve.
• It does NOT shift the demand curve

As you move RIGHT along the curve the QUANTITY DEMANDED INCREASES.

As you move LEFT along the curve the QUANTITY DEMANDED DECREASES

QUESTION:

What is the change in quantity demanded when the price drops from \$20 to \$10?

Quantity demanded changes from 2 to 4 SO the change in quantity demanded is 2.

EXIT TICKET:  Why do increases or decreases in quantity demanded not shift the position of the demand curve?

Wednesday October 19

• Today’s Goal What Factors Affect Demand? – Changes in Demand
• Learning Targets:
• I can determine a change in quantity demanded.
• I can explain the difference between change in quality demanded and change in demand.
• I can determine a change in demand.
• I can analyze what factors can cause change in demand.
• Bell Work: If someone loses their job, how does that change what they spend their money on?
• Discuss Bell work:
• People who are out of work are more likely to spend their limited funds on food and housing than on entertainment.

Changes in Demand

• Key Concepts
• Change in Demand:  Occurs when something prompts consumers to buy different amounts at every price.
• Usually occurs when a change in the marketplace, such as high unemployment, prompts consumers to buy different amounts of a good or services at every price.
• Change in demand is also called a shift in demand because it actually shifts the position of the demand curve.

A DECREASE in demand shifts the curve to the LEFT

An INCREASE in demand shifts the curve RIGHT

Six factors can cause a change in demand:

• income, market size, consumer tastes, consumer expectations, substitute goods, and complementary goods.

• Income – Increased income means a consumer can buy more.  Decreased income means a consumer an buy less.
• If a person’s income changes, either higher or lower, that person’s ability to buy goods or services also changes.
• Example:
• You work at a garden center.
• In the fall people garden less and buy fewer gardening products so you will probably work fewer hours and will have a smaller paycheck.
• This means you demand fewer bags of Takis at every price, shifting the curve to the left.

• Now imagine you are promoted to supervisor and receive a raise!
• You have more money to spend and your demand for Takis increases and shifts the demand curve to the right.
• Increased income usually increases demand, but it some cases, it causes demand to fall.
• Normal goods:  are goods that consumers demand more when their income rises.
• Inferior goods:  are goods consumers demand less of when their income rises.
• For example:     People with lower incomes may buy off-brand products, but when they start to earn more, they may start purchasing name-brand products because they consider the off-brand to be inferior.
• Market Size:  A growing market usually increases demand, while a shrinking market usually decreases demand.
• If the number of consumers increases or decreases, the market size also changes.
• This usually has a corresponding effect on demand.
• Example:  Wisconsin Dells:
• Each summer thousands of people visit the Dells and as a result the size of the population and the market grows.

• Consumer Tastes:  The popularity of a good or service has a strong effect on the demand for it.
• Because of changing consumer tastes, today’s hot trends often become tomorrow’s castoffs.
• When a good or service enjoys high popularity, consumers demand more at every price.
• When a good or services loses popularity, consumers demand less of it at every price.
• Advertising has a strong influence on consumer tastes.
• Sellers advertise to create demand for the product.
• Example:  Style
• Some people will stop wearing perfectly good clothes because advertising convinces them that a style is no longer popular.
• Think about your own closet.  Do you have items in it that you just had to have a year or two ago, but would never pay money for now?
• This is another example of consumer tastes changing demand.
• Consumer Expectations:  What you can expect prices to do in the future can influence your buying habits today.
• If you think the price of a good or service will change, that expectation can determine whether you will buy it now, or wait until later
• Example:  Sales
• People will often wait to buy something if they think it may go on sale.
• Substitute Goods:
• Substitutes:  goods and services that can be used in the place of each other, causing a change in demand.
• Because the products are interchangeable, if the price of a substitute drops, people will choose to buy it instead of the original item.
• Demand for the substitute will increase, while demand for the original item decreases.
• Example: Gas prices
• When gasoline prices are high, some people choose to commute by bus, train, or carpooling.
• When gasoline prices are lower, some people choose to drive instead of take public transportation.
• Again, when the price of one good rises, the demand for it will drop while demand for its substitute will rise.
• Complementary Goods
• Complements:  goods that are used together, so a rise in demand for one increases the demand for the other. (Also a decrease in demand for one will cause a decrease in a demand for the other)
• Example: CD player
• Consumers who buy CD players, also demand CDs to play

EXIT TICKET: Substitutes and Compliments

• On a separate sheet of paper:
• List 5 substitutes and 5 complements to soda.
• Example:
•  Substitute: Juice
• Compliment:  Chips

Thursday October 20

• Today’s Goal:  What is Elasticity of Demand?
• Learning Targets:
• I can define elasticity of demand.
• I can identify the difference between elastic and inelastic demand.
• I can define unit elastic.
• I can determine how total revenue is used to identify elasticity.

• Bell Work: Give examples of thing you buy regularly and say how important a price increase would be in deciding if you would still buy the product.
• Discuss:  This section focuses on how consumer demand for certain products responds to changes in price.

Chapter 4 Section 3: What is Elasticity of Demand?

Elasticity of Demand

• Key Concepts
• You have learned many factors that influence the demand for a product. However, those factors alone are not the only influences on the sales of goods and services.
• Store owners know that consumers are responsive to changes in price.
• Let’s examine the relationship between price and demand, and how it affects consumer’s buying habits.
• Consumer demand is not limitless – it is highly dependent on price.
• Demand is seldom fixed so price is seldom fixed.
• We know that if prices rise, consumers will buy less and if prices drop, consumers will buy more.
• THIS IS NOT ALWAYS THE CASE.
• Change in consumer buying habits is also related to the type of good or service being produced and how important that good or service is to the consumer.
• The marketplace IS sensitive to changes in price BUT, NOT ALL increases in prices result in a decrease in demand.
• Elasticity of Demand:  a measure of how responsive consumers are to price changes.
• Elastic:  when a change in price, up or down, leads to a relatively LARGE change in demand.
• The more responsive to change the market is, the more likely the demand is elastic.
• Price sensitive
• Inelastic:  when a change in prices lead to a relatively smaller change in the quantity demanded.
• Not case sensitive
• Example:  Necessity or Choice
• Most people consider getting a cavity filled to be a necessity, while having your teeth whitened is a service that can be postponed or eliminated without harm.
• As a result, the demand for whitening is more elastic than the demand for fillings
• How is consumer choice related to elasticity of demand?
• When consumers have many choices for a particular type of product, demand will be elastic.
• When there are fewer choices demands will be inelastic.

• Think of Elasticity where a rubber band represents the quantity demanded
• When the quantity demanded increases by a marked amount, the demand is ELASTIC and the rubber band STRETCHES A LOT
• When the quantity demanded barely changes, the demand is INELASTIC and the rubber band STRETCHES LITTLE
• Example of Elastic Demand:  Tablets
• Suppose that a certain brand of tablets goes on sale.
• If the price of that brand goes down 20% and the quantity demanded goes up 30%, then demand is elastic because the percentage change in quantity demanded is greater than the percentage change in price.
• Goods that have a large number of substitutes, like tablets, fall into the elastic category since if the prices change, consumers can choose other products.
• Example of Inelastic Demand:  Insulin
• Many diabetics require daily insulin to regulate their blood sugar.
• Even if the price of insulin were to rise sharply diabetics would still need the same amount of insulin as they did before.
• If the price were to drop, they would not need any more insulin than their required dosage.
• As a result, the demand for insulin is inelastic because the quantity demanded remains relatively constant.
• Changes in elasticity:
• Over time, the elasticity of demand for a particular product may change.
• For example, if substitutes for a product become available, the demand may become more elastic.
• Think about cell phones.  The cost of cell phones and their service has become more elastic as more providers enter the market.
• Demand can also become less elastic.
• Prescription drugs can be withdrawn from the market leaving fewer choices for the consumer.
• Unit Elastic:  when the percentage change in price and quantity demanded are the same.
• Example:  a 10% increase in price would cause EXACTLY a 10% decrease in demand. (or visa versa)
• NO GOOD OR SERVICE IS REALLY UNIT ELASTIC
• Unit elasticity is simply the dividing point between elastic and inelastic demand.
• It can be used to figure out if demand is elastic or inelastic.

Small group work: Elastic vs. Inelastic

• Place stretchy items in a box.
• Group students.
• Let one student from each group select a stretchy item from the box.
• Invite group members to discuss how they can use the item to demonstrate the concepts of elastic and inelastic demand.
• Students should also give an example of a product that is either elastic or inelastic.
• Students will present their demonstration to the class.

EXIT TICKET:  Use the term elastic and inelastic in a sentence that gives an example of the term.

Example:  The price of cell phones is elastic because more providers are entering the market.  The price of insulin is inelastic because people will still buy it due to necessity.

Friday October 14

• Today’s Goal:  What determines Elasticity?
• Learning Targets:
• I can define elasticity of demand.
• I can identify the difference between elastic and inelastic demand.
• I can define unit elastic.
• I can determine how total revenue is used to identify elasticity.

• Bell Work: Think of a product you buy regularly.  How important would a price increase be in deciding whether you would still buy the product?

What Determines Elasticity?

• Key Concepts
• Just like there are factors that cause a change in demand, there are also factors that affect the elasticity of demand.
• Availability of substitute goods or services
• The proportion of income that is spent on the good or service.
• Whether a good or service is a necessity or a luxury.
• Substitute Goods or Services
• If there is no substitute for a good or service, demand for it tends to be inelastic.
• Example: Insulin
• No substitute exists for insulin, so consumer’s demand is inelastic even when the price goes up.
• If many substitutes are available, demand tends to be elastic.
• Example:  Beef
• If the price of beef shoots up, consumers can choose to eat a different protein like chicken, pork, or fish.
• Why do substitutes affect both demand and elasticity of demand?
• In both cases substitutes offer consumers a choice, if the price of a particular good rise, to switch to something else that meets the same wants at a better price.
• Proportion of Income
• The percentage of your income that you spend on a good or service is another factor that affects elasticity.
• Examples:
• Elastic – Photography
• Suppose that photography is your hobby and you spent 10% of your income  on a camera, memory cards, software, and lenses.
• If the price rises, your demand will fall because you don’t have the money to spend on your hobby – Your demand is elastic.
• Inelastic – Pencils and/or Pens
• Demands for products that cost little of your income tends to be inelastic.
• If the price of pencils or pens rises it is unlikely you would buy fewer pens and pencils.
• You spend so little on these items, you could easily pay the increase.
• If the level of your income increase you are likely to increase your demand for some goods or services.
• Example: Movies
• You go from seeing one movie a month to three movies a month.
• Necessities Versus Luxuries
• Necessity – Something you must have such as food or water.
• Demand for necessities tends to be inelastic
• Even if the price rises, consumers will pay whatever they can afford for necessary goods and services.
• Does that mean that consumers will buy the same quantities no matter what the price?
• NO, if the price of a necessity rises too much, consumers may choose a substitute.
• Example:  Milk
• If the price of milk rises too much consumers may switch to a cheaper brand of milk or powdered milk.
• The change in quantity demanded is will change due to the law of demand, however, the change in quantity demanded is smaller than the change in price so demand is inelastic.
• Luxury – Something that you desire, but is not essential to your life.
• Demand for luxuries tends to be elastic
• Consumers will think twice about playing a higher price for something they don’t truly need.
• The change in quantity demanded is much greater than the change in price.

Calculating Elasticity of Demand

• Key Concepts
• Businesses find it useful to figure the elasticity of demand because it helps them to decide whether to make price cuts.
• If a demand for a good or service is elastic price cuts might help the business earn more.
• If demand is inelastic, price cuts will not help.
• To determine elasticity, economists look at whether the percentage change in quantity demanded is greater than the percent change in price.
• To calculate that relationship, economists use mathematical formulas.
• Calculating the Elasticity of Demand
• 1. Calculate percentage in quantity demanded. (If the final result is negative, treat it as it is positive.)
• Original quantity – New quantity   X 100 = Percent change in quantity demanded.

Original quantity

• 2,000 – 6,000 x 100 = 200%
• 2.  Calculate the percentage change in price. (Again if the final results is negative, treat it as if it is positive)
• Original price – price   X 100 = Percent change in price

Original price

• 10 – 8 x100 = 20%
• 3. Calculate Elasticity.
• Percent change in quantity demanded = Elasticity

Percent change in price.

• 200 % = 10
• 4.  After doing your calculations, if the final number is greater than 1, demand is elastic.  If the final number is less than 1 demand is inelastic.

10 > 1 so Demand is elastic

Total Revenue Test

• Key Concepts
• Business need to know about elasticity of demand because it influences the amount of revenue they will earn.
• Economists measure elasticity of demand by calculating a seller’s total revenue.
• Total Revenue: the amount of money a company receives for selling its products.
• Total Revenue = Price X Quantity
• You can measure elasticity by comparing the total revenue a business would receive when offering its products at various prices.
• Total Revenue test:  a method of measuring elasticity by comparing total revenues.
• If total revenue increases after the price of a product drops, then demand for the product is considered elastic.
• Why?
• Because even though the seller makes less on each of the units sold, the quantity demanded has increased enough to make up for the lower price.
• Example:  Hot Dogs
• If a hot dog stand sells 100 hot dogs for \$2.50 each, the total revenue is \$250 for the day. (\$2.50 X 100).
• However, if the price of hot dogs drops to \$2.00 each and 150 are sold, the total revenue is \$300 for the day. (\$2.00 X 150)
• The demand is elastic.
• If total revenue decreases after the price is lowered, demand is considered inelastic.
• The price reduction has caused only a slight increase in quantities sold, which is not enough to compensate for lower revenues.
• How does the total revenue test measure elasticity?
• If total revenue increases when price is decreased, then demand is elastic.
• If total revenue decreases when price is decreased, then demand is inelastic.
• How does the total revenue test help business owners decide to whether to lower prices?
• It allows them to see whether the increase quantity sold makes up for the lower amount of revenue from each item.
• Revenue Table
• Example:  Movie Ticket Revenue Table – Fill in the Table (Remember P X Q = TR)

 Price of a Movie Ticket (\$) Quantity Demanded per Month Total Revenue (\$)

 Price of a Movie Ticket (\$) Quantity Demanded per Month Total Revenue (\$)

EXIT TICKET:  What are the factors that affect elasticity of demand and how does that affect elasticity?

Answer:  The factors that affect elasticity are:  substitutes, proportion of income, and necessities vs. luxuries.  The greater number of substitute goods, the greater proportion of income used to purchase a product, and the more a good or service is considered a luxury the more elastic the demand is.