3 demand
TRANSCRIPT
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Economic Principles:Demand
Who’s Da Man? (Me.)
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Who Wants This Watch?
• Owned by me for 5 years.• Broken.
$1,000.00
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Who Wants This Watch?
• Owned by Brad Pitt for 5 years.• Broken.
$1,000.00
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What is Demand?
• In your own words, 1 minute, in yournotes.
• The quantities of a particular good orservice consumers are willing andable to buy at different possibleprices at a particular time.
30 seconds left
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Demand vs. “Want”
I want this -->
However, demand refers to being willing and able.
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Let’s Talk AboutHamburgers
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At higher prices,people buy less ofsomething than theydo at lower prices.
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Why?
Price Effect
4 factors that explain priceeffect
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Buying Power
•If prices go down, you canbuy more hamburgers withthe same amount ofmoney.
•Opposite, if price goes up.
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Diminishing PersonalValue
• If prices go down, you might eathamburgers all the time instead ofonce a week.
• For example, normally burgers are$5.00 so you only have it once aweek, but if the price falls to $1.00you will eat burgers for luncheveryday.
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Diminishing MarginalUtility
• How good does the first bite of thatfirst burger taste?
• How good does the last bite of yourfifth burger taste?
• The only way you’re going to eat fiveburgers is if the price is lower.
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Substitutes
• What might you have for lunch if burgersare too expensive?
• Availability of substitutes keeps pricesfrom getting too high.
• What is a substitute for…?
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Price Effect vs. Change inDemand
• For demand to change, the entiredemand curve must move.
• What causes demand to increase ordecrease?
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Price Elasticity ofDemand
• Measurement of the price effect.
• If the price changes, how much doesthe quantity demanded change?
• Inelastic <-------------------->Elastic
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• Two curves, one with a steeper slopethan the other.
• Same change in price, which onenow has a higher quantitydemanded?
• So, which one is more elastic?
$2.00
$1.00
500 600 700
A
B
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Elastic
• Lots of substitutesavailable
• Larger part of aperson’s budget
• People have a longtime to adjust to aprice change
• Examples?
• Few substitutes• Small part of
budget• Little or no time to
adjust to pricechanges
• Examples?
Inelastic
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Change in Income
• If incomes rise, people have moremoney to spend.
• Either buy greater quantities at thesame price or willing to pay higherprices.
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Prices or Availability ofSubstitutes
• If the price of one item changes ashift in demand for a substituteoccurs.
• Example?
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Prices or Availability ofComplementary Goods
• Goods that are used together• Examples?
• How might the change in price of onecomplementary good affect another?
• Price of one goes up, the demand forthe other goes down.
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Change in Weather orSeason
• Demand for some items changesbased on the temperature or theweather.
• Like what?
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Change In the Number ofBuyers
• If the population of an areaincreases, then there is moredemand.
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Change in Styles, Tastes,Habits
• What is the current demand forparachute pants?
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Change in Expectations
• What if there was a rumor that yourfavorite fast food restaurant mightshut down? How would that affectyour demand?
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Practice
• The price of maple syrup goes updue to a terrible maple tree virus.What might happen to the demandfor pancake mix?
• The demand for pancake mix will godown.
Complementary goods
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• I invent a new type of orange juicemachine that can convert 100% of anorange into the most delicious orangejuice anyone has ever tasted for muchcheaper than traditional production.Therefore, the price of orange juice goesdown. What happens to the demand forapple juice?
• Demand for apple juice goes down.
Substitutes
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• Britney Spears, who everyone thinksis totally sweet, decides to startwearing raccoon fur hats all the time.How might this affect the demand forraccoon fur hats?
• The demand will go up.
Change in styles, tastes, habits.
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• A new law is written that says allcomputers sold after January 31st,2009 must be made by Apple. Whatmight happen to the demand for PC’sprior to that date?
• The demand for PC’s will go up
Change in expectations
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• A new multi-national company moves it’sheadquarters into Bowling Green, OH.The company is bringing 10,000 peoplefrom out of town to live in BG. How mightthis affect the demand for pizza in BG?
• Due to more people in the market, thedemand will go up
Change in number of buyers
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• Microsoft decides to drop the price ofthe Xbox 360 to $100. How doesthis affect the demand? Thinkcarefully about price affect vs.change in demand!
• There is no change in demand.However, there is a change in thequantity demanded.