02 substitutes income effect

Opening BellOpening BellThink back to your business idea from Think back to your business idea from entrepreneurship

week.week.

1.1. Who are your customers?Who are your customers?

2.2. How often do they buy your goods/services?How often do they buy your goods/services?

3.3. Are there any other products that people Are there any other products that people would buy along with your products?would buy along with your products?

2 important effects2 important effects “complements” – a good that is purchased with another “substitutes” – a good which can be substituted for

another Substitution effect - Changes to prices of similar

goods changes people’s demand

Normal goods – goods you buy more of when your income increases

Inferior goods – goods you buy less of when your income increases

Income Effect – changes to a person’s income changes their demand

Why is this important for firms?Why is this important for firms?

What sorts of goods are these?What sorts of goods are these?

Others?Compliments?Normal/Inferior?

Cultural?Cultural?

Preferences changePreferences changeSpam in HawaiiSpam in HawaiiSauerkraut at Sauerkraut at

PuebloPueblo

On your bellringer paperOn your bellringer paper

4.4. List 3 normal goodsList 3 normal goods

5.5. List 3 inferior goodsList 3 inferior goods

6.6. List 3 pairs of substitutesList 3 pairs of substitutes

7.7. List 3 pairs of complimentsList 3 pairs of compliments

Changes to demandChanges to demand

Does Demand Does Demand change when the change when the price of a good price of a good changes?changes?

Only the Quantity Only the Quantity demanded demanded changes with pricechanges with price

Review:Review:What is the Q*D at What is the Q*D at

Price = $1.50?Price = $1.50?When Q*D is at 50, When Q*D is at 50,

what is the price?what is the price?

Quantity

$

Graphically speaking… Demand of movie tickets

D*

A RAISE!!!!

A Child!!!!

D after raise

Determinants of DemandDeterminants of Demand

Causes that Causes that will change will change Demand Demand

Determinants of DemandDeterminants of DemandChanges to tastes and preferencesChanges to tastes and preferences

Determinants of DemandDeterminants of Demand

Changes to incomeChanges to income

Determinants of DemandDeterminants of DemandAvailability and price of substitute goods Availability and price of substitute goods

Determinants of DemandDeterminants of DemandAvailability and price of complimentsAvailability and price of compliments

Determinants of DemandDeterminants of DemandChanges to populationChanges to population

Determinants of DemandDeterminants of DemandExpectations of the FutureExpectations of the Future

A trick to remember determinants of demand

T R I B ET = tastes of consumers

R = Related goods (P$ change)

I = Income of buyers

B = # of consumers

E = expectations of future

http://quizlet.com/2043838/individual-markets-flash-cards/

Quantity

$

Graphically speaking… Demand of movie tickets

D*

A RAISE!!!!

A Child!!!!

D after raise

A.A. The price of iPods The price of iPods fallsfalls

B.B. The price of music The price of music downloads fallsdownloads falls

C.C. The price of CDs The price of CDs fallsfalls

A C T I V E L E A R N I N G A C T I V E L E A R N I N G 11

Demand CurveDemand Curve

27

Draw a demand curve for music downloads. What happens to it in each of the following scenarios? Why?

A C T I V E L E A R N I N G A C T I V E L E A R N I N G 11

A. Price of iPods fallsA. Price of iPods falls

28

Q2

Price of music down-loads

Quantity of music downloads

D1D2

P1

Q1

Music downloads and iPods are complements.

A fall in price of iPods shifts the demand curve for music downloads to the right.

Music downloads and iPods are complements.

A fall in price of iPods shifts the demand curve for music downloads to the right.

A C T I V E L E A R N I N G A C T I V E L E A R N I N G 11

B. Price of music downloads fallsB. Price of music downloads falls

29

The D curve does not shift.

Move down along curve to a point with lower P, higher Q.

The D curve does not shift.

Move down along curve to a point with lower P, higher Q.

Price of music down-loads

Quantity of music downloads

D1

P1

Q1 Q2

P2

A C T I V E L E A R N I N G A C T I V E L E A R N I N G 11

C. Price of CDs fallsC. Price of CDs falls

30

P1

Q1

CDs and music downloads are substitutes.

A fall in price of CDs shifts demand for music downloads to the left.

CDs and music downloads are substitutes.

A fall in price of CDs shifts demand for music downloads to the left.

Price of music down-loads

Quantity of music downloads

D1D2

Q2

On a separate sheet of paperOn a separate sheet of paper Graphically sketch the changes to the demand curveGraphically sketch the changes to the demand curve

Label your graphsLabel your graphs1.1. New residents move to Arizona (houses)New residents move to Arizona (houses)2.2. You are downsized (steak)You are downsized (steak)3.3. The price of buns increases (hot dogs)The price of buns increases (hot dogs)4.4. The internet crashes (itunes mp3’s)The internet crashes (itunes mp3’s)5.5. You are downsized (studio apartments)You are downsized (studio apartments)6.6. You get a raise at work (used clothing)You get a raise at work (used clothing)7.7. You go to college (text books)You go to college (text books)8.8. You get a raise at work (Hawaiian cruises)You get a raise at work (Hawaiian cruises)9.9. The price of meat increases (A1 steak sauce)The price of meat increases (A1 steak sauce)10.10. The price of Fiji Water increases (tap water)The price of Fiji Water increases (tap water)11.11. Gas prices increase to $6.50/gallon (bicycles)Gas prices increase to $6.50/gallon (bicycles)12.12. Toxic waste dump found in Tempe (ASU degrees)Toxic waste dump found in Tempe (ASU degrees)13.13. Make up your own example and show demand shiftMake up your own example and show demand shift

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Q

On a separate sheet of paperOn a separate sheet of paper Graphically sketch the changes to the demand curveGraphically sketch the changes to the demand curve

Label your graphsLabel your graphs1.1. New residents move to Arizona (houses)New residents move to Arizona (houses)2.2. You are downsized (steak)You are downsized (steak)3.3. The price of buns increases (hot dogs)The price of buns increases (hot dogs)4.4. The internet crashes (itunes mp3’s)The internet crashes (itunes mp3’s)5.5. You are downsized (studio apartments)You are downsized (studio apartments)6.6. You get a raise at work (used clothing)You get a raise at work (used clothing)7.7. You go to college (text books)You go to college (text books)8.8. You get a raise at work (Hawaiian cruises)You get a raise at work (Hawaiian cruises)9.9. The price of meat increases (A1 steak sauce)The price of meat increases (A1 steak sauce)10.10. The price of Fiji Water increases (tap water)The price of Fiji Water increases (tap water)11.11. Gas prices increase to $6.50/gallon (bicycles)Gas prices increase to $6.50/gallon (bicycles)12.12. Toxic waste dump found in Tempe (ASU degrees)Toxic waste dump found in Tempe (ASU degrees)13.13. Make up your own example and show demand shiftMake up your own example and show demand shift

$

Q

On a separate sheet of paperOn a separate sheet of paper Graphically sketch the changes to the demand curveGraphically sketch the changes to the demand curve

Label your graphsLabel your graphs1.1. New residents move to Arizona (houses)New residents move to Arizona (houses)2.2. You are downsized (steak)You are downsized (steak)3.3. The price of buns increases (hot dogs)The price of buns increases (hot dogs)4.4. The internet crashes (itunes mp3’s)The internet crashes (itunes mp3’s)5.5. You are downsized (studio apartments)You are downsized (studio apartments)6.6. You get a raise at work (used clothing)You get a raise at work (used clothing)7.7. You go to college (text books)You go to college (text books)8.8. You get a raise at work (Hawaiian cruises)You get a raise at work (Hawaiian cruises)9.9. The price of meat increases (A1 steak sauce)The price of meat increases (A1 steak sauce)10.10. The price of Fiji Water increases (tap water)The price of Fiji Water increases (tap water)11.11. Gas prices increase to $6.50/gallon (bicycles)Gas prices increase to $6.50/gallon (bicycles)12.12. Toxic waste dump found in Tempe (ASU degrees)Toxic waste dump found in Tempe (ASU degrees)13.13. Make up your own example and show demand shiftMake up your own example and show demand shift

$

Q

On a separate sheet of paperOn a separate sheet of paper Graphically sketch the changes to the demand curveGraphically sketch the changes to the demand curve

Label your graphsLabel your graphs1.1. New residents move to Arizona (houses)New residents move to Arizona (houses)2.2. You are downsized (steak)You are downsized (steak)3.3. The price of buns increases (hot dogs)The price of buns increases (hot dogs)4.4. The internet crashes (itunes mp3’s)The internet crashes (itunes mp3’s)5.5. You are downsized (studio apartments)You are downsized (studio apartments)6.6. You get a raise at work (used clothing)You get a raise at work (used clothing)7.7. You go to college (text books)You go to college (text books)8.8. You get a raise at work (Hawaiian cruises)You get a raise at work (Hawaiian cruises)9.9. The price of meat increases (A1 steak sauce)The price of meat increases (A1 steak sauce)10.10. The price of Fiji Water increases (tap water)The price of Fiji Water increases (tap water)11.11. Gas prices increase to $6.50/gallon (bicycles)Gas prices increase to $6.50/gallon (bicycles)12.12. Toxic waste dump found in Tempe (ASU degrees)Toxic waste dump found in Tempe (ASU degrees)13.13. Make up your own example and show demand shiftMake up your own example and show demand shift

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Q

On a separate sheet of paperOn a separate sheet of paper Graphically sketch the changes to the demand curveGraphically sketch the changes to the demand curve

Label your graphsLabel your graphs1.1. New residents move to Arizona (houses)New residents move to Arizona (houses)2.2. You are downsized (steak)You are downsized (steak)3.3. The price of buns increases (hot dogs)The price of buns increases (hot dogs)4.4. The internet crashes (itunes mp3’s)The internet crashes (itunes mp3’s)5.5. You are downsized (studio apartments)You are downsized (studio apartments)6.6. You get a raise at work (used clothing)You get a raise at work (used clothing)7.7. You go to college (text books)You go to college (text books)8.8. You get a raise at work (Hawaiian cruises)You get a raise at work (Hawaiian cruises)9.9. The price of meat increases (A1 steak sauce)The price of meat increases (A1 steak sauce)10.10. The price of Fiji Water increases (tap water)The price of Fiji Water increases (tap water)11.11. Gas prices increase to $6.50/gallon (bicycles)Gas prices increase to $6.50/gallon (bicycles)12.12. Toxic waste dump found in Tempe (ASU degrees)Toxic waste dump found in Tempe (ASU degrees)13.13. Make up your own example and show demand shiftMake up your own example and show demand shift

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Q

On a separate sheet of paperOn a separate sheet of paper Graphically sketch the changes to the demand curveGraphically sketch the changes to the demand curve

Label your graphsLabel your graphs1.1. New residents move to Arizona (houses)New residents move to Arizona (houses)2.2. You are downsized (steak)You are downsized (steak)3.3. The price of buns increases (hot dogs)The price of buns increases (hot dogs)4.4. The internet crashes (itunes mp3’s)The internet crashes (itunes mp3’s)5.5. You are downsized (studio apartments)You are downsized (studio apartments)6.6. You get a raise at work (used clothing)You get a raise at work (used clothing)7.7. You go to college (text books)You go to college (text books)8.8. You get a raise at work (Hawaiian cruises)You get a raise at work (Hawaiian cruises)9.9. The price of meat increases (A1 steak sauce)The price of meat increases (A1 steak sauce)10.10. The price of Fiji Water increases (tap water)The price of Fiji Water increases (tap water)11.11. Gas prices increase to $6.50/gallon (bicycles)Gas prices increase to $6.50/gallon (bicycles)12.12. Toxic waste dump found in Tempe (ASU degrees)Toxic waste dump found in Tempe (ASU degrees)13.13. Make up your own example and show demand shiftMake up your own example and show demand shift

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Q