Activator - Ch. 4 Sec 1
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Activator - Ch. 4 Sec 1 • Three people enter a Mazda dealership all interested in buying a brand new car. All three initially stop to look at the Mazda RX8. The first person tells the salesperson that they “really like the RX8” but they “don’t have any money today”, and are “saving their money for a purchase within the next 6 months”. The second person tells the dealer that they “have the money to buy”, they “are going to ultimately buy RX8”, but they are shopping various dealerships and are “not willing to buy today”. The third person tells the dealer that they “love the RX8!”, they “have the money” and they “want to buy it today.” Answer the following questions based on the above scenario: 1. List each customer (1-3). Next to each customer, write each of the following that apply to their situation: 1. Desire to buy 2. Willingness to buy 3. Ability to buy 2. Which customer do think was most appealing to the salesperson, and why? 3. Which customer would you have helped first, and why?
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Activator - Ch. 4 Sec 1
• Three people enter a Mazda dealership all interested in buying a brand new car. All three initially stop to look at the Mazda RX8. The first person tells the salesperson that they “really like the RX8” but they “don’t have any money today”, and are “saving their money for a purchase within the next 6 months”. The second person tells the dealer that they “have the money to buy”, they “are going to ultimately buy RX8”, but they are shopping various dealerships and are “not willing to buy today”. The third person tells the dealer that they “love the RX8!”, they “have the money” and they “want to buy it today.”Answer the following questions based on the above scenario:
1. List each customer (1-3). Next to each customer, write each of the following that apply to their situation:
1. Desire to buy
2. Willingness to buy
3. Ability to buy
2. Which customer do think was most appealing to the salesperson, and why?
3. Which customer would you have helped first, and why?
Chapter 4 - DemandSection 1 – Understanding Demand
Demand – desire, ability, and willingness to buy a good/serviceThe amount of a product that a consumer (individual) or group of consumers (market) will purchase at a given price In a market system, buyers and sellers determines the prices of goods and servicesMicroeconomics – The study of the economic behavior and decision making of small units, such as individuals, families, and firms (businesses)
Application Chart – Demand
Make a three column chart that represents 3 items that you want on one side, whether you can afford them or not in the next, and whether you are willing to buy them in the last.
Desired Items Ability/Afford Willingness Demand1.
2.
3.
The Law of Demand Law of Demand –prices are
lower, consumers will buy more; prices are higher, consumers will buy less.
Inverse relationship between price and the QD of a product.
Prices strongly influence the quantity demanded of a product
Demand
Quantity Demanded Increases
Price
Prices of ProductsDecreases
Price
Prices ofProduct
Increases
Demand
Quantity DemandedDecreases
Change in Quantity Demanded
$3.50 $1.00
Change in Quantity Demanded
$3.50 $1.00
The Income Effect
Income Effect – the change in consumption resulting from a change in price, “more bang for your buck”
Consumers feel richer when prices drop, poorer when prices rise. Both affect the Quantity Demanded of a product.
The Income EffectPurchaseshttp://www.youtube.com/watch?v=JC7KB-HF6ao&feature=related
http://www.youtube.com/watch?v=_87YZPSdHX8&feature=related
More Bang for your Buckhttp://www.youtube.com/watch?v=4hZ9g4xo24A&feature=player_detailpage#t=2s
Substitution Effect Substitution Effect – when consumers react to an
increase in a good’s price by consuming less of one good and more of other goods
$3.99 $4.99 $3.99
The Demand Schedule
Price of Ice Cream
Quantity Demanded
$3.00 02.50 22.00 41.50 61.00 8.50 10.10 12
• Demand Schedule - a table that lists the quantity of a good that a person will purchase at each price in a market•Market Demand Schedule - lists the quantity of a good that all consumerswill purchase at each price in the market
Price of Ice Cream
Quantity Demanded
$3.00 02.50 302.00 501.50 1001.00 200.50 300.10 400
Application - The Demand Curve
Price per Ice Cream Cone
1.50
2.00
2.50
$3.00
1.00
0.50
0 1 2 3 4 5 6 7 8 9 10 11 12Quantity Demanded of Ice-Cream Cones per week
Price Quantity$3.00 02.50 22.00 41.50 61.00 8.50 10.10 12
• Demand Curve - graphically represents the demand schedule• Demand Curve is downward sloping because of the law of demand
• Plot the demand schedule below, which represents 2004 Florida Marlins avg. sales per game (in thousands)
Price 2004
$40.00 0
35.00 4
30.00 6
25.00 8
20.00 10
15.00 12
10.00 14
Playoffs
8
10
14
16
18
22
24
Chapter 4 Section 2
Price per Ticket
20.00
25.00
30.00
$40.00
15.00
10.00
0 2 4 6 8 10 12 14 16 18 20 22 24Quantity Demanded of Tickets
35.00Next Season
0
0
2
4
8
10
12D1 D2D3
Section 2 - Shifts of the Demand Curve
Changes in Demand are reflected as a shift in the curve
Shifts to the right indicate an increase in demand
Shifts to the left indicate a decrease in demand Demand
curve, D 1
Demandcurve, D 2
0
Increasein demand
Price
Quantity Demanded
Demand curve, D 3
Decreasein demand
Difference Between A Change in Quantity Demanded and a Change in Demand
QD - A change in the amount a consumer will purchase as a result of a change in price (ceteris paribus – all other things constant)
Reflected as movement along the curve D – A change in the amount a person will buy as a result of an outside factor
(change in ceteris paribus - popularity of product, consumer income, etc.) Reflected as a shift in the curve
Flow Chart – Determinants of Demand – pgs. 85 - 87
Consumer Income
Consumer Expectations
Population Consumer Tastes and Advertising
Price of Related Goods
DescriptionConsumer Income
has a major influence on a
consumer’s demand
Description Description Description Description
What Causes a Shift?
Example of Decrease Demand
People are paid less they buy less normal goods and
more inferior goods
Example of Decrease Demand
Example of Decrease Demand
Example of Decrease Demand
Example of Decrease Demand
Example of Increase DemandPeople are paid more, they buy more normal
goods
Example of Increase Demand
Example of Increase Demand
Example of Increase Demand
Example of Increase Demand
What Causes a Shift?1. Consumer Income 2. Consumer Expectations3. Population4. Consumer Tastes and
Advertising5. Price of Related ProductsGroup Assignment (pg. 86-88):
Create a scenario that represents each of the five determinants of demand.
Provide a scenario that shifts the demand curve to the right and the left.
Consumer Income Consumer Income – A consumer’s income affects their
demand for most goods and services Increase in income will cause an increase in consumption Decrease in income will cause a decrease in consumption Normal good – Inferior good –
Price of Related Goods
Price of related goods – demand for goods can be affected by the price for related goods
Complements – the demand of one good increases as a result of the purchase of another good
Substitutes – the demand for one good decreases because another good is used in its place
Consumer Tastes and Advertising
Consumer Tastes and Advertising – changes in popularity of products or the influence of trends and advertising can affect demand
Popularity of product decreases, decreases in demand Popularity of a product increases, increases in demand
http://www.youtube.com/watch?v=4OhrQMnOYOQ&feature=player_detailpage#t=34s
http://www.youtube.com/watch?v=m02-lyUOH5M&feature=player_detailpage#t=61s
Consumer Expectations
Consumer Expectations – refers to the way people think about the future, as it relates to consumption
Expectations for the future can affect consumption for the present
Population
Population – an increase in the number of consumers can cause an increase or decrease in the demand for products
Increase in population, increase in demand Decrease in population, decrease in demand
Demand Application – Average sales of SUV’s per month (in millions)
Price Early 90’s
$55 0
50 2
45 4
40 6
35 8
30 10
25 14
Late 90’s
2468
101420
•Plot the demand schedule below. The graph represents the demand for SUV’s during the early 1990’s. During the late 1990’s SUV’s became increasingly popular in the United States. During the mid 2000’s, gas prices increased nationally to average rates around 5.00 per gallon. Consumers expected these prices to remain in the future, which affected the demand for SUV’s around the country.
Gas Hikes
0123468
Price per SUV
20
25
30
$55
15
10
0 2 4 6 8 10 12 14 16 18 20 Quantity Demanded of SUVs
40
45
50
35
Demand Application – Average sales of SUV’s per month (in millions)
Price per SUV
20
25
30
$55
15
10
0 2 4 6 8 10 12 14 16 18 20 Quantity Demanded of SUVs
40
45
50
35
D1 D2D3
1. How did the curve change from the early 90’s to the late 90’s
2. What was the cause of the change from the early 90’s to the late 90’s?
3. What happened to the curve after the gas hikes?
Chapter 4 Section 3
1. List 2 items that you would buy less of if the price increased2. List 2 items that you would buy more of if the price decreased3. List 2 items that you would continue to buy, even if the
increased
Section 3 – Elasticity of Demand
Elasticity of Demand –how consumers will cut back or increase their quantity demanded for a product when prices rise or fall
Measures the extent to which changes in price causes changes in quantity demanded.
Helps determine how much a price change will influence the qd of any given product
Elastic Demand
Elastic – consumption changes drastically when a price rises or falls
A consumer is very responsive to price changes
Inelastic Demand Inelastic - changes in price causes a
relatively small change in quantity demanded
Consumers continue to purchase regardless of price change
Determinants of Demand Elasticity
1. Availability of Close Substitutes
• Pepsi/Coke, Butter/Margarine
2. Relative Importance
• How much you spend on a good
• Table salt versus designer clothes
3. Necessities versus Luxuries
• Medicine versus a luxury automobile
4. Change over time
• Longer time horizon – more elastic
• Gas in the short run is inelastic, but over time elastic
Values of Elasticity Elasticity has a precise mathematical definition
Percentage change in quantity demanded Percentage change in price
Value is less than 1, it is considered inelastic. Inelastic – Demand is < 1
Value is greater than one, demand is elastic. Elastic – Demand is > than 1
Value is equal to one, demand is unitary elastic. Unitary Elastic – Demand is = 1
The Midpoint MethodPrice Elasticity =
Price
8.00
$10.00
0 8 10
Quantity
10 – 8_ 9
22% 22%
= .22
= 1
$10 – 8_ $9
= .22
Unitary Elastic
A
B
B A
10 – 8__ 9
.22 .22
= .22
= 1
$10 – 8 9
Unitary Elastic
A B = .22
(Q2 – Q1) / [(Q2+Q1) / 2] (P2 – P1) / [(P2 + P1) / 2]
Application – Elasticity of Ice Cream Cones
Price
3.00
5.00
6.00
$7.00
2.00
1.00
0 5 10 15 20 25 30 35 Quantity Demanded of Ice-Cream Cones per week
4.00
$4 – 3 $3.5
.67_ .29
= .29
= 2.3
20 – 10 15
= .67
Elastic
Price Elasticity = (Q2 – Q1) / [(Q2+Q1) / 2] (P2 – P1) / [(P2 + P1) / 2]
(Q2 – Q1) / [(Q2+Q1) / 2]
(P2 – P1) / [(P2 + P1) / 2]
% change in qd% change in price
Application – Elasticity of Table Salt
Price
3.00
5.00
6.00
$7.00
2.00
1.00
0 5 10 15 20 25 30 35 Quantity Demanded of Table Salt
4.00
$6 – 2 $4
40 100
= 1
= .4
15 – 10 12.5
= .40
Inelastic
Price Elasticity = (Q2 – Q1) / [(Q2+Q1) / 2] (P2 – P1) / [(P2 + P1) / 2]
(Q2 – Q1) / [(Q2+Q1) / 2]
(P2 – P1) / [(P2 + P1) / 2]
% change in qd% change in price
Total Revenue
• Total Revenue – the amount paid by buyers and received by sellers of a good• Price of the goods x quantity demanded = Total Revenue
Price of a slice of pizza Quantity DemandedPer day
Total Revenue
$.50 300 150
$1.00 250 250
$1.50 200 300
$2.00 135 270
$2.50 100 250
$3.00 50 150
•Use the formula to show how you determine elasticity of demand for the graph.• Q2 _______ - Q1_______ = ______ / Q2 ______+ Q1 _______ / 2 = _______ = ________• P2 _______ - P1_______ = ______ / P2 ______+ P1 _______ / 2 = _______ = ________•- Elasticity QD______ P______P = ________•Did the price change cause an elastic or inelastic response in the QD for ice cream cones? ________________________________________________
20 10 10 20 10 15 .67
Elasticity Application 1
.67 . 50 1.34
Elastic
(Q2 – Q1) / [(Q2+Q1) / 2] (P2 – P1) / [(P2 + P1) / 2]
5 3 2 5 3 4 .50
Elasticity Application 2
•Use the formula to show how you determine elasticity of demand for the graph.• Q2 _______ - Q1_______ = ______ / Q2 ______+ Q1 _______ / 2 = _______ = ________• P2 _______ - P1_______ = ______ / P2 ______+ P1 _______ / 2 = _______ = ________•- Elasticity QD______ P______P = ________•Did the price change cause an elastic or inelastic response in the QD for insulin? ________________________________________________
8 5 3 8 5 6.5 .46
.46 1 .46
Inelastic
6 2 4 6 2 4 1
(Q2 – Q1) / [(Q2+Q1) / 2] (P2 – P1) / [(P2 + P1) / 2]
Elasticity Application 3Scenario: The Apple store in St. John’s Mall made the decision to drop the price of their Ipod Nano from $150 to $125. As a result, the sale of Nano’s increased from 200 a week to 250. - Create a Demand Schedule and Curve based on the above information.
Price of Nanos
QD per week
Price Per Ipod Nano
QD 0
2. Did the price change cause an elastic or inelastic response in the QD for Nano’s? ___________________3. If the firm drops their price by _________%, they will see an increase in sales of __________% 4. To determine if this is a good decision for the firm, calculate the total revenue of each price:- Multiply the first price of the Nano by the first QD – $______ x _______ = ___________________- Multiply the second price of the Nano by the second QD – $ ______ x _______ = __________________5. Which price point generates the most total revenue? ______________________
150
125
200
250
Elastic18 22
150 200 $30,000 125 250 $31250
125
150
125
200 250 •Use the formula to show how you determine elasticity of demand for the graph.• Q2 _______ - Q1_______ = ______ / Q2 ______+ Q1 _______ / 2 = _______ = ________• P2 _______ - P1_______ = ______ / P2 ______+ P1 _______ / 2 = _______ = ________•- Elasticity QD______ P______P = ________
250 200 50 250 200 225 .22
.22 .18 1.22 150 125 25 150 125 137.5 .18
•What is the price elasticity of demand when the price changes from $1 to $2? _________*Use the midpoint method formula to determine the answer to #1* Q2 – Q1__ ________ (Q2 + Q1)/2 = ________________ = ___________ P2 – P1__ ________ (P2 + P1)/2
201701
1.5
.12
.67
.18
Based on the above result, demand for Moonbucks coffee at this price range is (elastic/unit elastic/inelastic)
•What is the price elasticity of demand when the price changes from $5 to $6? _________*Use the midpoint method formula to determine the answer to #1* Q2 – Q1__ ________ (Q2 + Q1)/2 = ________________ = ___________ P2 – P1__ ________ (P2 + P1)/2
20 901
5.5
.22
.18
1.22
Based on the above result, demand for Moonbucks coffee at this price range is (elastic/unit elastic/inelastic)
The Midpoint MethodPrice Elasticity =
Price
8.00
$10.00
0 8 10
Quantity
10 – 8_ 9
22% 22%
= .22
= 1
$10 – 8_ $9
= .22
Unitary Elastic
A
B
B A
10 – 8__ 9
.22 .22
= .22
= 1
$10 – 8 9
Unitary Elastic
A B = .22
(Q2 – Q1) / [(Q2+Q1) / 2] (P2 – P1) / [(P2 + P1) / 2]
The Flaw in Point Elasticity of DemandElasticity = Percentage change in Quantity Demanded/Percentage change in Price
Price
8.00
$10.00
0 8 10
Quantity
10 – 8 X 100 10
20% 25%
= 20%
= .8
$8 – 10 X100 $8
= 25%
Inelastic
A
B
B A
8 – 10 X 100 8
25% 20%
= 25%
= 1.25
$10 – 8 X100 $10
Elastic
A B = 20%
% Q % P
Determinants of Demand Elasticity
1. Can The Purchase Be Delayed?
• Insulin, gas, cigarettes, etc…
2. Are Adequate Substitutes Available?
• Pepsi/Coke, Steaks/Chicken, etc…
3. Does the Purchase Use a Large Portion of Income?
• Table Salt vs. Automobiles
Determinants of Elasticity
Brand New BMW Gasoline Insulin
Can the purchase be delayed ?
Yes No No
Are adequate substitutes available?
Yes No No
Does the purchase use a large portion of income?
Yes Yes No
Type of Elasticity Elastic Inelastic Inelastic
Law of Diminishing Marginal Utility
Diminishing Marginal Utility – a decrease in the (utility) usefulness due to the reduced satisfaction of a product.
Utility – usefulness of a good/service to a consumer.
Do Now – Ch. 5 Sec 1• Following graduation, Braden McElroy opens a smoothie shop called, .
Initially, he needs to determine the products that he wishes to sell at the shop. He decides that he will offer 5 main types of smoothies on his menu
1. Braden’s Berry Blastoff2. Braden’s Banana Bonanza3. St. Simon’s Succulent Strawberries4. Brunswick’s Blueberry Lagoon5. Mocha Marsh Surprise
• During the first month of operation he offered all of his smoothies at 3.99. He found that people were willing to purchase “Braden’s Berry Blastoff”, “Braden’s Bananza Bonanza” and “St. Simon’s Succelent Strawberries”. Ultimately, Mocha Marsh Surprise sold very little, and he could barely keep “Brunswick’s Blueberry Lagoon in stock.
1. What should Braden do with the price of #’s 1, 2, and 3?
2. What should he do with the price of #4?
3. What might he do with number 5?
Application – Revenue Table
• Revune – amount of money a company receives by selling its goods• Price of the goods x quantity demanded = Total Revenue
Price of a slice of pizza Quantity DemandedPer day
Total Revenue Increase/Decrease Total Revenue
$.50 300 NA
$1.00 250
$1.50 200
$2.00 135
$2.50 100
$3.00 50
Application – Revenue Table
• Revune – amount of money a company receives by selling its goods• Price of the goods x quantity demanded = Total Revenue
Price of a slice of pizza Quantity DemandedPer day
Total Revenue Increase/Decrease Total Revenue
$.50 300 $150 NA
$1.00 250 $250 Increase
$1.50 200 $300 Increase
$2.00 135 $270 Decrease
$2.50 100 $250 Decrease
$3.00 50 $150 Decrease
