Chapter 4.1: Demand Copyright © Pearson Education, Inc.Slide 2 Chapter 4, Section 1 Bell ringer –...

Chapter 4.1: DemandChapter 4.1: DemandChapter 4.1: DemandChapter 4.1: Demand

Copyright © Pearson Education, Inc. Slide 2Chapter 4, Section 1

Bell ringer – Law of DemandBell ringer – Law of Demand

Is your max above? Is your max above?

Cold 12 oz. can of soda

Sneakers

6” Hoagie

Large bag of Doritos

Pack of gum

Write down the maximum you would pay for the following items:

$1 $3

$4.50 $6

$1.50

$150

$5

$100

$9.50

$3


“The most famous law in economics, and the one that economists are most sure of, is the law of demand. On this law is built almost the whole edifice of economics”

-David Henderson

The Concise Encyclopedia of Economics


ObjectivesObjectives

1. Explain the law of demand.

2. Describe how the substitution effect and the income effect influence decisions.

3. Create a demand schedule for an individual and a market.

4. Interpret a demand graph using demand schedules.

Copyright © Pearson Education, Inc.Chapter 1, Opener

Understanding DemandUnderstanding Demand

DemandThe desire to own something and the ability to pay for it

Have you ever gone shopping before? Has the price been too high to pay for it?

In order to understand, take the viewpoint:

Demand = Markets (us)

Supply = Sellers



Law of DemandConsumers will buy more of a good when its price is lower and less when its price is higher.

Common sense, right?

Have you ever spent money before? Then you get the law of demand.

Whether your income is $10 or $10 million, the price of a good will strongly influence your decision to buy.


Inverse RelationshipInverse Relationship

Inverse relationship – as one goes up, the other goes down.


Law of DemandLaw of Demand

• How does the law of demand affect the quantity demanded?

– Price changes always affect the quantity demanded because people buy less of a good when the price goes up.


Pizza - YummyPizza - Yummy

$1

Who would pay n for a slice??

$2$2.50

$3$3.50

$4

$4.25

$4.50 $5

$2.25

$3.25


Substitution Effect/Income EffectSubstitution Effect/Income Effect

• The law of demand is the result of two separate patterns of behavior we all experience. – Substitution Effect– Income Effect

• They both describe two different ways a consumer can change his or her spending patterns


Remember the pizza?Remember the pizza?

At what price do you throw in the towel and get a 6 incher at Subway?

That’s the substitution effect!



Substitution effectWhen consumers react to an increase in a good’s price by consuming less of that good and more of a substitute good.

Page 88


The Income EffectThe Income Effect

1 Gb thumb drive = $10


College professor requires you to have a thumb drive for class:At that price, why

not buy two!





Later in the semester, you lose one and have to buy another one:


Income EffectIncome Effect

Income effectThe change in consumption that results when a price increase causes your feelings to change about the product


The Law of Demand in ActionThe Law of Demand in Action

• Checkpoint: What happens to demand for a good when the price increases/decreases?

?

Because you feel poorer and then will spend less elsewhere



• The income effect is the change in consumption that results when a price increase causes spending to change.

– Economists measure consumption in the amount of a good that is bought, not the amount of money spent on it.

– The income effect also operates when the price is lowered. If the price of something drops, you feel wealthier. If you buy more of a good as a result of a lower price, that’s the income effect at work.


Demand SchedulesDemand Schedules

• To have demand for a good, you must be willing and able to buy it at a specified price.

• A demand schedule is a table that lists the quantity of a good that a person will purchase at various prices in the market.

• Market demand schedule show the quantities demanded at various prices by ALL consumers in the market.


Demand SchedulesDemand Schedules

• Demand schedules show that demand for a good falls as the price rises.– How does market demand change when the price

falls from $3 to $2 a slice?


ReminderReminder

• Demand is not what we WANT, it’s what we can afford to BUY at the specified price.


The Demand GraphThe Demand Graph

• A demand curve is a graphic representation of a demand schedule.

– The vertical axis is always labeled with the lowest possible prices at the bottom and the highest prices at the top.

– The horizontal axis should be labeled with the lowest possible quantity demanded at the left and the highest possible quantity demanded on the right.


Demand CurvesDemand Curves


Demand CurvesDemand Curves

• Ashley’s demand curve shows the number of slices she is willing and able to buy at each price, while the market demand curve shows demand for pizza in an entire market.– How are the demand curves similar?


Demand Curve SurveyDemand Curve Survey

• Directions on my Wiki


ReviewReview

• Now that you have learned how the law of demand affects the quantity demanded, go back and answer the Chapter Essential Question.– How do we decide what to buy?

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