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Monday, August 28 • Happy Monday • Quiz today – get ready! • After Monday, August 28 • Happy Monday • Quiz today – get ready! • After the quiz, place your answer sheet in the box and make a pile for both quiz sheets on the side counter. • We will do a little note-taking afterwards. 1

Unit 1: Basic Economic Concepts 2 Unit 1: Basic Economic Concepts 2

Demand 3 Demand 3

DEMAND DEFINED What is Demand? Demand is the different quantities of goods that consumers DEMAND DEFINED What is Demand? Demand is the different quantities of goods that consumers are willing and able to buy at different prices. (Ex: You are able to purchase diapers, but if you aren’t willing to buy then there is NO demand) What is the Law of Demand? There is an INVERSE relationship between price and quantity demanded Copyright ACDC Leadership 2015 4

Example of Demand I am willing to sell several A’s in AP Economics. How Example of Demand I am willing to sell several A’s in AP Economics. How much will you pay? Price Quantity Demanded Demand Schedule Copyright ACDC Leadership 2015 5

Copyright ACDC Leadership 2015 6 Copyright ACDC Leadership 2015 6

Why does the Law of Demand occur? The law of demand is the result Why does the Law of Demand occur? The law of demand is the result of three separate behavior patterns that overlap: 1. The Substitution effect 2. The Income effect 3. The Law of Diminishing Marginal Utility We will define and explain each… Copyright ACDC Leadership 2015 7

Why does the Law of Demand occur? 1. The Substitution Effect • If the Why does the Law of Demand occur? 1. The Substitution Effect • If the price goes up for a product, consumer buy less of that product and more of another substitute product (and vice versa) 2. The Income Effect • If the price goes down for a product, the purchasing power increases for consumers allowing them to purchase more. 8 Copyright ACDC Leadership 2015

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Why does the Law of Demand occur? 3. Law of Diminishing Marginal Utility • Why does the Law of Demand occur? 3. Law of Diminishing Marginal Utility • Utility = Satisfaction • We buy goods because we get utility from them • The law of diminishing marginal utility states that as you consume anything, the additional satisfaction that you will receive will eventually start to decrease • In other words, the more you buy of ANY GOOD the less satisfaction you get from each new unit consumed. Discussion Questions: 1. What does this have to do with the Law of Demand? 2. How does this effect the pricing of businesses? Copyright ACDC Leadership 2015 10

Can you see the Law of Diminishing Marginal Utility in Disneyland’s pricing strategy? Copyright Can you see the Law of Diminishing Marginal Utility in Disneyland’s pricing strategy? Copyright ACDC Leadership 2015

Graphing Demand Copyright ACDC Leadership 2015 12 Graphing Demand Copyright ACDC Leadership 2015 12

The Demand Curve • A demand curve is a graphical representation of a demand The Demand Curve • A demand curve is a graphical representation of a demand schedule. • The demand curve is downward sloping showing the inverse relationship between price (on the y-axis) and quantity demanded (on the x -axis) • When reading a demand curve, assume all outside factors, such as income, are held constant. (This is called ceteris paribus) Let’s draw a new demand curve for milk… Copyright ACDC Leadership 2015 13

GRAPHING DEMAND Demand Schedule Price Quantity Demanded $5 10 $4 Price of Milk Draw GRAPHING DEMAND Demand Schedule Price Quantity Demanded $5 10 $4 Price of Milk Draw this large in your notes $5 20 $3 30 $2 50 $1 80 Copyright ACDC Leadership 2015 4 3 2 1 10 20 30 40 50 60 Quantity of Milk 70 80 Q 14

GRAPHING DEMAND Demand Schedule Price Quantity Demanded $5 10 $4 Price of Milk $5 GRAPHING DEMAND Demand Schedule Price Quantity Demanded $5 10 $4 Price of Milk $5 20 $3 30 $2 50 $1 80 Copyright ACDC Leadership 2015 4 3 2 1 Demand 10 20 30 40 50 60 Quantity of Milk 70 80 Q 15

Where do you get the Market Demand? Billy Jean Other Individuals Market Price Q Where do you get the Market Demand? Billy Jean Other Individuals Market Price Q Demd $5 $4 $3 $2 $1 1 2 3 5 7 P 0 1 2 3 5 P $3 3 Q $3 D 2 Q 10 20 30 50 80 P $3 D Copyright ACDC Leadership 2015 9 17 25 42 68 D 25 Q D 30 Q

Demand Review 1. What are the two key aspects of the definition of demand? Demand Review 1. What are the two key aspects of the definition of demand? 2. What is the Law of Demand? 3. Give an example of the substitution effect 4. Give an example of the income effect 5. Give an example of the law of diminishing marginal utility 6. Explain how the law of diminishing marginal utility causes the law of demand 7. How do you determine the MARKET demand for a particular good? (from reading) 8. Name 10 fast food places Copyright ACDC Leadership 2015 17

Shifts in Demand • Ceteris paribus-“all other things held constant. ” • When the Shifts in Demand • Ceteris paribus-“all other things held constant. ” • When the ceteris paribus assumption is dropped, movement no longer occurs along the demand curve. Rather, the entire demand curve shifts. • A shift means that at the same prices, more people are willing and able to purchase that good. This is a change in demand, not a change in quantity demanded PRICE DOESN’T SHIFT THE CURVE Copyright ACDC Leadership 2015 18

Change in Quantity Demanded • Change in Quantity Demanded - a change in the Change in Quantity Demanded • Change in Quantity Demanded - a change in the quantity of the product purchased in response to a change in price • In other words… a movement along the demand curve

Change in Demand • Change in Demand- when there is a change in demand Change in Demand • Change in Demand- when there is a change in demand the entire demand curve shifts • A shift to the right is an increase in demand • A shift to the left is a decrease in demand

Change in Demand Schedule Price Quantity Demanded $5 10 $4 Price of Milk What Change in Demand Schedule Price Quantity Demanded $5 10 $4 Price of Milk What if milk makes you smarter? $5 4 20 $3 30 $2 50 $1 80 Copyright ACDC Leadership 2015 3 2 1 Demand 10 20 30 40 50 60 Quantity of Milk 70 80 Q 21

Change in Demand Schedule Price Quantity Demanded $5 10 $4 Price of Milk What Change in Demand Schedule Price Quantity Demanded $5 10 $4 Price of Milk What if milk makes you smarter? $5 4 20 $3 30 $2 50 $1 80 Copyright ACDC Leadership 2015 3 2 1 Demand 10 20 30 40 50 60 Quantity of Milk 70 80 Q 22

Change in Demand Schedule Price Quantity Demanded $5 10 30 $4 Price of Milk Change in Demand Schedule Price Quantity Demanded $5 10 30 $4 Price of Milk $5 4 20 40 $3 30 50 $2 50 70 $1 80 100 Copyright ACDC Leadership 2015 3 2 1 Demand 10 20 30 40 50 60 Quantity of Milk 70 80 Q 23

Change in Demand Schedule Price Quantity Demanded $5 10 30 $4 Price of Milk Change in Demand Schedule Price Quantity Demanded $5 10 30 $4 Price of Milk Increase in Demand Prices didn’t change but people want MORE Milk $5 4 20 40 $3 30 50 $2 50 70 $1 80 100 Copyright ACDC Leadership 2015 3 2 D 1 1 Demand 10 20 30 40 50 60 Quantity of Milk 70 80 Q 24

Change in Demand Schedule Price Quantity Demanded $5 10 $4 Price of Milk What Change in Demand Schedule Price Quantity Demanded $5 10 $4 Price of Milk What if milk makes causes baldness? $5 4 20 $3 30 $2 50 $1 80 Copyright ACDC Leadership 2015 3 2 1 Demand 10 20 30 40 50 60 Quantity of Milk 70 80 Q 25

Change in Demand Schedule Price Quantity Demanded $5 10 $4 Price of Milk What Change in Demand Schedule Price Quantity Demanded $5 10 $4 Price of Milk What if milk makes causes baldness? $5 4 20 $3 30 $2 50 $1 80 Copyright ACDC Leadership 2015 3 2 1 Demand 10 20 30 40 50 60 Quantity of Milk 70 80 Q 26

Change in Demand Schedule Price Quantity Demanded $5 10 0 $4 Price of Milk Change in Demand Schedule Price Quantity Demanded $5 10 0 $4 Price of Milk $5 4 20 5 $3 30 20 $2 50 30 $1 80 60 Copyright ACDC Leadership 2015 3 2 1 Demand 10 20 30 40 50 60 Quantity of Milk 70 80 Q 27

Change in Demand Schedule Price Quantity Demanded $5 10 0 $4 Price of Milk Change in Demand Schedule Price Quantity Demanded $5 10 0 $4 Price of Milk $5 Decrease in Demand Prices didn’t change but people want LESS Milk 4 20 5 $3 30 20 $2 50 30 $1 80 60 Copyright ACDC Leadership 2015 3 2 1 D 2 10 20 30 40 50 60 Quantity of Milk Demand 70 80 Q 28

Change in Demand Schedule Price Quantity Demanded $5 10 $4 Price of Milk What Change in Demand Schedule Price Quantity Demanded $5 10 $4 Price of Milk What happens to the demand for milk if the price of milk goes up? $5 4 20 $3 30 $2 50 $1 80 Copyright ACDC Leadership 2015 3 2 1 NOTHING! The demand stays the same 10 20 30 40 50 Demand 60 Quantity of Milk 70 80 Q 29

Change in Qd vs. Change in Demand Price of Milk P $3 There are Change in Qd vs. Change in Demand Price of Milk P $3 There are two ways to increase quantity from 10 to 20 A C B $2 1. A to B is a change in quantity demand (due to a change in price) 2. A to C is a change in demand (shift in the curve) D 2 D 1 10 Copyright ACDC Leadership 2015 20 Quantity of Milk Q Milk

What Causes a Shift in Demand? 6 Shifters (Determinates) of Demand: 1. Number of What Causes a Shift in Demand? 6 Shifters (Determinates) of Demand: 1. Number of Consumers 2. Income 3. Compliments (price of them) 4. Expectations (of future events) 5. Substitutes (price of them) 6. Tastes and Preferences Changes in PRICE don’t shift the curve. It only causes movement along the curve. Copyright ACDC Leadership 2015 31

Income The incomes of consumer change the demand, but how depends on the type Income The incomes of consumer change the demand, but how depends on the type of good. 1. Normal Goods – Ex: Luxury cars, Sea Food, jewelry, homes – As income increases, demand increases – As income falls, demand falls 2. Inferior Goods – Ex: Top Ramen, used cars, used clothes – As income increases, demand falls – As income falls, demand increases Copyright ACDC Leadership 2015 32

Inferior Goods 33 Inferior Goods 33

Prices of Related Goods The demand curve for one good can be affected by Prices of Related Goods The demand curve for one good can be affected by a change in the price of ANOTHER related good. 1. Complements are two goods that are bought and used together. – Ex: If price of hot dogs falls, demand for hot dog buns will. . . – If the price of one increase, the demand for the other will fall. (or vice versa) 2. Substitutes are goods used in place of one another. – Ex: If price of Pepsi falls, demand for coke will… – If the price of one increases, the demand for the 34 other will increase (or vice versa) Copyright ACDC Leadership 2015

Substitutes or Complements? 35 Substitutes or Complements? 35

Substitutes 36 Substitutes 36

Substitutes 37 Substitutes 37

Substitutes 38 Substitutes 38

Substitutes 39 Substitutes 39

Substitutes 40 Substitutes 40

Substitutes 41 Substitutes 41

Substitutes 42 Substitutes 42

Substitutes 43 Substitutes 43

Complements 44 Complements 44

Expectations (NICEST) • Expectations about the future can change demand. – Expected change in Expectations (NICEST) • Expectations about the future can change demand. – Expected change in prices – Expected change in income • Example: A hurricane is heading towards Florida and will arrive in 3 days. What will happen to the demand for bottled water?

Tastes and Preferences (NICEST) • Tastes and Preferencesthese change over time and with the Tastes and Preferences (NICEST) • Tastes and Preferencesthese change over time and with the season, effected by ads, trends, fads, etc. , when something is “in” people’s demand increases, when it is “out” demand decreases

Practice Questions 1. Which of the following will cause the demand for milk to Practice Questions 1. Which of the following will cause the demand for milk to decrease? A. Increase in the price of a substitute B. A decrease in income assuming that milk is a normal good C. A decrease in the price of milk D. An increase in the price of milk E. A decrease in the price of a complementary good Copyright ACDC Leadership 2015 47

Practice Questions 2. Which of the following will cause the quantity demanded of milk Practice Questions 2. Which of the following will cause the quantity demanded of milk to decrease? A. Increase in the price of a substitute B. A decrease in income assuming that milk is a normal good C. A decrease in the price of milk D. An increase in the price of milk E. A decrease in the price of a complementary good Copyright ACDC Leadership 2015 48

Practice Identify the determinant (shifter) then decide if demand will increase or decrease Shifter Practice Identify the determinant (shifter) then decide if demand will increase or decrease Shifter Increase or Decrease Left or Right 1 2 3 4 5 6 7 8 Copyright ACDC Leadership 2015 49

Practice Identify the determinant (shifter) then decide if demand will increase or decrease Hamburgers Practice Identify the determinant (shifter) then decide if demand will increase or decrease Hamburgers (a normal good) 1. Population boom 2. Incomes fall due to recession 3. Price of tacos, a substitute, decreases 4. Price increases to $5 for hamburgers 5. New health craze- “No ground beef” 6. Hamburger restaurants announce that they will significantly increase prices NEXT month 7. Price of fries, a complement, increases 8. Restaurants lower price of burgers to $. 50 Copyright ACDC Leadership 2015 50