Chapter 4 1 Demand Bell ringer

Chapter 4. 1: Demand

Bell ringer – Law of Demand Write down the maximum you would pay for the following items: Is your max above? Cold 12 oz. can of soda Is your max above? $1 $3 Sneakers $100 $150 6” Hoagie $5 $9. 50 Large bag of Doritos $4. 50 $6 Pack of gum $1. 50 $3 Chapter 4, Section 1 Copyright © Pearson Education, Inc. Slide 2

“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 Chapter 4, Section 1 Copyright © Pearson Education, Inc. Slide 3

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

Understanding Demand 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 Chapter 1, Opener Demand The desire to own something and the ability to pay for it Copyright © Pearson Education, Inc. Slide 5

Understanding Demand 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. Law of Demand Consumers will buy more of a good when its price is lower and less when its price is higher. Common sense, right? Chapter 1, Opener Copyright © Pearson Education, Inc. Slide 6

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

Law 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. Chapter 4, Section 1 Copyright © Pearson Education, Inc. Slide 9

Pizza - Yummy Who would pay n for a slice? ? $4 $2. 50

Substitution 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 Chapter 4, Section 1 Copyright © Pearson Education, Inc. Slide 11

Remember the pizza? At what price do you throw in the towel and get

Understanding Demand Page 88 Substitution effect When consumers react to an increase in a good’s price by consuming less of that good and more of a substitute good. Chapter 1, Opener Copyright © Pearson Education, Inc. Slide 13

The Income Effect 1 Gb thumb drive = $10 At that price, why not buy two! College professor requires you to have a thumb drive for class: 4 Gb thumb drive = $10 Chapter 1, Opener Copyright © Pearson Education, Inc. Slide 14

The Income Effect Later in the semester, you lose one and have to buy

Income Effect Income effect The change in consumption that results when a price increase

The 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 Chapter 4, Section 1 ? Copyright © Pearson Education, Inc. Slide 17

The Income Effect • 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. Chapter 4, Section 1 Copyright © Pearson Education, Inc. Slide 18

Demand 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. Chapter 4, Section 1 Copyright © Pearson Education, Inc. Slide 19

Demand 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? Chapter 4, Section 1 Copyright © Pearson Education, Inc. Slide 20

Reminder • Demand is not what we WANT, it’s what we can afford to

The 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. Chapter 4, Section 1 Copyright © Pearson Education, Inc. Slide 22

Demand Curves Chapter 4, Section 1 Copyright © Pearson Education, Inc. Slide 23

Demand 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? Chapter 4, Section 1 Copyright © Pearson Education, Inc. Slide 24

Demand Curve Survey • Directions on my Wiki Chapter 4, Section 1 Copyright ©

Review • 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? Chapter 4, Section 1 Copyright © Pearson Education, Inc. Slide 26