Chapter 4

Report
BELL WORK

Grab folders, and new
papers
3 hole punch
 Complete pgs.
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
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33, 64-65
Copy chart on pg. 85
UNIT 2: HOW MARKETS WORK
Chapter 4: Demand
 Chapter 5: Supply
 Chapter 6: Prices
 Chapter 7: Market Structure

CHAPTER 4 SECTION 1
“How do we decide what to buy?”
 Objectives

Explain Law of Demand
 How substitution/income effects influence decisions
 Make demand schedule for individual/market
 Understand demand graph using demand schedules
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Key Terms:

http://www.pearsonsuccessnet.com/snpapp/iText/produc
ts/0-13-3698335/Flash/Ch04/Econ_OnlineLectureNotes_ch4_s1.swf
INTRODUCTION

How does the law of demand affect qty.
demanded?
Price changes always affect qty. demanded b/c people
buy less of a good when prices go up
 By understanding demand schedules/curves you can
analyze how consumers react to changes in price.

DEMAND

Demand is the desire to own something w/ability
to pay for it

Law of Demand:
Price is down consumers buy more
 Price is up, consumers buy less
 Result of substitution/income effect
 Together they explain why increases in price decreased
purchasing

SUBSTITUTION EFFECT

When a consumer
reacts to rise in price
of a good…

By…..
Consuming less of that
good and more of a
substitute good
 Can also apply to drops
in pricing

INCOME EFFECT

Change in consumption that results when a price
increase causes real income to decline
Consumption measured in amount of good bought,
not price
 Can make you feel “richer/poorer”
 Causes a person spend more/same as before but qty.
is less.


Phone Apps: Example
 Apps go up to $5 per, you may still buy an app or 2 but
now you buy less than when they were $0.99.
 Vice-versa is true as well; you will buy more or feel
“wealthier” if they are less and your demand is higher
DEMAND SCHEDULES: FIGURE 4.2 PG.89
Explains how the price of an item affects the qty.
demanded of that item
 To have DEMAND you have to be willing/able to
buy it at a certain price.
 Schedule is a table that lists the qty a person will
purchase at various prices

INDIVIDUAL VS. MARKET SCHEDULES
Individual
Qty. demanded at
various prices by an
idividual
 Predicts individual qty.
a person is willing to
buy at prices
 Shows Law of Demand

Market
Qtys. demanded at
various prices by all
consumers
 Predict total sales @
diff. prices
 Shows Law of Demand

DEMAND GRAPH

Graphic representation of demand schedule
Vertical axis ALWAYS labeled lowest to highest
prices
 Horizontal axis SHOULD be labeled lowest to highest
possible qty. demanded

ALL demand curves/schedules reflect Law of
Demand
 Limits

Only accurate for one very specific set of conditions
 Cannot predict changing market conditions

LESSON CLOSING

Review
W/Partner: Think of a good that fits the
schedules/curves we just talked about.
 Create an individual/market schedule for that good

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
Pg. 90


Describe if it fits substitution or income effect more.
#11
Workbook

Complete pages 34-35, and 15
CHAPTER 4 SECTION 2
Bell Work: 1st 10 Minutes of class
Review
W/Partner: Think of a good that fits the
schedules/curves we just talked about.
Create an individual/market schedule for that good
Describe if it fits substitution or income effect more.
Pg. 90
#11
Workbook
Complete pages 34-35, and 15
CHAPTER 4 SECTION2
“Why does the demand curve shift?”
 Objectives

Difference in change in qty. demanded and shift in
demand curve
 Know factors that create changes in demand/cause
shift in curve
 Example(s) of how a change in demand in good for
one good can affect demand for a related good


Key terms

http://www.pearsonsuccessnet.com/snpapp/iText/products/0-13369833-5/Flash/Ch04/Econ_OnlineLectureNotes_ch4_s2.swf
INTRODUCTION

Why does the demand curve shift?
Caused by more than just price increases/decreases
 Other factors
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Income
 Consumer expectations
 Population
 Demographics
 Consumer tastes/advertising

CHANGES IN DEMAND

Demand Schedule takes into account only price
change
Doesn’t consider effects of news reports or many
other factors that change daily
 Demand curves are accurate only as long as price is
the only change that affects the consumers decision
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
Drop cp and allow other factors to change, curve is no
longer followed and a shift is produced

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Or only as long as ceteris paribus is true
Shift= @ every price, consumers buy a different quantity
than before; shifts entire demand curve
Heat wave/Summer Examples

What are people going to want more then?
GRAPHING CHANGES IN DEMAND
WHEN FACTORS OTHER THAN PRICE CAUSE DEMAND TO FALL,
THE CURVE SHIFTS TO THE LEFT
Which graph would represent the price of a book going up $1?
CHANGE IN DEMAND FACTORS
Several factors can lead to a change in demand,
rather than simply change the qty. demanded
 Income
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Most items we purchase are “normal goods”
As income rises we buy more of them
 Rise= shift to Right, Fall= shift to left
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Consumer Expectations
Current demand is positively related to its expected
future price
 If you expect price to rise, current demand will rise
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
Vice-versa w/ price drop, wait till its lower
CHANGE IN DEMAND FACTORS
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Population


Size of population will also affect the demand for
most products
Can have a particularly strong effect on certain goods
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Computers, technology, BABY BOOM?
Demographics
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Race, age, gender, and occupation of a population
Help businesses classify potential consumers
 Influence packaging, pricing, and advertising
 Example: Hispanics now largest minority, more advertising


Advertising/Consumer Tastes
Can play important role in trends of purchasing
 Spend $$ hoping to influence buyers
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COMPLEMENTS AND SUBSTITUTES
Demand curve for one good can also shift b/c
response to change in demand of another good
 Two types of related goods that interact this way

Complements: Goods that are bought/used together
 Substitutes: Goods used in place of one another
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LESSON CLOSING
Group Read Case-Study of Nebraska: pg 93
 Watch Case Study:

Fill out 2 Charts from Section 1 & 2
 Finish 34-36
 Start on activities on pg. 15, 23 in workbooks
 Use labtops to log on to pearson success net and
look at resources for Chapter 4 1 and 2


Action Graphs, Economics and you, visual glossary
CHAPTER 4 SECTION 3
Complete Two Bubble charts from Section 1 and 2
Copy down Concept Chart for S.3
Pre-Read Section 3:
CHAPTER 4 SECTION 3
“What factors affect elasticity of Demand?”
 Objectives

How to calculate elasticity of demand
 Factors that effect elasticity
 How firms use elasticity and revenue to make decisions


Key Terms

http://www.pearsonsuccessnet.com/snpapp/iText/products
/0-13-3698335/Flash/Ch04/Econ_OnlineLectureNotes_ch4_s3.swf
INTRODUCTION

What factors affect elasticity of demand?
Economists have figures a way to calculate how
consumers will react to changes in price
 Original price and how much you want a particular
good are both factors that determine your demand for
a product
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CONSUMER RESPONSE
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Elasticity of demand is the way that consumers
respond to price changes

It measures how drastically buyers will cut back or
increase their demand for a good as price rises/falls
Your demand for a good that you will keep buying despite a
price change is inelastic
 If you buy much less of a good after a small price increase,
your demand for the good is elastic

ELASTIC DEMAND

Elastic Demand comes from one or more of these
factors
Availability of substitute goods
 Limited budget that doesn’t allow for price changes
 Perception of good as a luxury item
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Calculating Elasticity of Demand
% change in qty demanded of good divided by %
change in price of good
 Law of demand implies that result will always be
negative
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Look at figure 4.5; answer 2 ?s
MEASURING ELASTICITY
If elasticity is less
than 1 it is
INELASTIC
 If elasticity is greater
than 1 it is ELASTIC
 If it is equal it is
unitary elastic
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FACTORS AFFECTING ELASTICITY
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Availability of substitutes
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Few substitutes

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Price increase may not result in less demand
 Can make good inelastic
 GAS!!
Wide variety of substitutes

Price increase can result in less demand as substitutes are
used.
 Good is Elastic
 Brand-names, food goods, designer clothing, etc.
OTHER FACTORS FOR ELASTICITY
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Relative importance
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How much of your budget you are willing to spend on
a good
Necessities v. Luxuries
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Whether or not good is considered a necessity or
luxury affects elasticity of demand for good
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Some people deem their phone a necessity now, others a
luxury
Change over time
Can’t always react quickly to price increase
 Often caused by time to find substitutes
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Demand is then INELASTIC short-term but eventually
ELASTIC
 Ex.: Gas guzzling SUVs are now being replaced.
HOW FIRMS USE ELASTICITY/REVENUE
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Elasticity=important to economics b/c helps
measure how consumers respond to changes for
different product

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Elasticity of demand determines how a change in
price will affect income/revenue of a firm (figure 4.6)
Law of demand states that an increase in price
will decrease qty demanded
Elastic demand; you can raise the price by __% and
demand could decrease by larger %= reduced revenue
 Vice-versa: Can decrease price by __% and demand
could increase by larger %= increased revenue
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Look/Answer 4.6 on 103
ELASTICITY AND REVENUE CONT’D
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Demand =Inelastic
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Consumers don’t respond much to price change
EX: if price increases, qty demand will decrease but
less than price increase
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Results in higher revenues (GAS)
Elasticity of Demand determines effect of a price
change on total revenue
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Why will revenue fall if firm raises price of elastic
good?


Demand decreases by a larger % than price increases,
decrease in revenue
What happens to revenue when price decrease, but
demand is inelastic?

Decreases
LESSON CLOSING
Test Friday
 Project Day tomorrow
 Study-Guide Day Tomorrow/Thursday
Closing options
 Work on projects w/partner
 Workbook work due on Friday. w/ test
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33-40, 15, 23, 28

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