Pump Primer • Without using your textbook, explain what you believe this term called “price” means. “ECONOMICS” By Alan J. Carper & Elizabeth Payne Bob Jones University Press. 2010 Unit 1: What Is Economics? Chapter 3: “Value & Demand” Objectives: You should be able to... • Identify and explain the principle of diminishing marginal utility • Describe the three functions of price. • Define demand. • Identify the law of demand. • Explain how changes in demand occur. BIBLICAL INTEGRATION • This world constantly changes, but God is the same today, as He was yesterday, and as He will continue to be tomorrow. (Heb.13:8) Value Value: 1. Karl Menger’s Rule a) b) c) 2. “value” = mind of buyer unsettling to many possibility goods = millions of different values Free Market a) Individual choices = own needs (Carper, 13) Value Diminishing Marginal Utility: Second Principle to Menger’s Rule a. Items may lose personal value (Carper, 14) Diminishing Marginal Utility • William Stanley Jevons (English economist) – 1871 solved “riddle” in Theory of Political Economy. – Developed – “Principle of Diminishing Marginal Utility” • “receive less and less (diminishing) additional (marginal) satisfaction” as they receive more and more during a specific period of time (Carper, 14) Principle of Diminishing Marginal Utility “Utils” Satisfaction: 1st bar 2nd bar 3rd bar Total = 6 utils =6 = 4 utils = 10 = 3 utils = 13 Satisfaction decreases with each additional bar Principle of Diminishing Marginal Utility • Total satisfaction = personal relationship w/God • World searches for earthly possessions for satisfaction = endless desire for more. – “But those who desire to be rich fall into temptation and a snare, and into many foolish and harmful lusts which drown men in destruction and (“The New King James”) perdition.” I Tim. 6:9 (Carper, 16) The Function of Prices Value: a. Greater than or equal to the price = sold b. Price higher than the value = no sale The Function of Prices “What is this thing called price?” Three functions: 1. Prices “transmit information” 2. “Provide incentives” 3. “Redistribute income” (Carper, 15) Function of Prices Rising prices Business need larger supplies Motivates to meet need Falling prices Warning! Cut production Reevaluate goods or services (Carper, 17) The Demand Curve In a world of scarcity, individuals incur trade-offs • thus, economists developed the idea of demand • demand analysis employs data on price and the quantity the consumer is willing to purchase at each price True Prices Determine by Supply and Demand • Buyers are just as important in the pricesetting process as sellers. A. The Law of Demand Demand = how many units of a product will be bought at a given price. (Carper, 19) The Law of Demand • Consumers – “Want” • Economist – Act of buying • Casting their vote with dollars • Informs business what goods and/or services are wanted or needed. (Carper, 19) The Law of Demand • There is no effect on the market until the good or service is actually bought. • Example: Introduction of a new sports car. (Carper, 19) Law of Demand • “Everything else being held constant, the lower the price charged for a good or service, the greater the quantity people will demand and vice versa” • Economist, wishing to observe the effects of price changes on a product’s demand, construct a demand schedule. (Carper, 19, 20) Demand Schedules and Demand Curves • constructed from information gathered in market research • approximations based on the most reliable information available • buyers adjust their demand accordingly • demand curve is merely a series of connected points rather than a line Demand Schedule Price per gallon Gallons per day $0.07 0.04 0.02 0.01 0.005 25 40 80 160 320 A demand schedule is a table showing consumption data Demand Curve • Using the data, we can draw a chart where – the vertical axis shows possible prices that might be charged – the horizontal axis shows quantity purchased at those prices • Economists call this a demand curve Demand Curve $.07 PRICE PER GALLON .06 .05 .04 .03 .02 .01 .00 0 40 80 120 160 200 240 280 GALLONS OF WATER PER DAY 320 360 400 DEMAND •Individual Demand and Market Demand –Market demand is the sum of the demands of all the buyers in a market. –The market demand curve is the horizontal sum of the demand curves of all buyers in the market. (Bade 93) DEMAND (Bade 93) Change In DEMAND • Changes in Demand – Change in demand is a change in the quantity that people plan to buy when any influence other than the price of the good changes. – A change in demand means that there is a new demand schedule and a new demand curve. (Bade 94) Change In DEMAND Figure 4.3 shows changes in demand. 1. When demand decreases, the demand curve shifts leftward from D0 to D1. 2. When demand increases, the demand curve shifts rightward from D0 to D2. (Bade 94) Change in Quantity Demanded • “Some demand curves have the same slope, however, some are steeper becoming more vertical” – Reflect relative inelastic demand for the good or service • Example: Insulin – Price does not determine need – “quantity is less responsive to price” (Carper, 21) Change in Demand • Influences that can cause a change in demand for a good: – number of customers – change in customer tastes – change in income – change in price of a substitute – change in price of a complementary good – change in the expected future price Related Goods – Prices of Related Goods A substitute is a good that can be consumed in place of another good. For example, apples and oranges. The demand for a good increases, if the price of one of its substitutes rises. The demand for a good decreases, if the price of one of its substitutes falls. (Bade 94) Complement Goods A complement is a good that is consumed with another good. For example, ice cream and fudge sauce. The demand for a good increases, if the price of one of its complements falls. The demand for a good decreases, if the price of one of its complements rises. (Bade 95) Normal & Inferior Goods – A normal good is a good for which the demand increases if income increases and demand decreases if income decreases. • Luxury goods, such as expensive automobiles, swimming pools, caviar, and precious jewelry, are normal goods, and their demand is extremely responsive to changes in income. – An inferior good is a good for which the demand decreases if income increases and demand increases if income decreases. • Recapped tires, travel on city buses, used cars, secondhand clothing, and powdered milk (Bade 95) “Giffen Goods” • Goods that experience an increase in quantity demanded as the price increases – goods that possess “snob appeal,” such as caviar, Rolls Royce automobiles, and other status symbol objects. (Carper, 23) Change in the Price of Related Goods “No single good or service can be definitely called a normal good or an inferior good since an inferior good to one person may be a normal good to another.” Substitute Goods = goods that resemble one another and that may be used in place of others chicken and beef hot dogs and hamburgers ice cream and ice milk (Carper, 23) Complementary Goods • “goods usually purchased or used together” – film and camera – gasoline and automobiles – hamburgers and French fries – peanut butter and jelly (Carper, 24) Change in Expectations • “Prices can change to lack or shortage of a product .” Expectations of many other things lead to a shift of the demand curve: expectations of changes in weather, business conditions, etc. (Carper, 24) Change in Tastes and Preferences • “As a product gains popularity, its demand curve experiences a rightward shift as people demand more at any given price.” • “As the product loses popularity, its demand curve begins to shift to the left.” “Shifts caused by change in tastes and preferences are usually from “fad” items” (Carper, 24) Change in Quantity vs. Change in Demand A change in the quantity demanded is a change in the quantity of a good that people plan to buy that results from a change in the price of the good. A change in demand is a change in the quantity that people plan to buy when any influence other than the price of the good changes. (Bade 94) Change in Quantity Demanded vs. Change in Demand. • Change in quantity demanded – movement along a given demand curve, prompted by a change in price • Change in demand – shift of a demand curve to the left or right (Carper, 21) Demand and quantity demanded Change in quantity demanded P Change in demand P D2 D D1 Q Q Activity 4 Demand National Council on Economic Education, New York, N.Y. Objectives • Define demand schedule and demand curve. • Construct a demand curve using hypothetical data. • Explain why consumers buy more of a good or service when the price decreases. • Explain the difference between a shift in the demand curve and a movement along the demand curve. • Describe and analyze the forces that shift the demand curve. • Explain why a demand curve would shift to the right or left given a scenario. Introduction • This lesson introduces the market system – Demand is half of a market and a demand schedule represents the quantities that people are willing and able to buy at alternative prices. – The Demand Curve is a graphical representation of the demand schedule. • Understanding a market is essential to success in Economics. Introduction • You will be graphing a demand schedule, which will help you to understand the implications of a shift in the demand curve. • Activity 3 focuses on the factors that shift the demand curve (homework sheets). • Activity 4 reinforces the factors that cause a demand curve to shift, the direction of the shift and whether the shift represents an increase or decrease in demand. Movement Along a Demand Curve • As the price declines from P to P1, the quantity increases from Q to Q1 • As the price decreases, the quantity demanded increases Shift in Demand The graph shows an increase in demand is a shift to the right (and a decrease in demand is a shift to the left) Increase in demand from D to D1 shows that at the same price (P), the quantity increased from Q to Q1. Shift in Demand Factors that Shift Demand: • Number of Consumers • Price of complementary good • Price of substitute good • Consumer income • Expectations about income or prices Activity 4: Reasons for Change in Demand • Break-up into groups of two or three and complete the following activity. Activity 4: Reasons for Change in Demand • Part A – Read the eight newspaper headlines in Figure 4.2, and use the table to record the impact, if any, of each event on the demand for beef. – Use the first column to the right of the headline to show whether the event causes a change in demand. – Use the next column to record whether the change is an increase or a decrease in demand. – In the third column, decide whether the curve shifts left or right. – Finally, write the letter for the new demand curve. – Use Figure 4.1 to help you. – Always start at curve B, and move only one curve at a time. • One headline implies that the demand for beef does not change. Activity 4 Y Inc. R C Y Y Inc. Dec. R L C A Y N Dec. -- L -- A -- Y Dec. L A Y Y Dec. Inc. L R A C Activity 4: Reasons for Change in Demand • Part B – Categorize each change in demand in Part A according to the reason why demand changed. – A given demand curve assumes that consumer expectations, consumer tastes and preferences, the number of consumers in the market, the income of consumers, and the prices of substitutes and complements are unchanged. In the table, place an X next to the reason that the event described in the headline caused a change in demand. – One headline will have no answer because it is a change in quantity demanded. X X X X X X X Works Cited Blade, Robin, and Michael Parkin. Foundations of Economics: Instructor’s Manual. 2nd ed. Boston: Pearson Education, Inc., 2004. Carper, Alan. Economics for Christian Schools. Greenville: Bob Jones University Press, 1998. Leppel, Professor Karen. “Introduction to Graphs.” Widener University. 25 Jul 2008. http://www.muse.widener.edu/~kleppel/EC202_ppt/ GRAPHS.PPT "The New King James Version." Logos Bible Software. CD_ROM. ed. 2004.