Unit 2 Microeconomics

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Unit 2 - Microeconomics

• Explain how supply and demand interact to
  determine price.
• Describe the major types of economic markets in
  the US.
• Define

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Chapter 4-Demand

• Miss Hesseltine

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Ch. 4.1- What is Demand

• Objectives
• Explain the meaning and concept of demand.
• Explain the purpose of a demand schedule.
• Illustrate the concept of demand in the form of a
  graph.

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Demand

• What is it? The determinants of Demand are
• Desire, ability, and willingness to buy a produce

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Demand Schedule

• Listing that shows the various quantities
  demanded of a particular product at all prices
  that might prevail in the market at a given time

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Demand Curve

• A graph showing the quantity demanded at each and
  every price that might prevail in the market.

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Gallons of OJ that Consumers want to BUY
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Law of Demand

• States that the quantity demanded of a good or
  service varies inversely with its price
• PRICE ? QUANITY DEMANDED ?
• PRICE ? QUANITY DEMANDED ?

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Why is it a LAW?

• Conclusive Studies show proof
• Common sense and simple observation (normal
  behavior)

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Change in Quantity Demanded

• Illustrated by movement along demand curve
• Change in the quantity purchased as a result of
  change in price
• HUGE Difference between shifts along demand curve
  and movement of DEMAND CURVE
• Left? Right?

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SUMMARY-Demand Lesson 1

• The demand curve is a graphic illustration of the
  quantity demanded at various prices.
• A change in price changes the quantity demanded
  and not the demand for the good or service.
• Understand these concepts, know these concepts,
  and own these concepts.

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PREVIOUS LESSON REVIEW

• THE DIFFERENCE B/T QUANTITY DEMANDED and DEMAND
• Qd is just a POINT on the curve and demand is the
  ENTIRE CURVE

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Previous Lesson

• Recall, one variable changes Qd and that
  is..

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Change in Demand

• Definition- Occurs when consumers are willing to
  buy different amounts at the same prices (at each
  and every price), at a specified time

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Change in Demand (Determinants of Demand)

• Income- normal inferior
• Consumer Tastes/Preferences
• Price of Related Goods- substitutes complements
• Changes in Expectations
• Number of Consumers

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Income

• As incomes rise, consumers are able to buy more
  products at each and every price.

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Normal Good

• As INCOME (Y) increases the demand for normal
  goods increases
• When peoples incomes increase, do they purchase
  more hamburger or more steak?

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Inferior Good

• As INCOME (Y) increases the demand for inferior
  goods decreases
• When peoples incomes increase, what happens to
  the market for SPAM?

Momwhats for dinner?YUMMY FRIED SPAM
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Consumer Tastes/Preferences

• Advertising, news reports, fashion trends,
  introduction of new products, and even changes in
  season can affect consumer tastes.

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Price of Related Goods

• Substitutes-products that can be used in place of
  other products (butter and margarine)
• Complements-products that increase the value of
  other products (peanut butter and jelly)
• HOW DO WE GRAPH THESE CHANGES?

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Changes in Expectations

• Expectations refer to the way people think
  about the future
• Expected future prices
• Expected future income
• Can cause a shift of the curve to LEFT or RIGHT
• EXAMPLE-expected food shortages, graph???

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Number of Consumers

• Individuals entering and exiting a market
• Consumers change for many reasons
• Population
• Weather
• Road Construction, etc.

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RECAP-CHANGE IN DEMAND

• Income- normal inferior
• Consumer Tastes/Preferences
• Price of Related Goods- substitutes complements
• Changes in Expectations
• Number of Consumers

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RECAP-CHANGE IN DEMAND

• Movement or shift of the entire DEMAND CURVE to
  the RIGHT or LEFT
• You should now be able to identify the difference
  between change in Qd and change in demand.

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Question 8

• Change in Income-causes consumer to buy more
  clothes at each and every price shifting demand
  curve to the RIGHT

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Income Effect (IE)

• the change in quantity demanded because of a
  change in the consumers real income when the
  price of a commodity changes

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IE

• P ?
• Consumers pay less
• EXTRA real income left to spend

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Substitution Effect (SE)

• Change in the quantity demanded because of the
  change in the relative price of the product

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Marginal Utility

• extra usefulness or satisfaction a person gets
  from acquiring or using one more unit of a
  product

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Diminishing Marginal Utility (DMU)

• States that the extra satisfaction we get from
  using additional quantities of the product begins
  to diminish
• NOT willing to pay as much for the 2nd, 3rd, 4th,
  and so on
• STOP Buying when MU

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Demand Elasticity

• The extent to which a change in price causes a
  change in the quantity demanded
• Measures consumers sensitivity to changes in price

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Elastic Demand

• Small change in prices causes a relatively large
  change in quantity demanded

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Inelastic Demand

• Given change in price causes a relatively smaller
  change in the quantity demanded

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Elasticity
INSULIN
BICYCLES
D
Price
Price
D
Quantity
Quantity
Perfectly Inelastic
Relatively Elastic
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Determinants of Demand Elasticity

• Can the purchase be delayed?
• Are adequate substitutes available?
• Does the purchase use a large portion of income?

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5 TESTS of Elasticity

• INELASTIC
• Few substitutes
• Necessity
• Inexpensive
• Total Revenue Test
• P?TR ?
• P?TR?

• ELASTIC
• Many Substitutes
• Luxury
• Expensive
• Total Revenue Test
• P? TR?
• P? TR ?