Demand DemandSupply Demand and Supply Why do roses cost more on Valentine’s Day? Why do TV ads cost more during the Super Bowl ($2.7 million for 30 sec.)

DemandDemand

DemandDemand and SupplySupplyWhy do roses cost more on Valentine’s Day?

Why do TV ads cost more during the Super Bowl ($2.7 million for 30 sec.) than during Nick at Nite reruns?

Why do hotel rooms in Sun Valley, Idaho cost more in the winter than in the summer?

Why do surgeons earn more than butchers?

Why do pro basketball players earn more than pro hockey players?

Why do economics majors earn more than most other majors?

Why are some of you going to major in economics in college?

The answer to these and other economics questions boil down to the workings of supply and demand – the subject of this chapter.

““Econ, Econ”Econ, Econ”

To

MMarketarket D Demandemand

““JO”JO”

$3$3 $3$3 $3$3++ ++

3535 3939 2626

$3$3

100100From “individual” demand to From “individual” demand to “market”“market” demand demand

[Total][Total]

““Bo”Bo” ““Mo”Mo”

DD DD DD DD

==

And, And, what ifwhat if the price of this product decreases from $3 to the price of this product decreases from $3 to $2$2??

Individual DemandIndividual Demand

$2$2

4040

$2$2

4545

$2$2

3030

$2$2

115115

A point to point movement on the same “D” curve is a “A point to point movement on the same “D” curve is a “Change in QDChange in QD””And – what if this good And – what if this good prevents cancerprevents cancer, so we have an , so we have an increase in “D”increase in “D” for it. for it.

DD22

115115

11

$5$544332211

…a specifiedspecified time periodtime period……other things being equalother things being equal

P QQDD

10102020353555558080

Price decreasesPrice decreases; ; QD increasesQD increasesConsumersConsumers “willingness to buy”“willingness to buy”

$5$5

$4$4

$3$3

$2$2

$1$1

DD

0 10 20 35 55 800 10 20 35 55 80Quantity DemandedQuantity Demanded

QD – how much will be purchased at a specific price [& date].QD – how much will be purchased at a specific price [& date].

QDQD22QDQD11

PricePrice QDQD

InverseInverse relationshirelationshipp

$399.00$399.00[[withwith 2 yr contract] 2 yr contract]

D Reasons For Reasons For Downsloping “D”Downsloping “D” Curve Curve1. Income EffectIncome Effect –current buyers buy more.2. Substitution EffectSubstitution Effect– new buyers now purchase.3. Diminishing MarginalDiminishing Marginal UtilityUtility - because buyers of successive units receive less marginal utility, they will buy more only when the price is lowered.

Change in QDChange in QD1. Price changePrice change2. MovementMovement [up/down the demand curve]3. Point to pointPoint to point [along the curve]

““D”D” refers to the “whole curve”.“whole curve”. [“all prices”“all prices”]““QD”QD” refers to a “point on the curve”“point on the curve”

based on a “particular price.”“particular price.”

$250.00$250.00

iPhoneiPhone [8GB][8GB]

1.1. Income EffectIncome Effect• When things are expensive, money buys less• When things are cheap, money buys more

2.2. Substitution EffectSubstitution Effect• When apples are expensive and their substitutes (pears) are relatively cheap, I buy fewer apples and more pears

3.3. Diminishing Marginal UtilityDiminishing Marginal Utility• Each additional unit of an item purchased gives less marginal utility

(happy points) than the previous unit. Therefore, the only way I will buy more is if the price is lower.

• Ex. When I’m hungry, I typically will buy 2 breakfast tacos. The reason I don’t buy a third taco is because the marginal utility of the third taco is less than the price of the taco. But, if the price of the taco is less than the marginal utility of the taco, then I will buy the third taco

DDPP11

PP22

QDQD11 QDQD11

PPicture oficture of

Law ofLaw ofDemandDemand

ElasticElastic or or InelasticInelastic(Total Receipts Test)(Total Receipts Test)

Total Receipts TestTotal Receipts Test20 x $2 = $40.0020 x $2 = $40.00

Total Receipts TestTotal Receipts Test20 x $2 = $4020 x $2 = $40

20 30 40 5020 30 40 50

$2$2

$1$1

InelasticInelastic ElasticElastic

30 x $1 = $30.0030 x $1 = $30.00 50 x $1 = $5050 x $1 = $50

11. Elasticity of DElasticity of D – the way price affects QD.12. ElasticElastic - - QDQD that is very responsive to pricevery responsive to price.13. InelasticInelastic - a chgchg in in priceprice has has littlelittle impact on QDimpact on QD.

Elastic (flexible) DemandElastic (flexible) Demand1.1. Substitutes Substitutes (butter)2.2. LuxuryLuxury (mink coat)3.3. ExpensiveExpensive (car)4.4. Has durabilityHas durability (refrigerator)5.5. Lasts a long timeLasts a long time (gas-guzzling car)

Inelastic (inflexible) DemandInelastic (inflexible) Demand1.1. No substitutesNo substitutes (milk)2.2. NecessityNecessity (insulin)3.3. InexpensiveInexpensive (safety pin)4.4. No durabilityNo durability (pencil)5.5. Lasts only a short timeLasts only a short time (bread)

..

ElasticElastic Demand For Cassette Tapes Demand For Cassette Tapes

-$1-$1

DD

“TR” Test$2.50x100,000=$250,000$1.50x600,000=$900,000 +$650,000+$650,000

Think of “responsiveness”“responsiveness” as “flatness”“flatness”.

+25+25% % QDQD

-$1

DD““TR” TestTR” Test

$2 = $30 bil.$1 = $20 bil. -$10 bil.-$10 bil.

..

Consumers change their minds at each and every price.

Based on good or bad publicity about OJ.

16 oz. Orange juice = 220 calories16 oz. Orange juice = 220 calories16 oz. Tomato juice = 78 calories 16 oz. Tomato juice = 78 calories

Change inChange in “ “DDemandemand” ” [curve][curve]

[“TIMER”][“TIMER”]

Quantity DemandedQuantity Demanded vs.vs. DemandDemand

Quantity Demanded [QD] is Quantity Demanded [QD] is triggered by a price chg.triggered by a price chg.

The quantities of a good or service that people will people will purchase at a specific pricepurchase at a specific price at a given time.

Demand [D] is triggered by “TIMER” [non-price].Demand [D] is triggered by “TIMER” [non-price].

A schedule of the total quantities of a good or service that purchasers will buy at different pricespurchasers will buy at different prices at a given time.

DemandDemand is a bunch of QD’s strung togetherbunch of QD’s strung together.

““Demand Shifters” [TIMER]Demand Shifters” [TIMER]1. 1. TTaste [aste [directdirect]]2. 2. IIncome [normal-ncome [normal-directdirect] [inferior-] [inferior-inverseinverse]]3. 3. MMarket Size [number of consumers-arket Size [number of consumers-directdirect]]4. 4. EExpectations [of consumers about future *price-xpectations [of consumers about future *price-directdirect, , about future availability-about future availability-inverseinverse, or about future income–, or about future income–directdirect..5. 5. RRelated Good *Prices [substitutes-elated Good *Prices [substitutes-directdirect] [complements-] [complements-inverseinverse]]

Change in “D” [curve]Change in “D” [curve]1. Non price changeNon price change [[“TIMER”“TIMER”]]2. Whole “D” curve shiftsWhole “D” curve shifts[There is a change in “QD” but it isnot caused by a change in “price.”[QD-”singleQD-”single price”price”; D-”all prices”D-”all prices”]

ComplementComplement[[inverseinverse]]

SubstituteSubstitute

[[DirectDirect]]ButterButter BreadBread BagelsBagels

PP

DD33 DD11 DD22

QDQD33 QDQD11 QDQD22

DD11 DD22

PPPP11

QDQD11

PP22

DD11

DD22

DD

PP

QDQD22

1. An “Increase in Taste” shifts the D curve right1. An “Increase in Taste” shifts the D curve right a. The Nehru jacket came & went in 6 months. b. Jordache jean demand created by TV c. Leisure suits and bell bottoms. d. Technological change may cause consumer taste to change[slide rules].

DD11

DD33PP

QDQD11Bell BottomsBell Bottoms

MiniMiniSkirtsSkirts

Hip HuggersHip HuggersPlatformsPlatforms

DD22

QDQD22QDQD33

Increase in demand for Increase in demand for dark chocolatedark chocolate after studies after studiesrevealed revealed that there werethat there were health benefitshealth benefits from from eating it.eating it.Scientists have discovered that smokers who ate Scientists have discovered that smokers who ate dark cdark chocolatehocolate had had

less hardening of the arteriesless hardening of the arteries and a and a lowered risk of blood clotslowered risk of blood clots..

DD11 DD22

PP

$45$45

QD1QD1 QD2QD2

DD11

DD22

Advertising Can Shift “Advertising Can Shift “DD”” [& also impact QD][& also impact QD]

DD11 DD22

PP

QDQD11 QDQD22

More incomeMore incomeresults inresults in

more demandmore demandfor steak;for steak;

less demandless demandfor spam.for spam.

SteakSteak SpamSpam

Less incomeLess incomeresults inresults in

more demandmore demandfor spam;for spam;

less demandless demandfor steak.for steak.

Normal GoodNormal Good – goods whose demand varies directlydirectly with income.Inferior GoodInferior Good – goods whose demand varies inverselyinversely with income.Butter, filet, steel-belts, new clothing & new cars v.Margarine, spam, used tires, old clothing & old cars

2. 2. Change in Change in IncomeIncome

Income

Demand For

SpamDemand

For

Steak

DD11 DD22

PP

QDQD11 QDQD22

More demand More demand for for both spamboth spamand steak.and steak.

can increase/decrease from economic decisions, advertising, andgovernment political decisions (ChinaChina).Ex: The large “baby boom”“baby boom” of 1946-64increased the demand for baby supplies. An increase in life expectancy increased demand for for medical caremedical care, retirementretirementcommunitiescommunities, and nursing homesnursing homes.

Increase in # of consumersIncrease in # of consumers

DD11 DD22

PP

QDQD11 QDQD22

If the iPod-TouchiPod-Touch is expectedexpected to increase in price from $299 to $399.

iPod-TouchiPod-Touch

Consumer expectationsConsumer expectations about future productfuture product priceprice, future future availabilityavailability, & future incomefuture income.

Ex: When the Korean WarKorean War broke out in thesummer of 1950, newnew car car sales boomedsales boomed (also washerswashers and refrigeratorsrefrigerators) out of the expectation of a production stoppage like during WWII. None occurred but it was the expectationexpectation that affected new car demandnew car demand.

carcar

ComplementComplement[[InverseInverse]]

SubstituteSubstitute[[DirectDirect]]

Gangsta GrillsGangsta Grills Chrysler 300sChrysler 300s ToyotasToyotas

DD11 DD22

PPPP11

QDQD11

P2

DD11

DD22

DD

PP

QDQD22

MV X PQMV X PQ

QD1 QD2

There are three types of goods.1.1. Independent goodsIndependent goods – price change of one has no impactno impact on the other. Ex: fishhooks & pantyhosefishhooks & pantyhose or or salt & shoelacessalt & shoelaces

2. Substitute goodsSubstitute goods(“competing goods”“competing goods”) - price change of one affects the demand of the other directlydirectly.

Ex: 77Up & CokeUp & Coke or Miller & BudMiller & Bud

3. Complementary goodsComplementary goods(“go together”“go together”) - price change of one affects the demand for the other inverselyinversely.

DD11 DD22

QDQD2 2 QDQD11

D2

D1

CameraCamera FilmFilm CerealCereal && milk Coffeemilk Coffee & & donutsdonuts

Peanut butter & jellyPeanut butter & jelly

PricePriceOfOf

7UP7UP

Demand Demand forfor

Dr PepperDr Pepper

[IncreaseIncrease in price of one; increaseincrease in “D” of the other]

P

PP22

PP11

QDQD22 QDQD11

QD QD

DD1 D2

[DecreaseDecrease in price of one; increaseincrease in the “D” for the other]

Car PricesCar Prices

Gasoline DemandGasoline Demand

PP

QD QD QDQD

DD11

They are so cheap that They are so cheap that even dogs are buying carseven dogs are buying cars

P1P2

QD1 QD2

I’m making more money without dropping my prices.

DD22

No changeNo changein pricein price

Price Price ofofiPod VideoiPod Video

Demand for Demand for MMicrosoft’sicrosoft’s Z Zuneune

Substitutes – DirectSubstitutes – Direct[IncreaseIncrease in price of one; increaseincrease in “D” of the other]

P

PP22

PP11

QDQD22 QDQD11

QD QD QDQD

DD DD11

DD22

1977, Bill was 1977, Bill was arrested for arrested for

running a stoprunning a stopsign and drivingsign and drivingwithoutwithout a a license.license.

PricePriceOfOf

ChickenChicken

Demand Demand for for

TurkeyTurkey

Substitutes - DirectSubstitutes - Direct

DD11 DD22

ComplementComplement[[inverseinverse]]

SubstituteSubstitute[[DirectDirect]]

MonitorMonitorDesktopDesktop

ComputersComputers LaptopsLaptops

DD11 DD22

PPPP11

QDQD11

PP22

DD11

DD22

DD

PP

Although both monitor monitor & & laptop QDs changedlaptop QDs changed, it is still a “Change in D”“Change in D” for those two, because the QD changes were not triggered by a change in price. were not triggered by a change in price. The price of desktop computers did changeprice of desktop computers did change so there is a

““Change in QD”Change in QD” for desktop computersdesktop computers.

QDQD22

Demand Demand for for

AppleAppleComputersComputers

DD11 DD22

Price OfPrice Of

WindowsWindowsComputersComputers

Substitutes - DirectSubstitutes - Direct

..[DIRECT][DIRECT]

[[iinnvveerrssee]]

Hot Dogs Hamburgers

Pancakes Syrup

““Substitutes”Substitutes”

PricePriceDecreasesDecreases

PricePriceDecreasesDecreases

PPDD22

DD DD11

QDQD22 QD QD11QDQD1 1 QDQD22

PP11

PP22

““CCoommpplleemmeenntts”s”PricePrice

DecreasesDecreasesDemandDemand

IncreasesIncreases PP

DD11 DD22DD

PP11

PP22

QDQD1 1 QD2QD2 QDQD11 QDQD22

SubstituteSubstitute//CCoommpplleemmeenntt RelationshipsRelationships

TTastes [directdirect]

IIncomes -Normal [directdirect] & Inferior[iinnvveerrssee]

MMarket Size(# of consumers) [directdirect]

EExpectations of consumers about [future price-directdirect; future income [directdirect]; and availability [iinnvveerrssee]

RRelated Good Price Changes [substitutes-directdirect; complements-iinnvveerrssee]

HelmetsHelmets

PP““TIMERTIMER””

““Decrease in D”Decrease in D”

Increase in “QD”Increase in “QD”[caused by a “decrease in price”][caused by a “decrease in price”]

Decrease in “QD”Decrease in “QD”[caused by an “increase in price”][caused by an “increase in price”]

1. Price change1. Price change2. Movement2. Movement3. P3. Pointoint to to ppoinointt[“[“Snap shotSnap shot of of 1 pt1 pt in in timetime]]

Change in “D” [“TIMER”]Change in “D” [“TIMER”]1. Non-price1. Non-price2. Whole curve2. Whole curve3. Shift3. Shift[“Time passes”][“Time passes”]

What could causeWhat could cause an an “increase“increase in in DemandDemand?”?” 5. ExpectationsExpectations of a shortageshortage1. Increase in tastetaste 6. ExpectationsExpectations of a price increaseprice increase2 .Increase in incomeincome [normal goodnormal good] 7. ExpectationsExpectations of positive future incomepositive future income3. Decrease in incomeincome [inferior goodinferior good] 8. IncrIncr in price of a substitutesubstitute for product “X”

4. Increase in market sizemarket size [## of of consumersconsumers] 9. DecrDecr in price of a complementcomplement of product “X”

PP11

PP22

QDQD11

PP11

PP22

QDQD11

DD DD

DD11 DD22 DD11

DD22PP

PP

““Increase in D”Increase in D”

QDQD22 QDQD22

Change in Change in DD [curve] [curve][non-price change/shift/whole curve][non-price change/shift/whole curve]5 Demand Shifters [“TIMER”]5 Demand Shifters [“TIMER”]1. TasteTaste [directdirect]2. IncomeIncome [normal - normal - directdirect] [inferior - [inferior - iinnvveerrssee]3. Market SizeMarket Size [number of consumersnumber of consumers -- directdirect]4. ExpectationsExpectations [price, income, & availabilityprice, income, & availability]5. Related Good Price changesRelated Good Price changes [substitutes - substitutes - directdirect] [complements - complements - iinnvveerrssee]

PP11

PP22

QDQD1 1 QDQD22

““Shifting the crab demand curve”Shifting the crab demand curve”

Change in Change in QDQD[price change/movement/pt to pt][price change/movement/pt to pt]

[“Moving” along the[“Moving” along the crab demand curvecrab demand curve” because of a crab price change]because of a crab price change]

++//-- QD QD//DD

___ ___ 1. CrabCrab sales are affected by a drop in crab pricesdrop in crab prices.

___ ___ 2. An increase in incomeincrease in income causes the demand curve for crabcrab to shift.

DD33 DD11 DD22

QDQD33 QDQD11 QDQD22

DD

++++

QDQDDD

___ ___ 1. A population increasepopulation increase affects sales of Pepsi Colas.___ ___ 2. Consumer incomes incomes in the city of Plano decrease, with the result that jewelry jewelry sales are affected.___ ___ 3. A camera store has a sale that features 25% off25% off the price of all camerascameras.___ ___ 4. Texas imposes a 15% luxury tax15% luxury tax on the sale of sailboatssailboats.___ ___ 5. A frost in Florida destroys 60% of the orange crop and increases expectationsexpectations about a future price increaseabout a future price increase of orangesoranges. ___ ___ 6. Consumers expect expect the the pricesprices of digital camerasdigital cameras to to decreasedecrease next month. ___ ___ 7. The sale of DVDsDVDs is affected by a 20% increase in the price of DVD players20% increase in the price of DVD players.

___ ___ 8. The sale of bunsbuns is affected by a 20% decrease in the price of20% decrease in the price of hamburger meathamburger meat.

___ ___ 9. The sale of Kangaroo meatKangaroo meat in Europe [Roo Steak] is affected by a 25% increase in the price of beef25% increase in the price of beef.

___ ___ 10. Dunkin DonutsDonuts lowers the price of donutslowers the price of donuts & experiences a change in sales.

++ DD-- DD

++ QDQD-- QDQD++ DD

-- DD-- DD

++ DD

++ DD

++ QDQD

DVDPlayers

Graph The Black Boldfaced ItemsGraph The Black Boldfaced Items++//-- DD//QDQD

DD DD11PP22

PP11[CCoommpplleemmeennttss - IINNVVEERRSSEE]

[CCoommpplleemmeennttss - IINNVVEERRSSEE]Hamburger

meat

PP11

PP22

DD11D

QDQD1 1 QQD2D2

PP22PP11

DD D1

QDQD22 QD QD11

[SubstitutesSubstitutes - - DIRECTDIRECT]

QDQD22 QD QD11BeefBeef

Kangaroo meatKangaroo meat

DVDsDVDs

BunsBuns

““Change in Demand”Change in Demand”

Change in DemandChange in DemandNon-Price ChangeNon-Price ChangeWhole CurveWhole CurveShiftShift

What is not held constantWhat is not held constant in these two graphs?in these two graphs?

Change in QDChange in QDPrice ChangePrice ChangePoint to PointPoint to PointMovementMovement

[[IINNVVEERRSSEE]]

PP11

PP22

PP22

PP11

QDQD1 1 QDQD22

DD

QDQD22 QDQD11

D1

DD22DD11 DD22

QQ1 1 QQ22 QQ2 2 QQ11

PPPPDo not confuse theseDo not confuse thesetwo with “Chg in QD”two with “Chg in QD”

DD

PricePrice

[D – “TIMER;[D – “TIMER; QD – price changeQD – price change [[iinnvveerrssee]]

__1. Which will cause an “Increase in D”“Increase in D” for MP3 Player phonesMP3 Player phones?

a. increase in income c. increase in the price of MP3 Player phones b. decrease in income d. decrease in the price of MP3 Player phones___2. Which will cause an “Increase in QD”“Increase in QD” for MP3 Player phonesMP3 Player phones? a. decrease in income c. decrease in the price of MP3 Player phones b. increase in income d. increase in the price of MP3 Player phones___3. Which will cause a “Decrease in D”“Decrease in D” for Projectors? a. increase in the price of projectors c. decrease in # of consumers b. decrease in the price of projectors d. increase in projector taste___4. Which will cause a “Decrease in QD”“Decrease in QD” for Projectors? a. increase in the price of projectors c. decrease in # of consumers b. decrease in the price of projectors d. increase in projector taste

A

C

C

A

MP3 Player Phone[stereo sound, downloadablesound games and ring tones]

1. What would cause an “increase in QD”“increase in QD” for SnickersSnickers? a. increase in price of Snickers b. decrease in price of Snickers c. decrease in income d. increase in number of consumers

2. What would cause an “increase in D”“increase in D” for SnickersSnickers? a. increase in taste b. decrease in price of Snickers c. decrease in income d. increase in the price of Snickers

3. What would cause a “decrease in QD”“decrease in QD” for SnickersSnickers? a. increase in taste b. decrease in price of Snickers c. increase in price of Snickers

4. What would cause a “decrease in D”“decrease in D” for SnickersSnickers? a. decrease in income b. increase in taste c. decrease in price of Snickers

5. An “increase in the price of ButterfingersButterfingers would cause a(n) (increase/decrease) in (QD/D) for SnickersSnickers?

QDQD & & DD PracticePractice Quiz Quiz[[SSnickersnickers]]

1. (Demand/Supply) is identified as quantities consumers are willing and able to buy at various prices during a given time period.2. The lawlaw of of demanddemand says that price & QDprice & QD are (directly/inversely) related.3. The most important variablemost important variable influencing decisions to produce and purchase goods is (technique/price). (Price/income) is not heldnot held constantconstant when when moving along a stable demand curvemoving along a stable demand curve.4. Income effect-theIncome effect-the increase or decrease in purchasing powerincrease or decrease in purchasing power brought on by a change in (taste/market size/price).5. Substitution effectSubstitution effect – tendency to substitutesubstitute a (higher/lower) -priced product for a more expensive product.6. Diminishing marginal utilityDiminishing marginal utility – – utilityutility, or (determination/anger/satisfation)

decreases as more of the same product [Snickers] is consumed.7. The law of demandlaw of demand refers to a (movement/shift) along a demand curve.8. Substituting chickenSubstituting chicken as the price of steak goes upsteak goes up is an example of the (income/substitution) effect.9. When the price of price of caviar fallscaviar falls, the purchasing power of our money income rises & thus permits us to purchase more caviar. This is the (income/substitution) effect.10. The demand (curve/schedule) is a numerical tabulationnumerical tabulation showing QD at each price. The demand (curve/schedule) is a graphical representationgraphical representation of the law of demand.

NS 1-10NS 1-10

11. ElasticityElasticity of of demanddemand–the way price affects (attitude/quantity/market size).

12. (Inelastic/Elastic) demand – demand that is very responsivevery responsive to price. [A small price increase causes a large decrease in quantity demanded.]13. (Inelastic/Elastic) demand-when a change in price has little impact on QDchange in price has little impact on QD..14. The 3-item test for 3-item test for elastic demandelastic demand are substitutes, luxury items, and (inexpensive/expensive) items.15. The 3-item test3-item test for inelastic demandfor inelastic demand are no substitutes, necessities, and (inexpensive/expensive) items.16. Expensive carsExpensive cars have (inelastic/elastic) demand.17. Pepsi ColaPepsi Cola has (inelastic/elastic) demand.18. InsulinInsulin has (inelastic/elastic) demand.19. The elastic demand curveelastic demand curve is more (horizontal/vertical). [much change]20. The inelastic demandinelastic demand curve is more (horizontal/vertical). [not much change]

NS 11 - 20NS 11 - 20

21. With the invention of the calculatorinvention of the calculator, the demand curve for the slide rule (increased/decreased). 22. When Forest Gump went to ChinaForest Gump went to China & the U.S. followed by opening up relations with Chinaopening up relations with China, the demand curve for Coke (increased/decreased). 23. An increase in incomeincrease in income would (increase/decrease) the demand for used clothingused clothing. [inferior good]24. A decrease in incomedecrease in income would (increase/decrease) the demand for lobster. [normal good]25. A decrease decrease in thein the price price of of product product XX [lumber] will (incr/decr) the demand for the ccoommpplleemmeennttaarryy product product Y. [nails]26. After Brooke ShieldsBrooke Shields[15] did her national TV ads[“Nothing comes between me and my Calvin’s”], the “D” curve moved (right/left).

NS 21-26NS 21-26

$45$45

27. An increase in the price of Pepsiincrease in the price of Pepsi causes the demand curve for CokeCoke to move to the (right/left). 28. If there is a sale on shirtssale on shirts, the demand curve for tiesties will move to the (right/left). 29. If a man’s workplace is about to close downman’s workplace is about to close down, his demand curve for major purchasesmajor purchases would move to the (right/left).30. If a cure for lung cancercure for lung cancer were found, the demand curve for cigarettescigarettes would move to the (right/left).31. If the price of pancakes decreasesprice of pancakes decreases, the demand for syrupsyrup, a ccoommpplleemmeenntt, will (increase/decrease).32. If the priceprice of of butter decreasesbutter decreases, the demand for margarinemargarine will (incr/decr).

33. A “change in QD”“change in QD” is caused by (price change/TIMER) [a “movement”]34. A “change in D” is caused by (price change/TIMER) [a “shift”]

NS 27-38NS 27-38

e

The EndThe End

““Econ, Econ”. Let Econ, Econ”. Let tell you about econ.tell you about econ.

1. Madonna gave a concert at the AAC after doubling the ticketdoubling the ticket priceprice and experiencing a change in anticipated attendance.

2. A decrease in tastedecrease in taste causes the demand for lobsterlobster to shift.3. A 20% increase in the price of Pepsi 20% increase in the price of Pepsi affect the sale of CokeCoke..4. Consumers expectexpect the price of cell phonescell phones to increase 25% next month.5. The sale of Ford F150sFord F150s is affected when the U.S. begins trading with CubaCuba.6. New autos decrease in priceautos decrease in price by 20% & the sale of gasolinegasoline is affected.

7. Victoria’s Secret increases the price of its thongsincreases the price of its thongs by 40% and experiences a change in the volume of sales.8. Britney Spears triples the price of her albumtriples the price of her album, ““Oops, I flunked Econ Again,” Oops, I flunked Econ Again,” and sales are affected.9. A drought in Texas destroys 40% of the state’s peachespeaches & increases

consumer expectationsexpectations about a future price increase of peaches.10. A 15% decrease in the price of motorcyclesmotorcycles affect the sale of helmetshelmets.

TTaste [directdirect]

IIncome [normal-directdirect] [inferior-iinnvveerrssee]

MMarket Size [# of consumers-directdirect]

EExpectations [price-directdirect] [income-directdirect] [availability-iinnvveerrsse]

RRelated Good Price Changes [subs-directdirect] [complements-iinnvveerrssee]

1.–QD 2. –D 1.–QD 2. –D 3. +D 4.+D 5.+D 3. +D 4.+D 5.+D 6.+D 7.–QD 8.–QD 9.+D 10.+D6.+D 7.–QD 8.–QD 9.+D 10.+D

1. Christina gave a concert at the AAC after lowering the ticket the ticket priceprice and experiencing a change in anticipated attendance.

2. An increase in tasteincrease in taste causes the demand curve for lobsterlobster to shift.3. The sale of cokecoke is affected by a 20% decrease in the price of Pepsi.20% decrease in the price of Pepsi.4. Consumers expectexpect the price of XBOXXBOX to decrease 25% next month.5. The sale of Dr PepperDr Pepper is affected when the U.S. goes to war with Chinawar with China.6. New SUVs decrease in priceSUVs decrease in price by 30% & the sale of gasolinegasoline is affected.

7. Victoria’s Secret decreases the price of its teddiesdecreases the price of its teddies by 50% and experiences a change in the volume of sales.8. The Spice Girls lowerlower the the priceprice of of their albumtheir album, “Oops,“Oops, We Actually Passed Econ,” We Actually Passed Econ,” and sales are affected.9. A freeze in California destroys 70% of the state’s orangesoranges and increases

consumer expectationsexpectations about a future price increase of oranges.10. A 50% increase in the price of breadbread affect the sale of bagelsbagels.

TTaste [directdirect]

IIncome [normal-directdirect] [inferior-iinnvveerrssee]

MMarket Size [# of consumers-directdirect]

EExpectations [price-directdirect] [income-directdirect] [availability-iinnvveerrssee]

RRelated Good Price Changes[subs-directdirect] [complements-iinnvveerrssee]

1.+QD 1.+QD 2.+D 3. -D 2.+D 3. -D 4.-D 4.-D 5. -D 5. -D 6.+D 6.+D 7.+QD 8.+QD 9.+D 10.+D7.+QD 8.+QD 9.+D 10.+D

Review of DemandReview of Demand

QDQD22QDQD11

PricePrice QDQD

InverseInverse relationshirelationshipp

$399.00$399.00[[withwith 2 yr contract] 2 yr contract]

D Reasons For Reasons For Downsloping “D”Downsloping “D” Curve Curve1. Income EffectIncome Effect –current buyers buy more.2. Substitution EffectSubstitution Effect– new buyers now purchase.3. Diminishing MarginalDiminishing Marginal UtilityUtility - because buyers of successive units receive less marginal utility, they will buy more only when the price is lowered.

Change in QDChange in QD1. Price changePrice change2. MovementMovement [up/down the demand curve]3. Point to pointPoint to point [along the curve]

““D”D” refers to the “whole curve”.“whole curve”. [“all prices”“all prices”]““QD”QD” refers to a “point on the curve”“point on the curve”

based on a “particular price.”“particular price.”

$250.00$250.00

iPhoneiPhone [8GB][8GB]

““Demand Shifters”Demand Shifters” [[““TIMER”TIMER”]]1. 1. TTaste [direct]aste [direct]2. 2. IIncome [normal-ncome [normal-directdirect] [inferior-inverse]] [inferior-inverse]3. 3. MMarket Size [number of consumers-arket Size [number of consumers-directdirect]]4. 4. EExpectations [of consumers about future price-xpectations [of consumers about future price-directdirect, , about future availability-about future availability-inverseinverse, or about future income–, or about future income–directdirect..5. 5. RRelated Good Prices [substitutes-elated Good Prices [substitutes-directdirect] [complements-] [complements-inverseinverse]]

Changes in “D” [curve]Changes in “D” [curve]1. Non price changeNon price change [“TIMER”]2. Whole “D” curve shiftsWhole “D” curve shifts[There is a change in “QD” but it isnot caused by a change in “price.”[QDQD--“singe price”“singe price”; D-”all prices”D-”all prices”]

ComplementComplement[[inverseinverse]]

SubstituteSubstitute[Direct][Direct]

Games Games for PS3for PS3

PS3PS3 XBOXXBOXPP

DD33 DD11 DD33

QDQD33 QDQD11 QDQD22

DD11 DD22

PPPP11

QDQD11 QDQD22

PP22

DD11

DD22

DD

PP

DD11 DD22

PP

QDQD11 QDQD22

An increase in tasteincrease in tastefor DVDs results in an

increase in demandincrease in demand.

A decrease in tastedecrease in tastefor videos results in a

decreasedecrease in in demanddemand.

DD33

QDQD33

D1 DD22

P

QD1 QDQD22

More incomeMore incomeresults inresults in

more demandmore demandfor new cars;for new cars;less demandless demandfor used cars.for used cars.

New CarsNew Cars Used CarsUsed Cars

Less incomeLess incomeresults inresults in

more demandmore demandfor used cars;for used cars;less demandless demandfor new cars.for new cars.

DD11 DD22

PP

QDQD11 QDQD22

More demandMore demandfor both normalfor both normal& & inferior goodsinferior goods

New CarsNew Cars

Used CarsUsed Cars

This is what we told one billion Chineseone billion Chinese, as new potential new potential consumersconsumers, when we opened trade relationstrade relations with them in 19721972.

DD11 DD22

PP

QDQD11 QDQD22

If Steve Jobs responds to iRateiRate customers who

bought the iPhoneiPhone at $599 and says, “iSorryiSorry,we will raise the price back to $599 in 3 weeks.”

iPhoneiPhone

$399$399

Buy it now to save money.Buy it now to save money.

DD11 DD22

PP

QDQD11 QDQD22

Let’s say that we are coming out of recessioncoming out of recession & consumersfeel secure about their jobs. [Positive future incomePositive future income]

DD11

DD22

PP

QDQD11QDQD22

Let’s say that we are going into a recessiongoing into a recession and consumersdon’t feel secure about their jobs. [NegativeNegative future income future income]

ComplementComplement[[InverseInverse]]

SubstituteSubstitute[[DirectDirect]]

MilkMilk CerealCereal Pop TartsPop Tarts

DD11 DD22

PPPP11

QDQD11

P2

DD11

DD22

DD

PP

QDQD22

Substitutes - DirectSubstitutes - Direct

Dr PepperDr PepperCokeCokePP11

PP22

PP11

PP22

QDQD11 QDQD22

DD

DD DD11

D2D2

DD11 DD22MotorcyclesMotorcycles

HelmetsHelmets

““Change in Demand”Change in Demand”

Change in DemandChange in DemandNon-Price ChangeNon-Price ChangeWhole CurveWhole CurveShiftShift

What is not held constantWhat is not held constant in these two graphs?in these two graphs?

Change in QDChange in QDPrice ChangePrice ChangePoint to PointPoint to PointMovementMovement

[[IINNVVEERRSSEE]]

PP11

PP22

PP22

PP11

QDQD1 1 QDQD22

DD

QDQD22 QDQD11

D1

DD22DD11 DD22

QQ1 1 QQ22 QQ2 2 QQ11

PPPPDo not confuse theseDo not confuse thesetwo with “Chg in QD”two with “Chg in QD”

DD

PricePrice

[D – “TIMER;[D – “TIMER; QD – price changeQD – price change [[iinnvveerrssee]] [Revised from previous][Revised from previous]__1. Which of the following will cause an “Decrease in D”“Decrease in D” for iPod nanosiPod nanos?

a. increase in income c. increase in the price of iPod nanos b. decrease in income d. decrease in the price of iPod nanos___2. Which will cause an “Decrease in QD”“Decrease in QD” for iPod nanosiPod nanos? a. decrease in income c. decrease in the price of iPod nanos b. increase in income d. increase in the price of iPod nanos___3. Which of the following will cause a “Increase in D”“Increase in D” for HDTVs? a. increase in the price of HDTVs c. decrease in # of consumers b. decrease in the price of HDTVs d. increase in HDTV taste___4. Which of the following will cause a “Increase in QD”“Increase in QD” for HDTVs? a. increase in the price of HDTVs c. decrease in # of consumers b. decrease in the price of HDTVs d. increase in IPOD taste

BB

DD

DD

BB

1. What would cause a “decrease in QD”“decrease in QD” for KitKatsKitKats? a. increase in price of KitKats b. decrease in price of KitKats c. decrease in income d. increase in number of consumers

2. What would cause a “decrease in D”“decrease in D” for KitKatsKitKats? a. increase in taste b. decrease in price of Kitkats c. decrease in income d. increase in the price of KitKats

3. What would cause an “increase in QD”“increase in QD” for KitKatsKitKats? a. increase in taste b. decrease in price of KitKats c. increase in price of KitKats

4. What would cause an “increase in D”“increase in D” for KitKatsKitKats? a. increase in # of consumers b. decrease in taste b. decrease in price of KitKats

5. A “decrease in the price of Reese’s Reese’s would cause a(n) (increase/decrease) in (QD/D) for KitKatsKitKats?

QDQD && DD PPracticeractice Q Quizuiz [“Revised”][“Revised”]

..

ElasticElastic//InelasticInelastic DemandDemand

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