UNIT 2: HOW MARKETS WORK ESSENTIAL QUESTION: WHO BENEFITS FROM THE FREE MARKET ECONOMY? CH. 4: DEMAND CH. 5: SUPPLY CH. 6: PRICES CH. 7 MARKET STRUCTURES.

UNIT 2

: HOW

MARKETS

WORK

ESSENTIAL Q

UESTION:

WHO B

ENEFITS F

ROM THE

FREE M

ARKET ECONOMY?

CH

. 4

: D

EM

AN

D

CH

. 5

: S

UP

PLY

CH

. 6

: P

RI C

ES

CH

. 7

MA

RK

ET

ST

RU

CT

UR

ES

CHAPTER 4

: DEMAND

ES

SE

NT

I AL

QU

ES

TI O

N: H

OW

DO

WE

DE

CI D

E W

HA

T T

O B

UY

?

Demand is BOTH

1. The desire to ___________________

2. The willingness (and ability) _____________________________________

The LAW OF DEMAND says that as _________increases, _________ Demanded decreases

OR, in other words, consumers will buy more of a good when its price is lower and less when its price is higher

This is the single most famous law in all of economics!

WHAT IS DEMAND?

THE DEMAND CURVE We are ONLY looking at changes in ________ here!

Everything else is held constant

ceteris paribis: Latin phrase for ____________________________________________

GRAPHING DEMAND

Practice Time!

Refer to “Market Forces of Supply & Demand (ch 4) PowerPoint)

This is a separate PowerPoint found on the blog

It’s the one with the ice cream example

THE SUBSTITUTION AND INCOME EFFECTS

We know as economists that people respond to incentives in predictable ways…

If something (pizza?) gets too expensive, people will buy less of it and buy more of something else , thus making a substitution.

How does this affect the demand curve?

If prices rise, the law of demand tells us….

Why? Because we feel poorer! So we buy less overall.

SECTION 2: SHIFTS IN THE DEMAND CURVE

Remember that a change (Δ) in price (P)means a change in quantity demanded (QD)

This is a movement ALONG THE CURVE, not a movement of the whole curve itself!

This is a really big deal!

To move the ENTIRE curve takes something MORE than just a change in price because the quantity demanded AT EVERY PRICE is changing!

In other words,

ΔQD ≠ΔD!!!!!

WHAT COULD CAUSE THIS?W H A T M A K E S T H E D E M A N D C U R V E S H I F T T O T H E L E F T O R R I G H T ?

1. __________

2. ________________

3. _______________

4. ________________

5. ______& _________

6. A ________in the price of ____________ goods

a. ___________________

b. ___________________

Remember that it’s shifting left or right (not up and down), and this indicates an increase or decrease.

WHAT ARE RELATED GOODS?

SUBST ITUTESGoods that are used in

place of one another

Hamburger instead of _________

________instead of red meat

Pop Tarts instead of _______

______ and ___________

RELATED GOODS CONTINUED

C O M P L E M E N T S

Are goods that are bought and used together

Snowboard and ________

Hot dogs and _________

Spaghetti sauce and ____

Bathing suits and _______

Smart phones and ______

SECTION 3: ELASTICITY OF DEMAND

One of the things economists can measure and predict is how responsive consumers will be to changes in price.

This is known as the ______ of_______

Being able to measure this will tell us how _____or ____consumers will change how much they buy if the price is increased or decreased.

Goods can be ______ or ____________.

ELASTICITY CONTINUED

How can you tell if a good is elastic or inelastic?

Consider the following:

1. Can the purchase be ________________?

2. Are there adequate ___________________________________?

3. Does the purchase use a large _______________________________?

The more “yes” answers you get, the more ELASTIC demand is for the good/service.

The more “no” answers you get, then demand for the good/service is inelastic

Let’s think through some examples:

Fresh tomatoes A House

Gasoline when your tank is on E trip to the beach

Gasoline from a particular gas station toilet paper

Going to the doctor flowers for your yard

Insulin flowers on Valentine’s Day

Going to your uncle’s funeral in California Butter

A college degree table salt

ELASTICITY CONTINUED

Other factors affecting elasticity:

1. Relative _____________________

• Clothing in a teenager’s budget

• Clothing in a stay-at-home-mom’s budget

• Shoelaces

2. Necessities vs. _______________________

Consumption of necessities doesn’t change much, even if prices change a lot

Will vary from person to person

3. Change _______________________

Some items take a while to change (cars, housing)

ELASTICITY AND REVENUE

Does a company always make more money if they raise their prices on the good or service they sell?

How do businesses use the Elasticity of Demand

How much can they afford to raise or lower their prices?

At what point will they actually start to lose money?

See the charts on p.103 and p. 104