ib econ demand theory

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Demand Theory - IB Econ Teacher Presentation

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Demand:

Demand IB Economics

Slide 2:

Quantity Demanded Demand P1 Q1 Q3 Q2 P2 P3 Price The Demand Curve Often we desire certain things like luxury cars or jewellery but we don’t have the ability to buy them so they are not a part of what economist consider demand Demand is the amount that consumers are willing and able to buy at each given price level This is what we call effective demand because it is backed by purchasing power The demand curve illustrates the relationship between the price and the amount consumers intend to buy at each given price (note the word intend – demand diagrams show planned or intended spend not realised or actual demand) We can see that there is an inverse or negative relationship – as the price goes up the demand goes down Note also the notation that we use Demand Curve Remember……Demand goes down to the devil!!!

Slide 3:

Drawing diagrams It is really important that you learn to draw the diagrams well because there are a lot of marks to gain if you do it correctly Use a ruler and a sharp pencil Label the axes properly (quantity always goes on the x axis and price on the y when we draw demand diagrams) If you were illustrating a certain market e.g. cars you would write Quantity of cars or price of cars We draw demand curves as a straight line We can draw several curves on one diagram but we have to label them each differently The first demand curve we drew would be labelled D1 The first demand curve we drew would be labelled D2 We label the prices and the quantities on the axis in the same way We always draw the curve first and then draw the dotted lines to show the new prices and quantities Later you will shade parts of diagrams and it is good to have different colours (pencil only) to hand although in the exam you will only have black Diagrams must be large enough so that labels can be seen clearly You MUST always explain/analyse what is happening in a diagram. This is why it is good to use different colours because you can use the colour to describe the area or line you are discussing. I WILL GIVE YOU A HARD TIME IF YOU DRAW SMALL AND MESSY DIAGRAMS!!!!!!!

Slide 4:

The individual demand curve for a good and market demand Each consumer will buy as much of a product they deem as worth it at each given price level A demand curve can be plotted for each individual To identify the market demand we calculate the sum of the demand from all individuals Below individual 1 buys 3 cans of coke, individual 2 buys 2 cans of coke and so the overall demand or the market demand is 2+3 = 5 This is exactly what you did with the demand for snickers. You worked out your individual demand and then the group (market) demand Quantity D 50p 5 Price Quantity D 50p 3 Quantity D 50p 2 Price Price Individual demand 1 Market Demand Individual demand 1 Demand curves for coke

Slide 5:

The shape of demand curves As we have already said the demand curve typically slopes down from left to right (down to the devil!) There is a negative relationship between price and quantity This is because of the assumptions we make about consumers They want to maximise the benefits they can receive with their limited income They will only buy something if they feel it is worth it The benefits from buying it have to outweigh the opportunity cost of using the money for something else This is what we call rational behaviour – it would be irrational to buy something that we didn’t think was worth it!! The law of economics says that as we buy more and more of something the benefit we get from each extra unit will fall (think about if you bought a mars and ate it, bought another and ate it, bought another and ate it…each time the mars would be less appealing and eventually you might not want to buy any at all!) This is true with all products although the point at which the value falls will depend on the person and the product So, the point is.. As we buy more it becomes less valuable which means we will only buy more if the price falls (it has to be worth it!) – hence the downward sloping curve.

Slide 6:

Movements along the demand curves When there is a change in price there is a movement along the demand curve When there is a fall in price there is an extension in demand (demand grows because the price is less and it is worth buying more) There is a movement down the curve (there is an increase in the quantity demanded) When there is an increase in price there is a contraction in demand (because the price is more it becomes less valuable and we buy less) There is a movement up the curve (there is a decrease in the quantity demanded) Remember – movements along the curve are always caused by a change in price – nothing else!!!! Important wording!

A contraction of demand:

A contraction of demand Quantity Demanded D P1 Q1 Q2 P2 A contraction of demand due to a higher price Price How to describe this? At the original price P1 there is a demand for the quantity Q1. As the price increases to P2 consumers see less value in the product and demand less. There is a contraction of demand and the quantity demanded reduces to Q2. Note: I talk about 1) where we were to start with, then 2) where we have got to and why that has happened. 0

An extension of demand:

An extension of demand Quantity Demanded Demand P1 Q1 Q3 P3 An extension of demand due to a lower price Price How to describe this? At the original price P1 there is a demand for the quantity Q1. As the price decreases to P3 consumers see more value in the product and demand more. There is an extension of demand and the quantity demanded increases to Q3. Note: I talk about 1) where we were to start with, then 2) where we have got to and why that has happened. 0

Slide 9:

Shifts of the demand curves When we did our Snickers experiment we saw that an increase income made us buy more at the same price. When we drew the 2 nd curve we saw that it had moved outwards What makes someone want to buy more of something at the same price? Think about a holiday in a villa in Spain - why would there be more demand for this even though the price had not changed? Income – if average incomes rise demand may rise Cost of flights – if the cost went down more people may consider - complementary goods Other European holidays become more expensive – the villa in Spain would be more attractive. The other European holidays would be known as a substitute substitutes – a competing alternative Complementary goods – goods that are consumed together e.g. DVDs and DVD players

Slide 10:

Shifts of the demand curves There are nine common factors that cause shifts in the demand curve (and none of those are price!!) These are called determinants of demand Changes in i ncome A dvertising and publicity Prices of s ubstitutes Prices of c omplementary goods F ashion Changes in Q uality W eather conditions The l aw U ncertainty of future prices Work out a mnemonic to help you remember this- can you make up a stupid sentence or word/s that will use the letters in blue? I, A, S, C, F, Q, W, L, U

Shifts in Demand:

Shifts in Demand How to describe this? This diagram shows how there has been an increase in demand at the same price (P1). The demand curve has shifted from D1 to D2 because there has been ______ ( fill this blank with - an increase in income, or increase in substitute price, or decrease in complementary price or whatever the reason ). This factor has made the consumers think that the product is more valuable at price P1 and therefore they want to buy more. The original quantity demanded was Q1 and the new quantity demanded is higher at Q2. There is an increase in demand for every given price level Price Quantity Demanded D1 P1 Q1 Q2 D2 Increase in Demand 0 The curve moves to the R ight so the demand is mo R e The shift of the demand curve to the right means that there is more demand at every given price level. This is called a change in demand

Shifts in Demand:

Shifts in Demand How to describe this? This diagram shows how there has been a decrease in demand at the same price (P1). The demand curve has shifted from D1 to D2 because there has been ______ ( fill this blank with – a fall in incomes, or decrease in substitute price, or increase in complementary price or whatever the reason ). This factor has made the consumers think that the product is less valuable at price P1 and therefore they want to buy less. The original quantity demanded was Q1 and the new quantity demanded is lower at Q2. There is a decrease in demand at every given price . Quantity Demanded D1 P1 Q1 Q2 D2 Decrease in Demand Price 0 The shift of the demand curve to the left means that there is less demand at every given price level The curve moves to the L eft so the demand is L ess

Normal and Inferior Goods:

Normal and Inferior Goods For normal products, more is demanded as income rises, and less as income falls There are exceptions called inferior products They are often cheaper poorer quality substitutes for some other good With a higher income a consumer can switch from the cheaper substitute to preferred alternative As a result, less of the inferior product is demanded at higher levels of income An example is cheap bread in developed countries or rice in developing countries Normal good – more is demanded when income rises Inferior good – less is demanded when income rises

Quick Test:

Quick Test D P1 Q1 Q2 D1 Output (Q) Price of Shell petrol D2 P1 Q1 Q2 Output (Q) Price of Texaco petrol P2 Diagram 1 shows the demand curve for Texaco petrol. Draw on your mini white boards what the demand curve will look like and what happens to the price and quantity when the price of texaco petrol goes up – be ready to explain this in words. Diagram 2 shows the demand curve for Shell petrol when the price of Texaco petrol went up. Draw on your mini white boards what happens to the curve and the price and quantity – be ready to explain in words

Composite Demand:

Composite Demand There are a couple of types of demand that you need to know about other than effective demand. The first is Composite Demand and the second is Derived Demand Think about land which can be used for residential and commercial property. If there is an increased demand for land for residential building then there will be less land available for commercial property (it will become scarce). When less is available it becomes more valuable and the price will go up. The growing use of wheat for bio-fuel is causing a shortage of wheat for pasta pushing up its price 2007 - Italian pasta manufacturers have warned that the price of pasta, one of Italy's staple foods, will go up by about 20% this autumn. Global warming and the growing use of durum wheat as a bio-fuel are blamed. Composite demand – a good that is demanded for more than one use – if there is an increase in one this could lead to a shortage in the other and a higher price

Derived demand:

Derived demand The housing market is a good example of the idea of derived demand. When construction of new homes rises, so too does the demand for materials used in new properties as well as demand for labour Other examples An increase in demand for healthcare will lead to an increase in demand for doctors An decrease in demand for cars will lead to a decrease in demand for steel Growth in global economic output will lead to an increase in the demand for oil Derived demand is when the demand for one good or service comes from the demand for another good or service

Slide 17:

Now to consolidate learning Read from page 18 to 24 Make notes Practice drawing diagrams by completing the student workpoint 2.1 P24 Then do some research and find an article online that talks about the price of something going up or down due to demand Be prepared to tell the class about this and draw a diagram on the board to explain

The HL Bit!:

The HL Bit!

Slide 19:

Linear Demand Functions We can show the relationship between the demand for a product and individual determinants of demand by using an equation This is the demand function A simple demand function relating the quantity demanded of a product to the price of the product is usually shown in this form Q D = a – bP Q D is the quantity demanded P is the price a is the quantity that would be demanded if the price was zero b is the slope of the curve Read through page 25/26 from the 4 th paragraph - an example of such….. Complete the student workpoint 2.2 on page 27

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