Micro Ch2 Demand theory

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Demand:

Demand IB Economics

Demand for chocolate bars experiment:

Demand for chocolate bars experiment

Getting an idea of what demand is The demand for chocolate bars experiment :

Getting an idea of what demand is The demand for chocolate bars experiment In my shop I have 4 items for sale 50p 50p 50p 50p

Slide4:

Product Quantities Can of coke (50p)   Snickers bar (50p)   Pint of milk (50p)   Mars bar (50p)   Getting an idea of what demand is Stage 1 Each item is 50p each You have £2.50 to spend and must spend it all You can buy any number of one product and do not have to buy all of the products When you have made your decision draw a table like the one below and fill it out

Stage 2:

Stage 2 It’s a new day and you have consumed everything that you bought yesterday A global shortage of peanuts has put the price up of a snickers bar to £1 50p 50p 50p £1

Slide6:

Product Quantities Can of coke (50p)   Snickers bar (£1)   Pint of milk (50p)   Mars bar (50p)   Demand for chocolate bars experiment continued Stage 2 It’s a new day and you have consumed everything that you bought yesterday A global shortage of peanuts has put the price up of a snickers bar to £1 You still have £2.50 income to spend and must spend it all You can buy any number of one product and do not have to buy all of the products When you have made your decision draw a table like the one below again and fill it out with your new preferences

Slide7:

Demand for chocolate bars experiment continued Stage 3 – calculating market demand Organise yourself into a group Work out the market quantities for your group for stages 1 and 2. Do this by adding together the quantities for each product at each price level demanded by each person in your group. See an example below Product Quantities - Stage 1 (Snickers cost 50p) Quantities - Stage 2 (Snickers cost £1) Can of coke ||||| ||||| |||| 14 ||||| |||| 9 Snickers bar ||||| ||||| ||| 13 |||| 4 Pint of milk ||||| ||||| || 12 ||| 3 Mars bar ||||| ||||| ||||| |||| 19 ||||| ||||| |||| 14 What this represents is the demand for each product – the amount each person would like to purchase at the price stated. By adding together each individual’s demand we get the market demand Make your team a table like the one above and complete it

Slide8:

Demand for chocolate bars experiment continued Stage 3 – calculating market demand Now lets represent this information in the form of a graph Use the graph paper provided Price goes on the vertical axis Quantity demanded goes on the horizontal axis Plot the quantity demanded of snickers bars for your group against the price (see the example below) You will see two points on the graph – one for the quantity demanded at 50p and another for the quantity demanded at £1 Draw these two points and draw a straight line through them like below

Slide9:

Demand for chocolate bars experiment continued Stage 3 – calculating market demand Now compare your graph with the other group’s graph Are they the same shape? Do they both slope downwards from left to right? So what can you conclude about the relationship between price and the amount demanded? Use your graph to estimate the following for your group What is the demand likely to be if the price were 75p? What is the demand likely to be if the price were 25p? What is the demand likely to be if the price were 60p?

Slide10:

Demand for chocolate bars experiment continued Let's now take the game one step further. Stage 4 It is now day three and the peanut crisis has eased. Snickers now cost 50p once more. The government has decided to provide all students with a grant As a result your income has increased and you now have £4 to spend. Again, in your group work out market demand by adding together each person's demand for each product The rules are the same as before Fill out your individual table to find your individual demand Fill out your group table to find your market demand (the sum of all your individual demands) Then create a table like the one below Product Quantities - Stage 1 (Income is £2.50) Quantities - Stage 4 (Income is £4) Can of coke     Snickers bar     Pint of milk     Mars bar    

Slide11:

Demand for chocolate bars experiment continued Stage 4 continued Comparing stage 1 and stage 4 what can we see? Was the demand for all of the goods greater than before? This is because demand is not static – it changes as a result of changes in factors that affect demand (other than price) So we know now that one of these factors is income; we saw that when we had an increase in income our demand levels increased. What other factors might increase demand? What factors might decrease demand? On your original graph plot the new snickers demand. Assume that you would get the same increase in demand at £1 and plot your second point. Now draw your new demand line What do we see? Now lets have a look at the theory of demand

The Theory of Demand:

The Theory of Demand

Slide13:

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…… D emand goes D own!!! Watch this video https://youtu.be/uXlZIn6W7Ew

Slide14:

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!!!!!!!

Slide15:

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

Slide16:

The shape of demand curves As we have already said the demand curve typically slopes down from left to right 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 cake and ate it, bought another and ate it, bought another and ate it…each time the cake 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.

Slide17:

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 the quantity demanded is Q1. As the price increases to P2 there is a contraction of demand and the quantity demanded reduces to Q2. 0

Time for you to draw!:

Time for you to draw! Answer: Describe the starting point Describe the change Describe what is happening in the diagram At the original price P1 the quantity demanded of strawberries is Q1. As the price increases to P2 there is a contraction of demand and the quantity demanded reduces to Q2. Quantity Demanded D P1 Q1 Q2 P2 A contraction of demand due to a higher price Price 0 In the market for strawberries there has been an increase in price Draw the diagram and analyse (describe what is happening)

An extension of demand:

An extension of demand How to describe this? At the original price P1 the quantity demanded is Q1. As the price decreases to P2 there is an extension of demand Q2. Quantity Demanded Demand P1 Q1 Q2 P2 An extension of demand due to a lower price Price 0

Time for you to draw!:

Time for you to draw! Answer: Describe the starting point Describe the change Describe what is happening in the diagram At the original price P1 the quantity demanded of gold is Q1 As the price decreases to P2 consumers there is an extension of demand and the quantity demanded increases to Q2. In the market for gold there has been a decrease in price Draw the diagram and analyse (describe what is happening) Quantity Demanded Demand P1 Q1 Q2 P2 An extension of demand due to a lower price Price 0

Slide22:

Shifts of the demand curves This time the price does not change!! 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

Slide23:

Shifts of the demand curves Things that cause a shift of the demand curve (and none of those are price!!) are called determinants of demand Prices of c omplements (things you buy with that product) e.g. ink cartridges with printers A dvertising and branding that creates desire and loyalty for a product T rends/Fashion P opulation – more people = more demand! I ncome level – this is the most important prices of s ubstitutes (similar products) e.g. Xbox and playstation are substitutes Remember CATPIS !! There are others but these are the main ones Watch this video https://youtu.be/aTSwcXJ700c

Shifts in Demand:

Shifts in Demand How to describe this? At P1 the quantity demanded was Q1. Now that income has increased (or any of the CATPIS factors) there is an outward shift of the demand curve from D1 to D2. Demand has increased from Q1 to Q2 Later we will see a change in price as a result of the change in demand but that will only happen when we add supply 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 ( not a change in quantity demanded like before)

Shifts in Demand:

Time for you to draw and write an explanation In the market for strawberries there has been a medical journal published that says strawberries prevent cancer. Draw a diagram and analyse Shifts in Demand Analysis Describe the starting point. At P1….. Describe what has happened (what happens when this journal is published) Describe what has happened to the demand curve At P1 the quantity of strawberries demanded is Q1. Due to the fact that strawberries are seen as a cancer preventing agent there will be an increase in demand for strawberries and demand shifts from D1 to D2 There has been an increase in demand from Q1 to Q2 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

Shifts in Demand:

Time for you to draw and write an explanation In China there is a massive increase in demand for washing machines. Copper is used to create the electrical wires. What happens in the market for copper? Shifts in Demand At P1 there is Q1 copper demanded As the demand for washing machines increases there will be an increase in demand for copper which is used to make the wiring for the washing machines. Demand will shift from D1 to D2 causing an increase in demand from Q1 to Q2 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 Draw a diagram and analyse

Shifts in Demand:

Shifts in Demand How to describe this? At P1 the quantity demanded was Q1. Now that income has decreased (or any of the CATPIS factors) there is an inward shift of the demand curve from D1 to D2. Demand has decreased from Q1 to Q2 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

Shifts in Demand:

Time for you to draw and write an explanation The government has just banned smoking inside public buildings. Describe the effect on the market for cigarettes Shifts in Demand At P1 the quantity of cigarettes demanded is Q1. Due to the change in law there is less demand for cigarettes. The demand curve shifts inwards from D1 to D2 and the demand falls to Q2 Draw a diagram and analyse Quantity Demanded D1 P1 Q1 Q2 D2 Decrease in Demand 0 The curve moves to the L eft so the demand is L ess

Shifts in Demand:

Time for you to draw and write an explanation The government has launched an advertising campaign to show the negative effects of too much sugar in your diet. What will happen to the sugar market? Shifts in Demand Analysis At P1 the quantity of sugar demanded is Q1. Due to the negative advertising campaign there is now less demand for sugar. The demand curve shifts inwards from D1 to D2 and the quantity demanded reduces to Q2 Draw a diagram and analyse Quantity Demanded D1 P1 Q1 Q2 D2 Decrease in Demand 0 The curve moves to the L eft so the demand is L ess

Normal and Inferior Goods:

Normal and Inferior Goods When we say that as income rises the demand for a good will increase we are making an assumption that the good we are discussing is a normal good For normal products, more is demanded as income rises, and less as income falls There are exceptions called inferior goods 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

Composite Demand:

Composite Demand There are a couple of types of demand that you need to know about. The first is Composite Demand Wheat is used for pasta It is also used for biofuel With global warming and the need to find more efficient fuels biofuel is increasing in demand As the demand for biofuel increase so does the increase in demand for wheat ( derived demand ) Wheat is needed for both pasta and biofuel ( composite demand ) As demand increases for wheat the price goes up (when we add the supply curve) The price goes up for pasta and biofuel 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

Does it look Shifty?:

Does it look Shifty? Price of Tennis Balls Here are some scenarios. On your mini white boards draw the change The price of tennis balls falls The price of tennis rackets goes up It is anticipated that tennis balls will go down in price in the next few months Slazenger, Adidas and Dunlop start advertising campaigns for their sports equipment The population of Milan increases There are no Italian successful tennis players for years and years Average incomes in Milan rise The price of tennis balls goes up Squash becomes cheaper to play and more fashionable as a summer activity Market for Tennis Balls in Milan Mind your P’s and Q’s!! Quantity of Tennis Balls

Slide34:

Complete the following 2 questions Remember to include Definition/s Diagram/s Analysis (description of what is happening and the changes in the diagram) get your wording right (look at the previous slides) Label the diagram and refer to it e.g. “in figure 1 demand has……” Example Distinguish between a shift of the demand curve for a product and a movement along the product’s demand curve With reference to two different determinants of demand explain why the demand for bicycles might increase

The HL Bit!:

The HL Bit!

Slide36:

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 QD = a – b P Quantity demanded if price is zero The slope of the curve The price Quantity demanded

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