Pump Primer

Without using your textbook, explain what you believe this term called “price” means.

CHAPTER 3

Value and Demand

Objectives:• You should be able to...• Identify and explain the principle of diminishing marginal

utility• Describe the three functions of price.• Define demand.• Identify the law of demand.• Explain how changes in demand occur.

Biblical Integration:

• This world constantly changes, but God is the same today, as He was yesterday, and as He will continue to be tomorrow. (Heb.13:8)

Value

• The buyer determines the value of an item!

• Subjective Value = worth determined by the buyer

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principle of diminishing marginal utility

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people tend to receive less and less (diminishing) additional (marginal)

satisfaction (utility) from any good or service as they obtain more and more of it during a

specific period of time

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principle of diminishing marginal utility

• “receive less and less” = diminishing• “additional” = marginal• “satisfaction” = utility• “specific period of time” = time limit

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The Function of Prices

• transmit information• provide incentives• redistribute income

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Where do prices come from?

• value = determined by buyer• price = determined by buyer and seller• supply and demand

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demand

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a willingness of consumers to purchase a product and their act of purchasing it

law of demand

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everything else being held constant, the lower the price charged for a good or

service, the greater the quantity of it people will demand, and the higher the price, the

lower the quantity they will demand

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demand schedule

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a table listing various quantities demanded at various prices

line-graph of demand schedule information

demand curve

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DEMAND CURVE

Giffen goods

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goods that experience an increase in the quantity demanded as the price increases

inelastic demand

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quantity is less responsive to the price

elastic demand

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quantity demanded being far more responsive to the price

change in quantity demanded

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whenever a change in price causes a change in the number of items demanded

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MOVEMENT OF DEMAND

change in quantity demanded

• caused by a price change

• moves along the same curve

change in demand

• caused by a demand change

• shifts the whole curve

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DEMAND AND QUANTITY DEMANDED

Change in quantity demanded

D

Q

P

Change in demand

D1

Q

P

D2

increase in demand

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buyers are willing to demand more of a good or service at every price along the curve

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SHIFT IN DEMAND

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CHANGE IN DEMAND

Figure 4.3 showschanges in demand.

1. When demand decreases, the demand curve shifts leftward from D0 to D1.

2. When demand increases, the demand curve shifts rightward from D0 to D2.

(Bade 94)

Change in Demand = Shift

1. A change in people’s incomes

2. A change in the price of related goods

3. A change in people’s tastes and preferences

4. A change in people’s expectations

5. A change in the number of consumers

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normal goods

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goods that experience an increase in demand because of an increase in

consumers’ incomes

inferior goods

• demand decreases because buyer’s income increases

• demand increases because buyer’s income decreases

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substitute goods

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goods that a household may use in place of others

complementary goods

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goods that are usually purchased or used together

fad items

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good and services that appear quickly on the scene, receive heavy advertisement, and sell in great quantities over a short period of time

Change in Expectations

• demand shifts due to anticipation of dramatic rise or fall of the price of a good

• influenced by:• price changes• advertisements

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ACTIVITY 4

Demand

National Council on Economic Education, New York, N.Y.

OBJECTIVES

• Define demand schedule and demand curve.• Construct a demand curve using hypothetical data.• Explain why consumers buy more of a good or service when the price

decreases.• Explain the difference between a shift in the demand curve and a movement

along the demand curve.• Describe and analyze the forces that shift the demand curve.• Explain why a demand curve would shift to the right or left given a scenario.

INTRODUCTION

• This lesson introduces the market system• Demand is half of a market and a demand schedule

represents the quantities that people are willing and able to buy at alternative prices.

• The Demand Curve is a graphical representation of the demand schedule.

• Understanding a market is essential to success in Economics.

• You will be graphing a demand schedule, which will help you to understand the implications of a shift in the demand curve.

• Activity 3 focuses on the factors that shift the demand curve (homework sheets).

• Activity 4 reinforces the factors that cause a demand curve to shift, the direction of the shift and whether the shift represents an increase or decrease in demand.

MOVEMENT ALONG A DEMAND CURVE

• As the price declines from P to P1, the quantity increases from Q to Q1

• As the price decreases, the quantity demanded increases

SHIFT IN DEMANDThe graph shows an

increase in demand is a shift to the right (and a decrease in demand is a shift to the left)

Increase in demand from D to D1 shows that at the same price (P), the quantity increased from Q to Q1.

Factors that Shift Demand:• Number of Consumers• Price of complementary good• Price of substitute good• Consumer income• Expectations about income or prices

ACTIVITY 4: REASONS FOR CHANGE IN DEMAND

• Break-up into groups of two or three and complete the following activity.

• Part A• Read the eight newspaper headlines in Figure 4.2, and

use the table to record the impact, if any, of each event on the demand for beef.

• Use the first column to the right of the headline to show whether the event causes a change in demand.

• Use the next column to record whether the change is an increase or a decrease in demand.

• In the third column, decide whether the curve shifts left or right.

• Finally, write the letter for the new demand curve.• Use Figure 4.1 to help you.• Always start at curve B, and move only one curve at a

time. • One headline implies that the demand for beef does

not change.

ACTIVITY 4

Y Inc.

R C

Y Inc.

R CY Dec. L A

Y Dec. L AN -- -- --

Y Dec. L A

Y Dec. L AY Inc

.R C

ACTIVITY 4: REASONS FOR CHANGE IN DEMAND

• Part B• Categorize each change in demand in Part A

according to the reason why demand changed.• A given demand curve assumes that consumer

expectations, consumer tastes and preferences, the number of consumers in the market, the income of consumers, and the prices of substitutes and complements are unchanged. In the table, place an X next to the reason that the event described in the headline caused a change in demand.

• One headline will have no answer because it is a change in quantity demanded.

X

X

X

X

X

X

X