Current Events:
Brown Calls Nov. Jobs Report a `Big Disappointment'
http://www.youtube.com/watch?v=lnusYxm4MwU
Dec. 3 (Bloomberg) -- Scott Brown, chief economist at Raymond James & Associates Inc. discusses the U.S. November jobs report and the outlook for the economic recovery. Payrolls increased 39,000, less than the most pessimistic projection of economists surveyed by Bloomberg News, after a revised 172,000 increase the prior month, Labor Department figures showed today in Washington. Brown speaks with Betty Liu, Michael McKee and Sara Eisen on Bloomberg Television's "In the Loop." (Source: Bloomberg)
Cf. http://iusbvision.wordpress.com/2010/12/05/video-how-tax-cuts-work-in-our-tax-system/
The Chapter 3 Section 1 Quiz is on Thursday.
The Chapter 2 Make-Up Test is today.
Cf. http://shanawiki.wikispaces.com/Honors+Business+Economics+Chapter+2+Test+Prep+Page+Fall+2010
The Ch. 2 Sec. 3 American Free Enterprise Make-Up Quiz is today.
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Prices and Markets
Chapter 4 Demand
(Supply and) Demand
In-class assignment: in your own words, summarize and explain supply and demand. Draw an individual (each student) sample Supply and Demand Curve as it is described in the video. What is the relationship between prices and quantity demanded? What does it mean in Economics to move towards equilibrium? What is the consumer surplus? What is a producer surplus?
Supply and Demand Screen shot 1
The Big Idea
Section 1 What is Demand?
ceteris paribus ([key-te-rees pah-ri-boos] other things being equal
Guide to Reading
Section Preview
Content Vocabulary
demand
microeconomics
market economy
demand schedule
demand curve
To get a better picture of demand, economists construct graphs. They try to find out how many people are willing to buy an item at various prices, and then plot that information on a graph like this.
Deriving the Demand Curve
In-class assignment: if asked to explain to a friend who knew nothing about the demand curve, how would you explain it? Where does the demand curve come from?
The Law of Demand
Demand refers to the amount of a good or service that people are willing and able to buy at a specified price.
| Best Selling Christmas Items | |
|---|---|
| 2009 | Nook eReader (Barnes & Noble) |
| 2008 | Elmo Live (Fisher Price) |
| 2007 | iTouch (Apple) |
| 2006 | Playstation 3 (Sony) |
| 2005 | Xbox 360 (Microsoft) |
| 2004 | RoboSapiens (WowWee) |
| 2002-3 | Beyblades (Hasbro) |
| 2001 | Bratz Dolls (MGA Entertainment) |
| 2000 | Razor Scooters (Razor USA) |
market demand curve
marginal utility
diminishing marginal utility
Diminishing Marginal Utility
In-class assignment: define diminishing marginal utility based on the video and its explanation.
What makes us happy? Is Jim happy? Is there a difference if Jim is hungry, or not? Is there a difference between cookie #1 and cookie #2, and thereafter etc.? What happens as he eats cookies? What do we discover according to this experiment? What is the Law of Diminishing Marginal Utility? Is there a point Jim should have stopped eating cookies?
Economists use the word utility to describe the ability of a good or service to satisfy some want we possess. A donut has utility if it can satisfy our hunger; a movie has utility if it satisfies our desire for entertainment. Economists also recognize that the ability of a product to satisfy our want or need may diminish the more frequently it is consumed. The first donut you buy may do a great job of satisfying your hunger, the second may as well. But the third may be less satisfying to you, and you may be totally uninterested in the fourth. The once invaluable donut has lost much of its seductive appeal. We might call this the law of diminishing seductive appeal. But economists are a stodgy bunch, so they call this the law of diminishing marginal utility.
Now given our law of demand, we realize that if the donut vendor cuts his price, we may recover some interest. At half price, we might muscle-up for one more 417 calorie chocolate covered cholesterol enhancing treat. But even at a reduced price, utility will eventually diminish until prices drop again and then again and again.
The laws of demand and diminishing marginal utility combine to produce demand curves that predictably flow downward from left to right. The actual market price for a good may change, and that will trigger a change in the number of units sold, but the relationship between demand and price will remain constant—prices and demand will shift in sync with one another along the demand curve.
Economists refer to this sliding along the demand curve as movement. Movement occurs when changes in the market price for a good causes demand to slide up or down the curve—or when a change in the demand causes
But economists also recognize the existence of certain factors that will cause the entire curve to shift—move either to the left or the right. Changes in income, consumer tastes or preferences, and in the price of substitution goods and complementary goods will prompt not just movement along the curve but a shift of the curve in one direction or the other.
Imagine you've been lost in the desert, wandering around in the blistering heat without water for days. Somehow you finally stumble into a roadside oasis, a gas station and mini-mart that has sweet, delicious water for sale. You'd probably give your left... leg for a bottle. Your demand for water is off the charts.
So you enjoy that first bottle of water. You no longer feel like you're about to die. Your lips are no longer cracked and dry, your throat no longer parched.
You're thinking about maybe buying a second bottle of water. But you don't need it. You'd pay a few bucks for it, sure, but it's no longer of nearly priceless value to you.
That's diminishing marginal utility.
Equilibrium Price
As useful (and fascinating) as supply and demand curves are on their own, they become even more valuable (and for economists, truly sublime) when combined. When we plot supply and demand for a product on the same graph, we discover how producers and consumers will interact in the marketplace—and where exactly they will converge.
Remember the demand curve looked like this.
This clamoring for more goods might encourage new suppliers to enter the market. And as we noted above, the entrance of new competitors will increase supply. And when this occurs the market will settle on a new equilibrium price.
Academic Vocabulary
prevail
inversely
Reading Strategy
Products in the News
Wrist Watch
An Introduction to Demand
Main Idea
Economics and You
Demand Illustrated
The Individual Demand Schedule
The Individual Demand Curve
Reading Check
Interpreting
How do you react to a change in the price of an item? How does this illustrate the concept of demand?
The Law of Demand
Main Idea
Economics and You
Why We Call It a "Law"
The Market Demand Curve
Reading Check
Explaining
How does the market demand curve reflect the Law of Demand?
Demand and Marginal Utility
Main Idea
Economics and You
Reading Check
Describing
In-class assignment: working with a partner, and using the graphic organizer, explain how a change in price changes the quantity demanded of an item.
How does the principle of diminishing marginal utility explain the price we pay for another unit of a good or service?
Preview
Guide to Reading
Ch. 4 Sec. 2 Reading Strategy Determinants Of Demand
In-class assignment:
Working with a partner, and using the graphic organizer, explain how a change in price changes the quantity demanded of an item.
Content Vocabulary
change in quantity demanded
Change in Demand vs Change in Quantity Demanded, 5:13
In-class assignment
What happens to demand? Is there anything that could alter the underlying demand? What does a shift to the left indicate? What happens when apartment rent increases? Is a house a substitute? What is the difference between change in demand vs change in quantity demanded?
income effect
substitution effect
Substitution goods represent another factor influencing demand. A substitution good is one that has a similar utility as another—they both satisfy a similar need. If the cost of the substitution good changes, the demand for our original good will be affected. If the price of Twinkies falls, donut eaters may flock to the vanilla crème filled sponge cake that has been “tantalizing taste buds and filling lunch boxes since 1930.” As a result, our demand curve would shift to the left like this.
Income and Substitution Effects, 4:05
In-class assignment:
We want to consider Jimmy. What are Income and Substitution Effects? How do they work? How do they add up to the total price effect? What is the substitution effect? What is the income effect?
In economic terms, CDs and digital music files are complementary goods. The low price for digital downloads (free if you bootleg, a buck or so per song at legit stores like iTunes) has caused demand for more expensive physical CDs to crater.
In 2000, Americans bought 942 million CDs, spending some $13.2 billion. Five years later, as digital music boomed, CD sales had fallen to 705 million units and $10.5 billion in sales.
The future, clearly, is in the download market. Music on shiny silver plastic discs may soon go the way of the 8-track.
change in demand
There are some goods that have relatively static demand curves. In particular, some goods remain in constant demand regardless of changes in the price. Demand for these goods is called inelastic. (If the demand for a good is sensitive to price changes, it is called elastic.) A handful of factors influence the price elasticity of demand of a particular good: its importance, the availability of substitutes, and the percentage of our income that it costs us.
If a good is essential and we cannot do without it, demand for the good will remain constant regardless of changes in price. Medicine and milk are basic necessities; we will buy them even if the price rises. We will also continue to buy products if there is no substitute or alternative for that product. We can’t substitute water for gasoline; face power is white but it is no substitute for salt. And if a good is cheap, we will buy it even if its price rises. We would spring for a box of matches, even if the price jumped from 79 cents to $1.25.
So let’s review the essentials. The law of demand tells us what we all know—that when prices go up demand goes down and when prices go down demand goes up. Demand measures the amount of a good or service that people are willing and able to buy at a specified price. And a demand curve plots the size of demand at various prices. Several factors influence demand: diminishing marginal utility, income, substitution goods, complementary goods, and tastes or preferences. And the more that a price change influences our willingness and ability to buy a product, the more elastic is that product’s demand.
Factors that Increase Demand, Shifting Curve to the Right:
- Increased income
- Increase in price of substitution goods
- Decrease in price of complementary goods
- Changing consumer tastes
- Decreased income
- Decrease in price of substitution goods
- Increase in price of complementary goods
- Changing consumer tastes
Remember our delicious and entertaining complementary goods, baseball tickets and hot dogs?
Turns out that sales in baseball tickets and Dodger Dogs don't track each other perfectly. Since the economy went into decline a couple years back, prices for baseball tickets have held steady or even increased. But attendances haven't fallen too dramatically. Ballpark hot dog sales, though, have fallen off sharply.
What does that mean? It means that hot dogs have greater price elasticity than baseball tickets. People still want to go to the ballgame, even if tickets become more expensive relative to incomes. But they're willing to forego the extra five or ten bucks they might have spent on an overpriced hot dog once they're inside.
Ballpark concession owners from coast to coast must be crying into their $12 "souvenir cup" beers.
substitutes
complements
Complementary goods also impact demand. Complementary goods are goods that go together or are related: beer and pretzels, cameras and film, polyester bell bottoms and platform shoes, Rogaine and hair gel.
When the price of one good changes, its complementary good is affected. If film prices increase, people will buy fewer cameras. If polyester bells drop in price, demand for the four-inch platforms that best highlight the timeless lines of the disco-era bad-boys will rise. And so on.
The demand curve for a good will shift to the left if the price of its complementary good increases. And vice versa.
One awesome example of complementary goods: baseball tickets and hot dogs. Because what goes better with America's pastime than a delicious piece of mystery meat on a bun, with ketchup and mustard?
| Top 10 Hot Dog Baseball Stadiums for 2005 | ||
|---|---|---|
| Stadium | Hot Dogs Sold | |
| 1 | Dodger Stadium (Los Angeles) | 1,674,400 |
| 2 | Coors Field (Colorado) | 1,545,000 |
| 3 | Wrigley Field (Chicago) | 1,543,500 |
| 4 | Yankee Stadium (New York) | 1,365,000 |
| 5 | Minute Maid Park (Houston) | 1,248,000 |
| 6 | Edison Field (Anaheim) | 1,133,000 |
| 7 | HHH Metrodome (Minnesota) | 850,000 |
| 8 | Citizens Bank Park (Philadelphia) | 800,000 |
| 9 | Shea Stadium (New York) | 745,000 |
| 10 | U.S. Cellular Field (Chicago) | 495,000 |
Academic Vocabulary
principle
illustrated
Reading Strategy
Companies in the News
McMakeover Deluxe
Change in the Quantity Demanded
The Income Effect
The Substitution Effect
Reading Check
Describing
How is a change in the quantity demanded illustrated on the demand curve?
Figure 4.4 Change in Demand, p. 99
In-Motion Animations
Change in Demand
Cf. http://glencoe.com/sites/common_assets/socialstudies/in_motion_08/epp/EPP_p99.swf
Figure 4.4 Change In Demand
Change in Demand
Consumer Income
The Global Economy and You
Digital Demand in South Korea
Consumer Tastes
Substitutes
Complements
Expectations
Number of Consumers
Reading Check
Explaining
How do changes in consumer income and tastes affect the demand curve?
Ch. 4 Sec. 2 Section Review Determinants Of Market Demand
HW email to gmsmith@shanahan.org or hand in hard copy.
The Chapter 2 Test Test Prep page.
Cf. http://shanawiki.wikispaces.com/Honors+Business+Economics+Chapter+2+Test+Prep+Page+Fall+2010
Santa Claus Is Laying Off His Reindeer, 1:34
Danny's [economic] Christmas song, 1:39
Santa Needs a Bailout for Christmas, 2:48
The Chapter 3 Section 1 Quiz is on Thursday.
Monday HW
1. p. 94, Reading Check, Explaining, How does the market demand curve reflect the Law of Demand?
2. p. 95, Reading Check, Describing, How does the principle of diminishing marginal utility explain the price we pay for another unit of a good or service?
