demand ib economics. demand for chocolate bars experiment
TRANSCRIPT
Demand
IB Economics
Demand for chocolate bars experiment
Getting an idea of what demand isThe demand for chocolate bars experiment
• In my shop I have 4 items for sale
50p50p 50p
50p
Product Quantities
Can of coke (50p)
Snickers bar (50p)
Pint of milk (50p)
Mars bar (50p)
Getting an idea of what demand isStage 1
Each item is 50p eachYou have £2.50 to spend and must spend it allYou can buy any number of one product and do not have to buy all of the productsWhen you have made your decision draw a table like the one below and fill it out
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
50p50p 50p
£1
Product Quantities
Can of coke (50p)
Snickers bar (£1)
Pint of milk (50p)
Mars bar (50p)
Demand for chocolate bars experiment continuedStage 2
It’s a new day and you have consumed everything that you bought yesterdayA global shortage of peanuts has put the price up of a snickers bar to £1You still have £2.50 income to spend and must spend it allYou can buy any number of one product and do not have to buy all of the productsWhen you have made your decision draw a table like the one below again and fill it out with your new preferences
Demand for chocolate bars experiment continuedStage 3 – calculating market demand
Organise yourself into a groupWork 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
ProductQuantities - 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 demandMake your team a table like the one above and complete it
Demand for chocolate bars experiment continuedStage 3 – calculating market demand
Now lets represent this information in the form of a graphUse the graph paper providedPrice goes on the vertical axisQuantity demanded goes on the horizontal axisPlot 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 £1Draw these two points and draw a straight line through them like below
Demand for chocolate bars experiment continuedStage 3 – calculating market demand
Now compare your graph with the other group’s graphAre 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 groupWhat 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?
Demand for chocolate bars experiment continuedLet's now take the game one step further.
Stage 4It 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 productThe rules are the same as beforeFill out your individual table to find your individual demandFill out your group table to find your market demand (the sum of all your individual demands)Then create a table like the one below
ProductQuantities - Stage 1
(Income is £2.50)Quantities - Stage 4
(Income is £4)
Can of coke
Snickers bar
Pint of milk
Mars bar
Demand for chocolate bars experiment continuedStage 4 continuedComparing 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
Quantity Demanded
Demand
P1
Q1 Q3Q2
P2
P3
Price
The Demand CurveOften 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 demandDemand is the amount that consumers are willing and able to buy at each given price levelThis is what we call effective demand because it is backed by purchasing powerThe 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 downNote also the notation that we use
Demand Curve
Remember……Demand goes Down!!!
Watch this video
Drawing diagramsIt is really important that you learn to draw the diagrams well because there are a lot of marks to gain if you do it correctlyUse a ruler and a sharp pencilLabel 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 carsWe draw demand curves as a straight lineWe 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 wayWe always draw the curve first and then draw the dotted lines to show the new prices and quantitiesLater 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 clearlyYou 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!!!!!!!
The individual demand curve for a good and market demandEach consumer will buy as much of a product they deem as worth it at each given price levelA demand curve can be plotted for each individual To identify the market demand we calculate the sum of the demand from all individualsBelow 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 = 5This 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
PricePrice
Individual demand 1 Market DemandIndividual demand 1
Demand curves for coke
The shape of demand curvesAs we have already said the demand curve typically slopes down from left to right There is a negative relationship between price and quantityThis is because of the assumptions we make about consumersThey want to maximise the benefits they can receive with their limited incomeThey will only buy something if they feel it is worth itThe benefits from buying it have to outweigh the opportunity cost of using the money for something elseThis 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 fallthink 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 productSo, 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.
Movements along the demand curvesWhen there is a change in price there is a movement along the demand curveWhen 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
Quantity Demanded
D
P1
Q1Q2
P2A 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
Time for you to draw!
Answer:
1.Describe the starting point
2.Describe the change
3.Describe what is happening in the diagram
At the original price P1 there is a demand for the quantity Q1 of strawberries.
As the price increases to P2 consumers see less value in the strawberries and demand less.
There is a contraction of demand and the quantity demanded reduces to Q2.
Quantity Demanded
D
P1
Q1Q2
P2A contraction of demand
due to a higher price
Price
0
In the market for strawberries there has been an increase in priceDraw the diagram and analyse (describe what is happening)
Time for you to draw!
Answer:
1.Describe the starting point
2.Describe the change
3.Describe what is happening in the diagram
At the original price P1 there is a demand for the quantity Q1 of copper.
As the price increases to P2 consumers see less value in the copper and demand less.
There is a contraction of demand and the quantity demanded reduces to Q2.
Quantity Demanded
D
P1
Q1Q2
P2A contraction of demand
due to a higher price
Price
0
In the market for copper there has been an increase in priceDraw the diagram and analyse (describe what is happening)
An extension of demandHow to describe this?
At the original price P1 there is a demand for the quantity Q1. As the price decreases to P2 consumers see more value in the product and demand more. There is an extension of demand and the quantity demanded increases 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.
Quantity Demanded
Demand
P1
Q1 Q2
P2
An extension of demand due to a lower price
Price
0
Time for you to draw!
Answer:
1.Describe the starting point
2.Describe the change
3.Describe what is happening in the diagram
At the original price P1 there is a demand for the quantity Q1 of gold.
As the price decreases to P2 consumers see more value in the gold and demand more.
There is an extension of demand and the quantity demanded increases to Q2.
In the market for gold there has been a decrease in priceDraw 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
Shifts of the demand curvesWhen we did our Snickers experiment we saw that an increase income made us buy more at the same price.When we drew the 2nd curve we saw that it had moved outwardsWhat 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 riseCost of flights – if the cost went down more people may consider - complementary goodsOther 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
Shifts of the demand curvesThings that cause a shift of the demand curve (and none of those are price!!) are called determinants of demandPrices of complements (things you buy with that product) e.g. ink cartridges with printersAdvertising and branding that creates desire and loyalty for a productTrends/FashionPrice – not a determinant!Income level – this is the most importantprices of substitutes (similar products) e.g. Xbox and playstation are substitutesRemember CATPIS!!
Watch this video
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 Right so the demand is
moRe
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)
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
Analysis1.Describe the starting point. At P1…..2.Describe what has happened (what happens when this journal is published)3.Describe what has happened to the demand curve
1.At P1 the quantity of strawberries demanded is Q1.2.Due to the fact that strawberries are seen as a cancer preventing agent there will be an increase in demand for strawberries3.The demand curve shifts outwards from D1 to D2 and the quantity demanded increases to Q2
Price
Quantity Demanded
D1
P1
Q1 Q2
D2
Increase in Demand
0
The curve moves to the Right so the demand is
moRe
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
Analysis1.Describe the starting point. At P1…..2.Describe what has happened (change in demand for washing machines)3.Describe what has happened to the demand curve
1.At P1 the quantity of copper demanded is Q1.2.Due to the fact that there is an increased demand for washing machines there is an increase in demand for copper.3.The demand curve shifts outwards from D1 to D2 and the quantity demanded increases to Q2
Price
Quantity Demanded
D1
P1
Q1 Q2
D2
Increase in Demand
0
The curve moves to the Right so the demand is
moRe
Draw a diagram and analyse
Shifts in DemandHow 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
Q1Q2
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 Left so the demand is
Less
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
Analysis1.Describe the starting point. At P1…..2.Describe what has happened (ban)3.Describe what has happened to the demand curve
1.At P1 the quantity of cigarettes demanded is Q1.2.Due to the change in law there is less demand for cigarettes 3.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
Q1Q2
D2
Decrease in Demand
0
The curve moves to the Left so the demand is
Less
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
Analysis1.Describe the starting point. At P1…..2.Describe what has happened (advert)3.Describe what has happened to the demand curve
1.At P1 the quantity of sugar demanded is Q1.2.Due to the advertising campaign there is less demand for sugar3.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
Q1Q2
D2
Decrease in Demand
0
The curve moves to the Left so the demand is
Less
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
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 Glasgow increases•There are no British success stories at Wimbledon for years and years•Average incomes in Glasgow rise•The price of tennis balls goes up•Cricket becomes cheaper to play and more fashionable as a summer activity
Market for Tennis Balls in Glasgow
Mind your P’s and Q’s!!
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
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
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 is when the demand for one good or service comes from the demand for another good or service
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
Important to remember…When we talk about market forces (supply and demand) we are assuming that the market is perfectly competitive
there are lots of small firms that have no price making power firms are price takers – they have to take their price from the market
The market price comes about because of supply and demand (market forces)There is an invisible hand that sets the market price (Adam Smith)When you are describing a change in a market the change in demand comes first and the price changes as a result (not the other way around) More about this later……
Adam Smith
Adam Smith
Consumer SurplusConsumer surplus is a measure of welfare gained as a result of consuming goods and services
Watch this pajholden videohttp://www.youtube.com/watch?v=qTxniCLYgok
Starter from Easy Mark Qs
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
1. Distinguish between a shift of the demand curve for a product and a movement along the product’s demand curve
2. With reference to two different determinants of demand explain why the demand for bicycles might increase
The HL Bit!
Linear Demand FunctionsWe can show the relationship between the demand for a product and individual determinants of demand by using an equationThis is the demand functionA simple demand function relating the quantity demanded of a product to the price of the product is usually shown in this formQD = a – bPQD is the quantity demandedP is the pricea is the quantity that would be demanded if the price was zerob is the slope of the curveRead through page 25/26 from the 4th paragraph - an example of such…..Complete the student workpoint 2.2 on page 27
QD = a – bP
Quantity demanded if price is zero
The slope of the curve
The price
Quantity demanded