CHAPTER OUTLINE

1. Distinguish between quantity demanded anddemand, and explain what determines demand.

A. CompetitiveMarkets

B.  TheLaw of Demand

C. DemandSchedule and Demand Curve

D. IndividualDemand and Market Demand

E.  Changesin Demand

1.  Pricesof Related Goods

2.  ExpectedFuture Prices

3.  Income

4.  ExpectedFuture Income and Credit

5.  Numberof Buyers

6.  Preferences

F.  Changein Quantity Demanded Versus Change in Demand

IN THECLASSROOM

n  ClassTime Needed

You might try to cover these topics in foursessions, though if you have a lot of examples, or participation and questionsfrom the class, the time could lengthen to five entire classes.

           Takeas much time as possible on the differences between movements along the supplyand demand curves versus shifts in the curves. Go over the reasons for theshifts and give several examples, always reinforcing the process of answeringthe 3 questions for analyzing changes in equilibrium. Try to use current eventexamples to explain movements in price and quantity.

           An estimate of the time percheckpoint is:

·            4.1 Demand—60 to 75 minutes

·            4.2 Supply—60 to 75 minutes

·            4.3 Market Equilibrium—60 to 90minutes

ClassroomActivity: When it comes to introducing demand, pickan object that your students buy, say a bottle of Pepsi. Bring a bottle toclass as a visual aid and simulate a market for this good in which the studentsare consumers and you are the seller. Set up a price range for this good(starting at $0.60 and going up to $1.60 in $0.20 increments). Then ask for 3-4volunteers and ask them one at a time how many bottles of Pepsi they would bewilling and able to buy right then at each price. From this you can set up ademand schedule for Pepsi on the board that illustrates the relationshipbetween price and quantity demanded. Sum all of the individual demands togetherto calculate a market demand. This demand schedule can be used to set up the lawof demand and to help students distinguish between quantity demanded and demandfor individuals and for the market. Then draw the resulting market demand curveon the board. This market demand curve will illustrate the downward slopeindicative of the law of demand and can further be used to distinguish betweenchanges in quantity demanded and changes in demand - the difference betweenmovements along the demand curve and shifts of the demand curve. You can alsobreak students into groups and have them brainstorm a list of factors thatcould change the demand for Pepsi and shift the demand curve. Make sure theykeep the product identical in their analysis and ask them to think about anyfactor, other than the price of Pepsi, that would change the amount of Pepsithat people would be willing and able to purchase. After allowing students timeto brainstorm this list, you can use their ideas about what specifically causesa change in demand for Pepsi to create the list of what factors change demandin a market in general. 

Classroom Activity: It is best to do this next classroomactivity on a different day from the demand experiment. To introduce the supplycurve, tell the students that you would like a Pepsi that is available from amachine somewhere near the classroom and you want someone to get it for you.You are going to continue teaching while the student is out of the room and youwill be giving hints about what is on the next test. Ask the students to raisetheir hand if they are willing to fetch one can of Pepsi if you pay, say $15.00.Write down the number. Lower the price you’re willing to pay in $1 incrementsuntil the number of students willing to fetch you the drink begins to decrease.Keep track of the numbers. Then lower the price you’re willing to pay in 25¢increments until you get close to only having one student willing to fetch youthe drink. Keep track of the numbers. Lower the price in smaller increments ifnecessary until just one student is willing to fetch you a drink. Now use thedata to make a supply curve for Pepsi in your classroom today. You can use thiscurve to discuss the law of supply.

CHAPTER LECTURE

Lecture Launcher: Consider starting your introductory lecture of demand and supply by reachingback to an “Eye On the U.S. Economy” from chapter 3 and using a story madefamous by Milton Friedman. Ask the class if someone has a regular pencil. Havea student hold up the pencil and ask the class to think about how that pencilgot into this student’s hand: someone grew and harvested a tree, someone madethe graphite center, someone grew the rubber that made the eraser, someone madethe brass eraser holder, someone made the yellow paint, and someone assembledall these bits. Shippers, wholesalers, and a retailer all played a part ingetting that pencil to your student’s hand. Emphasize that no one told anyonethat this student wanted a pencil. Markets did all this work. You can use thisexample of the power of the market to segue into the study of demand and supply.

n 4.1       Demand

Competitive Markets

·        Markets vary in the intensityof competition. This chapter studies a competitive market, which is amarket that has many buyers and sellers, so no single buyer or seller can influenceprice. Also it is important to stress that no coordinated action on the part ofgovernment or any other central authority is required to make markets workefficiently.

qLand Mine:Students often have a difficulttime accepting that all sellers are price takers, so be sure to point out thata competitive market is just one type of market structure and the other marketstructures will be analyzed in greater detail as the semester progresses. Theidea is to start with the simplest market structure to work with and build incomplexity from there, so that other market structures (where firms may havesome price setting ability) will be addressed after students can work with acompetitive market. You may even find it useful to introduce the termsmonopoly, oligopoly, and monopolistic competition at this point asforeshadowing of where they will be building up to.  However, they have to walk before they canrun…

Law of Demand

• The     price of a good or service affects the quantity people plan to buy. The quantity demanded of a good or     service is the amount that consumers are willing and able to buy during a     given time period at a specified price.

• The     law     of demandstates     that other things remaining the same, if the price of a good rises, the     quantity demanded of that good decreases; and if the price of a good     falls, the quantity demanded of that good increases.

Demand Schedule and Demand Curve

• The demand for a good     refers to the entire relationship between the price of the good and the     quantity demanded of the good when all other influences on buying plans remain     the same.

• A demand schedule is a list of the     quantities demanded at each different price when all other influences on     buying plans remains the same. The table below gives the demand schedule     for a good.

                       

Price  (dollars)	Quantity  demanded
1	50
2	40
3	30
4	20
5	10

• A     demand     curve     is a graph of the relationship between the quantity demanded of a good and     its price when all other influences on consumers’ planned purchases remain     the same. The figure illustrates the demand curve resulting from the     demand schedule in the table.

Individual Demandand Market Demand

• The market demand is the sum of the demands     of all the buyers in the market. At each price, add the quantity each     buyer demands and the sum is the market quantity demanded.

Changes inDemand

• When any factor     that influences buying plans other than the price of the good changes,     there is a change     in demand     and the demand curve shifts. An increase in demand shifts the demand curve     rightward and a decrease in demand shifts the demand curve leftward. Five     factors change demand:

·        Prices of RelatedGoods: A substitute is a good that canbe consumed in place of another good (grape jelly and strawberry jelly) and a complement is a good that is consumedwith another good (peanut butter and jelly). Arise in the price of a substitute or a fall in the price of a complementincreases the demand for the good.

·        Expected FuturePrices:A rise in the expected future priceof a good increases the currentdemand for that good as consumers stockpile now in anticipation of buying less inthe future at higher expected prices. A fall in the expected future price decreases current demand as consumers delay theirpurchases in anticipation of taking advantage of lower expected future prices.

·        Income: A normal good is a good for whichdemand increases when income increases and demand decreases when incomedecreases. An inferiorgoodis a good for which demand decreases when income increases and demand increaseswhen income decreases (such as generic goods, instant ramen noodles, cannedmeat)

·        Expected FutureIncome and Credit:  When income is expected to increase in the futureor when credit is easy or inexpensive to get, the demand for some goods increases.This effect is especially evident with big ticket items.

·        Number of buyers: The larger the numberof buyers, the larger is the demand.

·        Preferences: Preferences are anindividual’s attitudes toward goods and services. If people “like” a good more,the demand for it increases.

Change in the Quantity Demanded Versus Change in Demand

• A change in price results     in a movement along the demand curve, which is change in the quantity     demanded.     A change in other factors shifts the demand curve, which is a change in demand.

• In the figure,     the movement along demand curve D₀ from point a     to point b as a result of the price rising from $2 to $4 is a     change in the quantity demanded. The shift of the demand curve from D₀ to the new demand curve D₁ is a change in demand.

·        Understanding thedifference between change in demandversus change in the quantity demanded. It is crucial for your students to understand the differencebetween a “change in demand” and “change in the quantity demanded.” A usefulexercise to get students to see the difference is to put a list of situationson the board and ask them to identify each as either a “change in demand” or a“change in the quantity demanded.” Before you do that there is a simple rulethat you can impart that will help students solve the exercise much moreeasily. The rule is that the price of the good or service itself is the only factor that can cause a change in thequantity demanded. Anything else that affects demand is a change in demand.

Below is a quick listof scenarios that you might wish to pose to ask if there is a change in demand(the demand curve shifts) or a change in the quantity demanded (a movementalong the demand curve).

·        The local gas station raisesthe price of its gasoline (change in the quantity demanded).

·        People purchase more newautomobiles when their income rises (change in demand).

·        Sales of Pepsi rise in the faceof a price hike for Coke (change in demand for Pepsi and change in the quantitydemanded of Coke).

·        Purchases of personal computersincrease when retail stores slash prices (change in the quantity demanded).