Microeconomics Year 11 Bridging Work for Non-GCSE Students Summer Term 2020 [THE PRICE MECHANISM] Activity: Creating A Demand Curve • The want or willingness of consumers to buy goods and services but consumers must have enough money to buy goods and services they demand • Effective Demand- Desire for a good or service supported by the ability and willingness to pay You are thinking about starting a business during lockdown delivering home made cupcakes. You have done some market research by asking 5 members of the neighbourhood how many loaves of bread they would purchase at each price in a week. Calculate the total demand for your product (market demand) at each price level. (You need to add up all of the individual demand at each prive level) Individual Demand Price Lee Aneesh Sarah Samara Mindy Market Demand 5 +3+10+4+8 = 30 £0.50 5 3 10 4 8 £1 4 3 8 2 4 £1.50 3 2 6 1 2 £2 2 1 4 0 1 £2.50 1 0 2 0 0 Individual Demand Individual demand is the demand for a good or service by an individual consumer. Draw Sarah’s individual demand for your cupcakes here. You’ll need to put Quantity on the X axis and Price on the Y axis. You cannot do it another way in Economics. Market Demand Market demand is total demand for a product created by adding together all the individual demands Next, draw a demand curve for your product. This will need to include the total demand from ALL individuals added together. Your demand curve must have the following: • Title e.g. Market for Cupcakes • Labelled Axes • Prices written in • Quantities written in • Curve drawn showing the relationship between price and quantity Watch this video to see if your demand curve looks the way it is supposed to and to give a bit of an introduction to demand https://www.youtube.com/watch?v=LwLh6ax0zTE Changes in Price Any change in price leads to a movement ALONG the demand curve • Increases in price lead to a contraction of demand. Show this on the diagram below using the cupcakes data from previous pages and price £1 and £1.50. Remember to label the axis price and quantity and label the demand curve as D1. At £1 you will sell _________ cupcakes. At £1.50 there will be a contraction of demand along D1 as consumers demand less cupcakes at a higher price and will now only demand _______ cupcakes. • Decreases in price lead to an extension of demand. Show this on the diagram below using price of £1 to £0.50 Explain what has happened in this diagram (use the format from the example above) Movement Along the Demand Curve For most goods and services the quantity demanded will fall as the price rises. This shows an inverse relationship. This is called the law of demand and occurs for three reasons. Read this article and write a brief explanantion for each of the reasons below https://www.economicsonline.co.uk/Competitive_markets/Demand_curves.html 1. Substitution effect 2. Income effect 3. Law of diminishing marginal utility Here is what a diagram showing a fall in price should look like when there are no specific values we use P1, P2, Q1, Q2. The demand schedule for Yummy Bagels is as follows. Draw a properly labelled Demand Curve. The current price is $4. Price Quantity Demanded per week $1 3500 $2 3000 $3 2500 $4 2000 $5 1500 Your demand curve must have the following • Title • Labelled Axes • Prices written in • Quantities written in • Curve drawn showing the relationship between price and quantity Show on the diagam above what would happen to the demand for bagels if Yummy Bagels drop their prices by 50% Explain in words what will happen if Yummy Bagels increases the price. (HINT: You need to use the word “contraction” or “extension”) (HINT: You also need to use the word “inverse”) Shifts in the Demand Curve A shift of the demand curve is when the demand curve moves to the right or left. Anything that affects the demand for a product that is NOT the price (non-price factors) will shift the demand curve. Market for Pumpkins Price Quantity Demanded in September Quantity Demanded in October $0.50 550 $0.60 500 $0.70 450 $0.80 400 $0.90 350 1. Draw the demand curve for pumpkins in September. Label this curve D1 2. In October, it is Halloween and at every price level, there is an increase in demand for pumpkins by 1000 pumpkins. Fill in the table to show this and then draw new demand curve for pumpkins in October. Label this curve D2. 3. https://www.khanacademy.org/economics-finance-domain/ap-macroeconomics/basic-economics-concepts- macro/demand/v/change-in-demand-versus-change-in-quantity-demanded-microeconomics-khan-academy Watch this video and explain the difference between change in demand and change in quantity demanded. THIS IS VERY IMPORTANT FOR YOU TO UNDERSTAND. Increases in Demand If there is an increase in demand, the curve will shift to the right. This is shown on the diagram. Don’t forget to put in your lables. When we don’t have a value for price and quantity we will label those as P1 and P2 and Q1 and Q2. This shows that at price p1 consumers will purchase more of this good. Decreases in Demand If there is a decrease in demand, the curve will shift to the left. Show this on a diagram Factors that Shift the Demand Curve Read the text and use it to summarise why each of the following factors will shift the demand curve. 1. Income- disposable income (income after tax has been deducted) 2. Taste and fashion 3. Marketing 4. Change in price of substitute goods 5. Change in price of complementary goods 6. Population size and demographic 7. Expectations of future price changes 8. Economic Situation Activity: Shifts in Demand for Skateboards Tony Eagle is a pro skater. He has started up his own skateboard shop, and would like you to do some analysis of factors than may affect demand for skateboards in Reading. Remember to show P1 to show the price and Q1 and Q2 to show the change in quantity demanded at the same price P1 once the curve has shifted. Don’t forget to label your axes Price and Quantity and label your demand curve D1 and D2. 1. Income- disposable income (income after tax has been deducted) Coronavirus had lead to on average a decrese in incomes The UK government lowers the rate of income tax of £550 per month. 2. Taste and fashion Skateboarding is added as an official Olympic sport and Kim Kardashian tweets about how she would never date receives a lot more television coverage. Everyone is a skater, because skateboarding is so last decade. loving it. 3. Marketing 4. Seasons Tony spends a lot of time on Reading High Steet The winter is viciously cold and it snows in Reading marketing his skateboards to young people. He also pays frequently. a bunch of Reading instagram influencers to post about his boards. 5. Substitute and complementary goods Substitute goods: alternative goods that could be used for the same purpose Complementary goods: products which are used together The price of longboards decreases The price of kneepads and skateboard helmets decrease 6. Population size and demographic If the number of people in a country increase or decrease this will change demand for goods and services simply by virtue of market size. What would happen to the demand for Tony Eagle’s Change in the age or demographic of the population is skateboards if high cost of living in London pushes more also important. If a larger % of the population is older people to move to Reading? there will be increased demand for products used by older persons. What would happen to the demand for skateboards as Britains population ages? 7. Expectations of future price changes If consumers expect prices to rise, they are likely to demand more of the product now. This may be because they hope to sell the product and make a profit off it in the future. E.g. buying art, houses, shares What would happen to demand for skateboards if people believed that exclusive Tony Eagle skateboards would be able to be sold for a profit in the future? If consumers expect price rises, they may purchase goods and services now to save money in the future when prices rise. In retailiation for Donald Trump’s steel tariffs, the UK has put an import tax on American timber, a crucial part of making skateboards. Tony Eagle has been very outspoken in the press about how this will increase the prices of his skateboards. 8. Economic Situation If the economy is in a poor state and there is significant unemployment, this may mean that consumers purchase less of certain products as people are worried about becoming unemployed and begin to save instead of spend. There are widespread reports that there will be another economic downturn in 2020 due to corona virus, and this will be far worse than the 2008 global financial crisis. Consequences of Demand Curve Shifts 1. A change in price will lead to shift in demand for substitute and complement goods. Falling demand for petrol due to less travel due to corona virus has meant that the price of petrol has fallen. Show the effect of falling petrol prices in 2020 on the market for cars. An increase in demand for Heinz baked beans has increased the price of Heinz baked beans.