Transcript Economics Section 6

Recap
• So far we have discussed some of the
fundamental concepts of Economics.
– Sec 1 Definition of economics
– Sec 2 & 3 Addressed limited resources 7
scarcity
– Sec 4 & 5 Institutional forces that affect
economic behaviors
Objectives
• The major factors that explain the
operation of our market economy.
• The concepts of supply & demand.
• Elastic & inelastic demand.
Wordsmithing
• Law of Diminishing Demand
– states that as the demand price goes up or
down, so will the supply of the good/service.
• Demand Curve
– shows the amount of goods/services that will
be purchased at various prices.
• Substitutes
– alternative goods/services. The greater the
number of substitutes the greater degree of
elasticity.
Wordsmithing cont.
• Elastic Demand
– As prices fluctuates, so does demand. Price goes
up=demand goes down or vise-versus
• Inelastic Demand
– Price fluctuates up/down within a relevant range while
demand stays consistent
• Supply Curve
– Amount of goods/services available at various prices
• Market Equilibrium Point
– The point at which the quality & price sellers are
willing to offer is equal to quality/price buyers are
willing to accept
“Forecasting is like trying to drive a
car blindfolded and following
directions given by a person who is
looking out the back window”.
-Anonymous
Law of Diminishing Demand
Most families budget a certain amount of money
to be spent on groceries each week/month.
If the price of hamburger drops, it is reasonable
to expect that he/she will switch some of their
food money to hamburger and away from some
other foods.
On the other hand, if hamburger prices rises,
you would expect them consumers to buy less
hamburger and more of other foods.
Demand Curve
If we plot on a graph how much
hamburger consumers would purchase at
different prices, we would have a demand
curve similar to the one on the next slide.
Demand Curve for Hamburger
4.00
3.50
3.00
.A
2.50
.B
2.00
.C
1.50
.D
1.00
.E
2
4
6
8
10
12
14
Demand Curve
With all these prices & quantities to choose from,
how does one know what the best price is?
If you are the buyer, the lower the price, the
better the deal.
If you are the seller, the price needs to be set
where you will get the greatest total revenue.
The easiest way of comparing different price
levels is to make a demand schedule.
Demand Schedule
Point
Price per lb Quantity/lbs Total revenue
A
$3.00
2
$6.00
B
$2.50
4
$10.00
C
$2.00
6
$12.00
D
$1.50
8
$12.00
E
$1.00
10
$10.00
Demand Schedule
So based on the demand schedule, the
price that will yield the greatest total
revenue for the seller would be between
$1.50 and $2.00; they both yielded $12.00.
At the price of $1.75, the seller should sell
7 pounds, which would be the optimum
price ($1.75 X 7 = $12.25).
Elastic Demand
All products do not have the same
demand curve. Because of the great
number of substitutes for hamburger,
demand will fluctuate (up or down)
depending on its selling price. This
fluctuating demand is called elastic
demand.
Inelastic Demand
If a certain product, such as gasoline,
does not have many good substitutes, the
demand will remain the same as long as
there is not a quick, radical change in
price. Let’s take a look at what a demand
curve for gasoline looks like…………..
Demand Curve for Gasoline
1.50
P 1.40
R 1.30
I 1.20
C
1.10
E
1.00
0.90
($)
0
A
B
C
D
E
5
10 15 20 25 30
Demand (Quantity in Gallons)
35
Demand Curve
As we can see from the demand curve,
relatively small changes in price will not
change people’s driving habits, so demand
will stay the same. When demand stays
relatively constant with small percentage
changes in price, this is referred to as
inelastic demand.
Demand Schedule for Gasoline
Point
A
Price per
Gallon
$1.40
Quantity in
Gallons
20
Total
Revenue
$28
B
$1.30
20
$26
C
$1.20
20
$24
D
$1.10
20
$22
E
$1.00
20
$20
Demand Schedule
AS you might have noticed, as price goes
down, so does total revenue. On the other
hand, as price goes up, so does total
revenue. When the price and total revenue
move in the same direction, this indicates
inelastic demand. The optimum price for
the seller would be at the highest level
where price does not affect demand.
Supply Curve
So far things should be making sense.
This is because of the simple example in
which we have had only one seller and
one buyer. However, we still need to factor
in suppliers. In remembering the law of
diminishing demand, as the demand
prices rises, so does the supply quantity
and as supply increases, prices tend to
decrease.
Supply Curve
With all this in mind, the market price for
gasoline will be driven downward by increased
supply if the price was set at the top of the
demand curve. This is because at very high
prices more firms are willing to supply the
market.
How much suppliers are willing to release into
the market depends on the price they can
receive. Typically, the higher the price, the more
suppliers will release to the market.
Supply Curve for Gasoline
P
R
I
C
E
1.50
1.40
1.30
1.20
1.10
1.00
0.90
0
•
•
•
•
•
5
10 15 20 25 30
Supply ( Quantity in Gallons
35
Market Equilibrium Point
Suppliers want to maximize their total
revenue, just as sellers do. So when the
quantity & price that sellers are willing to
offer are equal to the quantity & price that
the buyers are willing to accept, then they
have reached the market equilibrium point.
Class Participation Required
Supply and Demand
Review
As prices fluctuates, so does demand. Price goes
up=demand goes down or vise-versus
Price fluctuates up/down within a relevant range
while demand stays consistent
Amount of goods/services available at various
prices
The point at which the quality & price sellers are
willing to offer is equal to quality/price buyers are
willing to accept
Review
– states that as the demand price goes up or
down, so will the supply of the good/service.
– shows the amount of goods/services that will
be purchased at various prices.
– alternative goods/services. The greater the
number of substitutes the greater degree of
elasticity.