Transcript Economics Chapter 7

Economics Chapter 7
Supply and Demand
Section 1: Demand
• Voluntary exchange, agreeing on terms
• Demand in economics, the different amounts
we will purchase at various prices.
• Market
• Law of demand, how people react to changing
prices.
– Inverse relationship
Factors in purchasing
• Diminishing Marginal Utility
– Utility, the power that a good or service has to
satisfy a want.
– Law of diminishing marginal utility, You get more
satisfaction from each additional purchase of an
item, but the utility will diminish for each
additional unit.
– One candy bar is great, two are better, three is
good, four is too much for that price.
Factors continued
• Real Income Effect
– No one will be able to buy everything they want.
– Real Income Effect, people can not keep buying
the same amount of a product if the price rises.
– This can work in reverse also, the price declines,
your real income increases.
Factors continued
• Substitution Effect
• Substitute, two items that are not exactly the
same but satisfy the same need.
• If the price of one drops people will purchase,
substitute, that item.
• Example, butter and margarine
Section 2: The Demand Curve and the
Elasticity of Demand
• As the price goes down, the demand goes up.
• Quantity demanded is usually measured by
the year.
• Assume a constant-quality unit.
• If demand increases, the curve shifts to the
right.
Price elasticity of demand
• Elasticity is how responsive consumers are to
price changes on given items.
• Elastic Demand, price changes greatly affect
the amount bought. A brand of coffee, rise in
price makes consumers go to a substitute.
• Inelastic demand, price change does not affect
substantially. Electricity, salt
3 factors in elacticity
• 1. The existence of substitutes.
• 2. The percentage of a person’s total budget
devoted to the purchase of that good.
• 3. How much time we allow for the consumer
to adjust to the change in price.
Determinants of Demand
•
•
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Changes in population and income.
Changes in taste.
Substitutes available.
The use of complimentary goods.
– More bread bought = more butter sold.
Section 3: the Law of Supply and the
Supply curve
• The willingness and ability of
producers to provide goods and
services at different prices.
• As price rises, the quantity supplied
rises.
• Profit drives this concept.
The Law of diminishing returns
•
After some point, when adding additional
units to the factors of production, there will
be a decrease in the amount of units per
factor.
• Example, hiring workers to the point of more
workers versus machines. Less output.
The Supply Curve
• The supply curve works exactly opposite of
the demand curve.
• On a graph, the curve rises as you go left to
right.
• Higher cost = more supply.
The determinants of Supply.
– 1. The price of inputs, if the price of inputs drops,
more can be produced at the same price, ( shift to
the left on the curve).
– 2. Technology
– 3. Taxes
– 4. Number of firms in the industry.
Section 4: Putting Supply and
demand together
• Equilibrium price- The price of any good or service
will find the level at which the quantity demanded
and the quantity supplied are balanced.
• Shortage, The quantity demanded is higher than the
quantity supplied. The price is below the equilibrium
price (EP).
• Surpluses occur when more is produced than
demanded, above the EP.
Section 4
• Market forces take care of shortages and
surpluses when no government is involved
• Price controls- Government
– Price ceilings
• Rationing
• Black Market
– Price Floors