Transcript Economics Chapter 7

Supply and Demand
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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
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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.
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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.
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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
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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.
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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
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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.
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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.
 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.
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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.
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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.
◦ 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.
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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.
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Market forces take care of shortages and
surpluses when no government is involved
Price controls- Government
◦ Price ceilings
 Rationing
 Black Market
◦ Price Floors