Transcript The Law of Demand

Demand:
7.1
Understanding Demand:
• Demand: The desire to own something, and
the ability to pay for it.
• The Law of Demand: The law of demand
states that when a good’s price is lower,
consumers will buy more of it.
$
QD
Substitution Effect:
• The law of demand is the result of 2 separate
behavior patterns.
1. Substitution effect: If the price for a good
increases, people may purchase less of that
good or find an adequate substitute good
Real Income Effect:
2. Real income effect: If price for a good goes
up, your limited budget won’t buy as much as
it used to. If price goes down you can feel
richer, and will purchase more goods.
Utility:
• Utility: The power that a good or service has
to satisfy a want.
• Marginal utility: additional amount of
satisfaction each time you purchase a good.
• Law of diminishing marginal Utility: Rule that
states each additional unit of a good you
purchase, the less satisfaction you’ll receive.
The Demand Curve and Elasticity
of Demand:
7.2
Demand Schedule:
• Demand Schedule: A table that lists the
quantity of a good that people will purchase
at each price in the market.
Price Per Slice of Pizza:
Quantity Demanded:
$5.00
10
$4.00
20
$3.00
30
$2.00
40
$1.00
50
Demand Curve:
• Demand Curve: is a graphic representation of
a demand schedule
• Shows the relationship between the price of a
certain good, and the quantity a person will
purchase.
• Demand curve slopes downward, showing
that as price decreases, quantity consumed
increases.
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Quantity Demanded
50-
40-
30-
20-
1-
10-
$ Per Slice of Pizza
Demand Curve:
Population
Income
Preference Change
5-
Prices of Complement Goods
4-
Available Substitutes
32-
Quantity Demanded
50-
40-
30-
20-
1-
10-
$ per slice of pizza
Shifts in the Demand Curve:
Elasticity of Demand:
• There are always some goods that you will
always find money to buy, even if the price
were to rise drastically.
• There are also some goods that you would cut
back on or stop buying altogether if the price
were to rise just slightly.
• Economists describe the way that consumers
respond to prices changes as elasticity of
demand.
Elastic vs. Inelastic Demand:
• elastic: when you buy less of a good even
after a small price increase. (ex: sporting event
tickets)
• inelastic: demand for a good that you will
keep buying despite price changes. (ex:
gasoline)
The Law of Supply and the
Supply Curve:
7.3
The Law of Supply:
• Law of Supply: As the price for a good
increases, the quantity supplied also
increases.
$
QS
Profit Incentive:
• The reason a company will produce more
when prices are high, is hopes of greater
profits.
Supply Schedule:
• Supply Schedule:
• Shows the relationship between price and the
quantity supplied for a specific good. (similar
to demand schedule)
Price Per Slice of Pizza:
Quantity Supplied:
$1.00
10
$2.00
20
$3.00
30
$4.00
40
$5.00
50
5432-
Quantity Demanded
50-
40-
30-
20-
1-
10-
$ Per Slice of Pizza
Supply Curve:
Shift of the Supply Curve:
4 things that cause the supply curve to shift:
- Cost of inputs
- Number of firms
- Taxes
-Technology
* Remember: shifts to the right show an
increase in supply, to left shows a decrease in
supply.
Law of Diminishing Returns:
Law of diminishing returns: level of production
decreases as more workers are hired.
• -Why does this happen??
– *Workers are working with limited capital.
• (Ex: there are only so many machines in a
factory.)
Combining Supply and Demand:
7.4
S
543-
-- Equilibrium price
21-
Quantity Demand
50-
40-
30-
20-
D
10-
$ Per Slice of Pizza
Graphing Supply and Demand:
Equilibrium Price:
• Equilibrium price: the point at which demand
and supply come together.
• It is at this point, where there is balance
between price and quantity Demanded.
• This is where businesses want to be.
Disequilibrium:
• Disequilibrium: If the market price or quantity
demanded is anywhere except the equilibrium,
the market is in a state of disequilibrium.
• Disequilibrium can produce 1 of 2 outcomes.
• -Excess demand- quantity demanded is greater
than quantity supplied. (when price is below
equilibrium)
• -Excess supply- quantity supplied is greater than
quantity demanded. (when price is above the
equilibrium point)
5-
S
4-
- New Equilibrium
3-
-E
21-
Quantity Demanded
50-
40-
30-
20-
D
10-
$ Per Slice of Pizza
Increase
in
Demand
Shifts in Equilibrium Price:
S
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-E
2-
-New Equilibrium
1-
Quantity Demanded
50-
40-
30-
20-
D
10-
$ Per Slice of Pizza
Increase in Supply
Government Intervention:
-Sometimes, the government must step in to
control prices.
1. Price Ceiling- maximum price that can be
legally charged for a good. (ex: rent Control)
2. Price Floor-Minimum price for a good or
service.
(ex: minimum wage)
3. Rationing- Limiting items that are in short
supply. (can lead to a black market)