Post on 11-Jan-2016
Unit Three
ECONOMICS
Demand and
Supply
PA Standards
6.2.12E; 6.2.12.G; 6.3.12.D; 6.3.12.E; 6.3.12.F
DEMANDAmount of a good or
service that a consumer is willing and able to buy at
various possible prices during a given time
period.
willing and able
QUANTITY DEMANDED Amount of a good or
service that a consumer is willing and able to buy at
each particular price during a given time
period.
each particular price
The Law of DemandAn increase in a good’s
price causes a decrease in the
quantity demanded; a decrease causes an
increase.
1. Income EffectPurchasing power
refers to the amount of money
people have to spend on goods
and services
1. Income Effect
Income Effect refers to the increase or decrease in
purchasing power caused by a
change in price
2. Substitution Effect
Tendency of consumers to
substitute a similar, lower-priced
product for another product that is
more expensive
Substitute Goods replace a more expensive, or
brand-name good
Complementary Goods are
commonly used with other goods
Product Substitute Good Complementary Good
Butter Margarine Bread
Steak Hamburger A-1
Digital CameraDisposable
CamBatteries
3. Diminishing Marginal Utility
Decrease in the utility (usefulness) of a good as more
units are consumed
(usefulness)
Demand Schedule
A list of the quantity of goods that
consumers are willing and able to buy at a series of possible prices
Demand CurveA graph which plots the information from a demand schedule;
it shows the relationship between
price & demand
Determinantsof Demand
Non-price factors that influence the amount of demand for a good
or service
Determinants of Demand
Consumer Tastes and Preferences
Consumer Expectations
Determinants of Demand
Market Size
-- decisions by private businesses-- government
policy-- new technology
Determinants of Demand
Income
-- generally, as income rises, so does demand-- income relates to purchasing power
Determinants of Demand
Prices of Related Goods-- ?? Substitutes ??
-- ?? Complements ??
Elasticityof Demand
The degree to which changes in a good’s
price affect the quantity demanded
by consumers
Elastic Demand
A small change in a good’s price causes a
major, opposite change in the
quantity demanded.
Elastic Demand
Elasticity of demand if…
…the product is not a necessity
Elastic Demand
Elasticity of demand if…
…there are readily available substitutes
Elastic Demand
Elasticity of demand if……the product’s cost
represents a large portion of consumers’
incomes
Inelastic Demand
A change in a good’s price has little impact
on the quantity demanded.
Inelastic Demand
Inelasticity of demand if…
…the product is a necessity
Inelastic Demand
Inelasticity of demand if…
…there are few or no readily available
substitutes
Inelastic Demand
Inelasticity of demand if……the product’s cost
represents a small portion of consumers’
incomes
Elasticity for a product varies
depending on the specificity of the
market—you can look at the big picture
(general market) or the close-up picture
(specific market)
The more time that passes following a price change, the
more elastic a product’s demand
becomes
Measuring Elasticity
Total Revenue (total receipts) is the total
income that a business receives from selling its
products
Total Revenue & Elastic Demand
A drop in a company’s total
revenue from a price increase indicates
elastic demand for a product.
Total Revenue & Inelastic Demand
An increase in a company’s total revenue
because of a price increase indicates
inelastic demand for the product.
To maximize revenue, the seller must
determine at what point pricing choice brings the highest
revenue
SUPPLY
The quantity of goods and services that
producers are willing to offer at various possible
prices during a given time period.
QUANTITY SUPPLIED
The amount of a good or service that a producer is willing to sell at each
particular price.
Producers supply more goods and services
when they can sell them at higher prices and
fewer goods and services when they must
sell them at lower prices.
Law of Supply
Profit
Amount of money remaining after
producers have paid costs
Costs of Production
Business expenses involved in the
manufacture of a product
Profit influences specific and general
markets--new manufacturers will enter a profitable market; current
manufacturers will increase production
A list of each quantity of a product that producers are willing to supply at
various market prices
Supply Schedule
Supply CurveIt plots on a graph
the relationship between a good or
service and the quantity supplied
ElasticityOf Supply
The degree to which price changes affect the quantity supplied
Elastic Supply
A small change in price causes a major change in
the quantity supplied
Elastic Supply
Elastic supply if…
…the product can be produced quickly
Elastic Supply
Elastic supply if…
…the product can be produced
inexpensively
Elastic Supply
Elastic supply if…
…production uses few, readily available
resources
Inelastic Supply
When a good’s price has little impact on
the quantity supplied
Inelastic Supply
Inelastic supply if…
…the product is expensive to produce
…the product requires time to be
produced
Inelastic Supply
Inelastic supply if…
…production uses resources not readily
available
Determinantsof Supply
Non-price factors that move the entire
supply curve
Determinants of Supply
Prices of Resources
Competition
Technology
Determinants of Supply
Producer Expectations
Government Action--tax
--subsidy--
regulation
Making Production DecisionsProductivity
The amount of a good or service produced
per unit of input
Total Product
All of the product a company makes in a
given period of time—with a given amount of
input
Marginal Product
Change in output generated by adding
one more unit of input
Law of Diminishing ReturnsAs more of one input is
added to a fixed supply of other resources,
productivity increases up to a point, but at some point marginal product will diminish.
Increasing Marginal Returns
Stage of production when addition of units raises
returns.
More workers, more product
DiminishingMarginal Returns
Stage of production when addition of units
reduces returns.More workers, declining marginal product
NegativeMarginal Returns
Stage of production when addition of units
lowers returns.More workers, negative marginal product
Costs of Production
Costs that do not change as the level of
output changes
Fixed Costs
depreciation
overhead
Costs of Production
Costs that change as the level of output changes
Variable Costs
Costs of Production
Sum of fixed and variable costs
Total Costs
Costs of Production
Additional costs of producing one
more unit of product
Marginal Costs
End of Chapters 3 & 4