Download Ch. 3 and 4

Ch. 3 and 4
Demand and Supply
Ch. 3 Demand and Price Effect
• The Law of Demand – The inverse relationship
between the quantity demanded and the price of
a product. People will buy more of something at
lower prices than at higher prices.
• Demand – quantities of a particular good or
service that consumers are willing and able to
buy at different prices at a particular time.
• Price effect – the inclination of people to buy less
of something at higher prices than they would
buy at lower prices.
4 Factors explain why people behave
this way:
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Buying power
Diminishing marginal utility
Diminishing personal value
Availability of substitutes
Buying Power
• The quantity of goods and services a person
can buy with a given amount of money
Diminishing Marginal Utility
• The point reached when an additional unit of
a product consumed is less satisfying than the
one before.
Diminishing personal value
• Using a product bought for different purposes,
the value you place on the products
usefulness
Availability of substitutes
• A good or service that can replace another
good or service
Price Elasticity of Demand
• A measure of the impact of the price effect, it
indicates a buyer’s eagerness to buy a good or
service
• When the price effect is large, the demand is said
to be elastic
• Example: in the case of cola, a small change in
price causes a relatively large change or “stretch”
in the amount demanded. When the price effect
is small, the demand is inelastic, which means
there is little or no stretch.
Factors that effect price elasticity of
demand
• Substitutes – when substitutes are plentiful,
demand is elastic
• Percentage of budget – a product’s price tend
to be more elastic when the price represents a
significant percentage of the household
budget
• Time – the longer that people have to adjust
to a product’s price change, the more elastic
the demand
Relationship between price effect and
change in demand
• What causes the demand for a product to
increase or decrease?
– Change in income
– Prices or availability of substitutes
– Prices or availability of complementary goods
– Change in weather/season
– Change in number of buyers
– Changes in styles, tastes, and habits
– Change in expectations
Ch. 4 Supply and Price Effect
• Supply – the quantity of a good or service
producers are willing and able to sell at different
prices at a particular time
• Law of supply – a positive relationship between
the quantity supplied and the price of the
product
– As the price rises, the quantity supplied will tend to
rise. As the price declines, the quantity supplied will
tend to decline. Supply is not a particular quantity for
sale today in the market. It is a list of prices and the
quantities that a company is willing and able to supply
at each price.
Marginal Cost
• The change in cost for an additional output,
and opportunity cost
Market supply
• The total of all individual suppliers’ products
in a market at a particular time
Price Elasticity of Supply
• If a change in price causes a large change in the
amount supplied, the price effect is significant and
supply is elastic
• A change in price has much less influence on the
quantity supplied, so the price effect is small and the
supply inelastic
• Important element in determining the price elasticity
of supply is the ease and speed of bringing new
resources into production in response to a higher price.
The quicker and easier it is for businesses to expand
production, the more elastic the production supply will
be.
Relationship between price effect and
change in supply
• Price increase and decreases send messages to
suppliers of goods and services. Prices encourage
producers to increase or decrease their output.
As prices rise, the increase attract additional
producers, while price decreases drive producers
out of the market.
• What causes changes in supply?
– Changes in the marginal cost of production
– Changes in the number of producers
– Change in expectations