Download Section 9 - Economics

Name:______________________
Economics
Notes Packet: Chapters 3 and 4
Ch. 3: Demand
Section 3.1: Nature of Demand
• Demand
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• Quantity demanded
• Describes the amount of a good or service that a consumer is willing &
able to buy at each particular price during a given time period
• “willing and able”
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• “specific time period”
• A day, week, month, year, or some other definite time period
• Law of Demand
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• 3 Economic concepts explain this law
• Income effect
• Substitution effect
• Diminishing Marginal Utility
• Income Effect
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• As purchasing power increases so does the demand for goods &
services
• As purchasing power decreases so does the demand for goods &
services
• Any change in consumer purchasing power caused by a change in price
• Substitution effect
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• Diminishing Marginal Utility
• Remember utility is usefulness or the amount of satisfaction that an
individual receives from consuming a product
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Name:______________________
Economics
Notes Packet: Chapters 3 and 4
• There is a limit to a product usefulness and thus a limit to a
consumer’s demand for it
• Demand Schedules
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• Demand Curves
• Plots the information on a demand schedule on a graph for a visual
representation
Section 3.2: Changes in Demand
• Demand Shifts
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• Determinants of Demand
• Factors that don’t deal with price that influence demand; these
include:
• Consumer tastes and preferences
• Market size
• Income
• Prices of related goods
• Consumer expectations
• Consumer Tastes and Preferences
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• Ex: A popular singer loses fans and interest so demand for his next
album decreases
• Market Size
• As a market expands, it has more consumers than before; thus greater
potential demand
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• EX: The invention of digital cameras shrinks the market for
traditional cameras
• Income
• When income increases, consumers have more money to spend; increased
spending leads to increased demand
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Name:______________________
Economics
Notes Packet: Chapters 3 and 4
• Sometimes the effect is reversed
• A family gets more money and instead of buying DVDs, the family
buys a Blu-Ray player & Blu-Ray disks
• So higher income does not result in more DVDs being
bought, but less as the family upgrades to a better good
• Prices of Related Goods
• Substitute Goods
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• An increase in a product’s price leads to increased demand
for its substitute
• Ex: the price of butter goes up, the demand for
margarine increases as its less expensive
• Complementary Goods
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• Ex: Paint & paintbrushes or toothbrush & toothpaste
• As the price of paint increases, the demand for paint
and paintbrushes decreases
• Consumer Expectations
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• Your future expectations of greater income has caused demand to
increase
• If you anticipate lower income due to a layoff or wage cuts and choose to
purchase less goods
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Section 3.3: Elasticity of Demand
• Elasticity of Demand
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• The demand for a product can be elastic or inelastic
• Elastic Demand
• Exists when a small change in a good’s price causes a major, opposite
change in the quantity demanded
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• Demand is also elastic when a small increase in a good’s price
results in a significant decrease in quantity demanded
• Goods w/ elastic demand
Name:______________________
Economics
Notes Packet: Chapters 3 and 4
• The product is not a necessity
• The product has readily available substitutes
• The products cost represents a large portion of the
consumer’s income
• Inelastic Demand
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• A good is usually inelastic if:
• The product is a necessity
• There are few or no readily available substitutes
• The product’s cost represents a small portion of consumer’s
income
• Measuring Elasticity
• One of the simplest ways to measure demand elasticity is through the total
revenue test
• Total Revenue (Total Receipts) refers to the total income that a
business receives from selling its products
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• Total Revenue and Elastic Demand
• A drop in a business’s total revenue from a price increase indicates elastic
demand for the product
• Total Revenue and Inelastic Demand
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Ch. 4: Supply
Section 4.1: Nature of Supply
• Supply
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• Quantity supplied
• The amount of a good or service that a producer is willing to sell at each
particular price
• “willing and able”
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• “specific time period”
• A day, week, month, year, or some other definite time period
Name:______________________
Economics
Notes Packet: Chapters 3 and 4
• Law of Supply
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• Profit motive
• The desire by producers to make money
• Profit Motive
• Profit
• The amount of money remaining after producers have paid all of
their costs
• Costs of production
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• A business makes a profit when revenues are greater than the costs
of production
• Supply Schedules
• Lists the quantity of a product that producers are willing to supply at
various market prices
• Supply Curve
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• Elasticity of Supply
• The degree to which price changes affect the quantity supplied
• The supply for a product can be elastic or inelastic
• Elastic Supply
• Exists when a small change in price causes a major change in the quantity
supplied
• Products with elastic supply can be made:
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• Suppliers can change the production rates of such goods in order to meet
changing consumer demand
• Inelastic Supply
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• Products with inelastic supply require a lot of:
• Time
• Money
• Resources that are not readily available
Name:______________________
Economics
Notes Packet: Chapters 3 and 4
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Section 4.2: Changes in Supply
• Supply Shifts
• Like demand, supply is affected by factors other than price
• Determinants of supply
• Non-price factors that shift the entire supply curve of a product,
instead of simply changing the quantity supplied along the original
supply curve
• The determinants of supply include:
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• Competition
• Prices of related goods
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• A change in one of these determinants can cause a change in the
overall supply of a product
• Prices of Resources
• One of the most common determinants that can shift the supply curve is a
change in the price of resources
• When the price of a resource falls, production costs fall
accordingly
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• Thus, the supply curve shifts to the right
• If the cost of a resource increases, production costs increase
accordingly; higher costs also mean lower profits
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• Government tools
• Taxes
• A tax is required payment of money to the government to help
fund government services
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• Subsidies
Name:______________________
Economics
Notes Packet: Chapters 3 and 4
• Payments to private businesses by the gov’t
• Subsidies can reduce a business’s production costs
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• Regulation
• To protect the public, the gov’t passes many kinds of regulations (rules)
about how companies conduct business
• Loose gov’t regulations tend to increase supply
• Strict gov’t regulations tend to decrease supply
• Technology
• Usually new technology makes production more efficient & less
expensive
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• Competition
• Competition tends to increase supply, while a lack of competition tends to
decrease supply
• Prices of Related Goods
• Supply for one good often is connected to the supply for its related goods
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• Producer Expectations
• Producer expectations of future higher prices causes the supply curve to
shift to the right
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• Productivity
• Tells business owners how efficiently their resources are being used in
production
• Total Product
• To understand how output is affected by changes in input, a
company first must calculate its output
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• Marginal Product
• To maximize productivity, business owners also need to know
their marginal product
Name:______________________
Economics
Notes Packet: Chapters 3 and 4
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Section 4.3: Making Production Decisions
• Law of Diminishing Returns
• The effect that varying the level of an input has on total and marginal
product
• It states that as more of one input is added to a fixed supply of
other resources, productivity increases up to a point
• At some point, however the marginal product will diminish
eventually resulting in a negative marginal product
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• Increasing Marginal Returns
• Diminishing Marginal Returns
• Negative Marginal Returns
Name:______________________
Economics
Notes Packet: Chapters 3 and 4
• Costs of Production
• Fixed Costs
• Some production costs do not change no matter how many goods
are made
• Production costs that do not change as the level of output
changes are called fixed costs
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• Overhead, total fixed costs
• Variable Costs
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• Variable costs include raw materials and wages
• Total Costs
• The sum (total) of the fixed and variable costs
• Marginal Costs
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• Marginal costs are the additional costs of producing on more unit
of output