Download SUPPLY AND DEMAND

SUPPLY AND DEMAND
CH 4 SEC 2
CH 5 SEC 1
CH 6 SEC 2
Chapter 4 Section 2
The Law of Demand
I. Explain the causes of a change
in quantity demanded.

A.
Microeconomics

Branch of economics that deals with
behavior and decision making by small
units such as an individual or business.
3
I. Explain the causes of a change
in quantity demanded.

B.
Demand


C.
Combination of desire, ability, and
willingness to buy a product.
Law of Demand



The demand for an economic product
varies inversely with its price.
When prices goes up, demand goes down
When prices go down, demand goes up
4
I. Explain the causes of a change
in quantity demanded.

D.
Change in the quantity demanded



A change in the quantity of the product
purchased in response to a change in
price.
Move from one point on the demand curve
to a new point on the same demand
curve.
Income Effect and Substitution Effect
5
I. Explain the causes of a change
in quantity demanded.

D.
Change in the quantity demanded


Income Effect
 Change in quantity demanded because
of a change in the consumer’s real
income due to a change in price.
Substitution Effect
 Change in quantity demanded because
of a change in the relative price of the
product.
6
II. Describe the factors that could
cause a change in demand.

A. Change in demand




Consumers demand different amounts at
every price, causing the demand curve to
shift to the left or the right
Demand increases – shift right
Demand decreases – shift left
Income, tastes, related products
7
II. Describe the factors that could
cause a change in demand.

A. Change in demand

Consumer Income
 If income increases, you buy more
 If income decreases, you buy less

Consumer Taste
 If you prefer something, you buy more
 If you dislike something, you buy less
8
II. Describe the factors that could
cause a change in demand.

A. Change in demand

Prices of related products
 Substitutes
 Products that can be used in place of
other products – Coke vs. Pepsi
 Complements
 Products that tend to be used
together – Coffee and Cream
9
III. Understand diminishing
marginal utility.

A. Marginal Utility


Extra usefulness or satisfaction from
acquiring one more unit of a product.
B. Diminishing Marginal Utility

The more units of a certain economic
product a person acquires, the less eager
that person is to buy more.
10
Chapter 5 Section 1
The Law of Supply
I. Understand the meaning
and concept of supply.

A. Supply


Schedule of quantities offered for sale at
all possible prices in a market.
B. Law of Supply



Economic principle stating that the
quantity supplied varies directly with its
price
Price goes up, supply goes up
Price goes down, supply goes down
12
II. Explain difference between
supply schedule and curve.

C. Supply Schedule


Quantity demand on the x axis - Price per
unit on the y axis. Points to be plotted.
D. Supply Curve

Slopes upward and to the right.
13
III. Explain change in quantity
supplied.

A.
Change in the quantity supplied

Quantity supplied
 Amount that producers bring to the
market at any one price.

Change in the quantity supplied
 Change in amount offered for sale in
response to a change in price.
 Move from one point on the supply
curve to a new point on the same
supply curve.
14
IV. Specify the reasons for a
change in supply.

A. Changes in supply




Producers offer different amounts of
products for sale at all possible prices in
the market.
Supply increases – shift right
Supply decreases – shift left
Number of reasons for shifts
15
IV. Specify the reasons for a
change in supply.

A. Changes in supply




1) Costs of Inputs – what its takes to
make the product
2) Productivity - efficiency increases
supply
3) Technology – can be good or bad
4) Number of sellers – competition
16
IV. Specify the reasons for a
change in supply.

A. Changes in supply

5) Taxes and Subsidies
 Taxes increase the costs to make the
product
 Subsidies are government payments
to an individual or business to
encourage or protect a certain type of
economic activity.
17
IV. Specify the reasons for a
change in supply.

A. Changes in supply

6) Expectations – if a supplier thinks
prices are going up
they will withhold
supply.

7) Government regulations – restricts
supply.
18
Chapter 6 Section 2
How Prices are Determined
I. Understand how prices are
determined in competitive markets.

A. The Adjustment Process

1) Moves toward market equilibrium
 Situation in which prices are relatively
stable and the quantity supplied is
equal to quantity demanded.
20
I. Understand how prices are
determined in competitive markets.

A. The Adjustment Process

2) Surplus
 Situation in which the quantity supplied
is greater than the quantity demanded
at a given price.
 If there is a surplus, the price is likely to
decrease.
21
I. Understand how prices are
determined in competitive markets.

A. The Adjustment Process

3) Shortage
 Situation in which the quantity
demanded is greater than the quantity
supplied at a given price.
 If there is a shortage, the price is likely
to increase.
22
I. Understand how prices are
determined in competitive markets.

A. The Adjustment Process

4) Equilibrium Price
 The price that creates neither a shortage
nor a surplus.
 Intersection of supply and demand
curves.
 Price where q supplied is = q demanded
23
II. Explain the importance of an
economic model.

A. Economic Model

A set of assumptions that can be used to
help analyze behavior and predict
outcomes.
 1) Listed in a table
 2) Illustrated with a graph
 3) Stated algebraically
24