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Chapters 4 and 5
Supply and Demand
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p. 1
The Law of Demand
• The law of demand holds that other things
equal, as the price of a good or service rises, its
quantity demanded falls.
– The reverse is also true: as the price of a good or
service falls, its quantity demanded increases.
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p. 2
Demand Curve
The demand curve has a negative slope, consistent with
the law of demand.
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p. 3
Demand
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p. 4
Demand and Marginal Utility
• Marginal Utility – the extra usefulness or
additional satisfaction a person gets from using
one more unit of a product
– As we use more and more of the product, we
encounter diminishing marginal utility –
satisfaction begins to decline
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p. 5
Diminishing Marginal Utility
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p. 6
Shift in the Demand Curve
• A change in any variable other than price that
influences quantity demanded produces a shift in the
demand curve or a change in demand.
• Factors that shift the demand curve include:
–
–
–
–
Change in consumer incomes (Income Effect)
Population change
Consumer preferences (Fads)
Prices of related goods:
• Substitutes (Substitution Effect): goods consumed in place of one
another
• Complements: goods consumed jointly
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p. 7
Shift in the Demand Curve
This demand curve has shifted to the right. Quantity
demanded is now higher at any given price.
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p. 8
Change in Demand
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p. 9
Demand Elasticity
• Demand Elasticity – how responsive
consumers are to a change in price.
– Elastic Demand
• Highly responsive to a price change – ex. Gas stations
– Inelastic Demand
• Unresponsive (or very little) to a price change – ex.
Insulin shots, heart transplant, salt
Determinants of Demand Elasticity
1.
Can the purchase be delayed?
2.
Are adequate substitutes available?
3.
Does it use a large portion of your income?
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p. 10
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p. 11
Demand Elasticity
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p. 12
The Law of Supply
• The law of supply holds that other things equal,
as the price of a good rises, its quantity
supplied will rise, and vice versa.
• Why do producers produce more output when
prices rise?
– They seek higher profits
– They can cover higher marginal costs of production
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p. 13
Supply
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p. 14
Supply Curve
The supply curve has a positive slope, consistent with
the law of supply.
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p. 15
GRAPHING SUPPLY
Price of Corn
P
Plot the Points
$5
CORN
P QS
4
$5
4
3
2
1
3
2
1
o 5 10
20 30 40 50 60 70 80
Quantity of Corn
60
50
35
20
5
Q
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p. 16
GRAPHING SUPPLY
Price of Corn
P
Plot the Points
$5
CORN
P QS
4
$5
4
3
2
1
3
2
1
o
10 20 30 40 50 60 70 80
Quantity of Corn
60
50
35
20
5
Q
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p. 17
GRAPHING SUPPLY
Price of Corn
P
Plot the Points
$5
CORN
P QS
4
$5
4
3
2
1
3
2
1
o
10 20 303540 50 60 70 80
Quantity of Corn
60
50
35
20
5
Q
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p. 18
GRAPHING SUPPLY
Price of Corn
P
Plot the Points
$5
CORN
P QS
4
$5
4
3
2
1
3
2
1
o
10 20 30 40 50 60 70 80
Quantity of Corn
60
50
35
20
5
Q
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p. 19
GRAPHING SUPPLY
Price of Corn
P
Plot the Points
$5
CORN
P QS
4
$5
4
3
2
1
3
2
1
o
10 20 30 40 50 60 70 80
Quantity of Corn
60
50
35
20
5
Q
© OnlineTexts.com
p. 20
GRAPHING SUPPLY
Price of Corn
P
$5
Plot the Points
S
CORN
P QS
4
3
2
1
o
Connect the Points
10 20 30 40 50 60 70 80
Quantity of Corn
$5
4
3
2
1
60
50
35
20
5
Q
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p. 21
GRAPHING SUPPLY
Price of Corn
P
$5
S
CORN
P QS
4
$5
4
3
2
1
3
2
1
o
10 20 30 40 50 60 70 80
Quantity of Corn
60
50
35
20
5
Q
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p. 22
Shift in the Supply Curve
• A change in any variable other than price that
influences quantity supplied produces a shift in
the supply curve or a change in supply.
• Factors that shift the supply curve include:
– Change in input costs
– Increase in technology
– Change in size of the industry
– Taxes
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p. 23
Shift in the Supply Curve
For an given rental price, quantity supplied is now lower
than before.
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p. 24
Theory of Production
• The Production Function – See page 128
– The Production Period
– Total Product
– Marginal Product
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p. 25
Stages of Production
• Stage I – Increase Marginal Returns
– Adding more workers increase output
• Stage II – Decrease Marginal Returns
– Total production keeps growing, but by smaller and
smaller amounts (diminishing returns)
• Stage III – Negative Marginal Returns
– With added workers, output begins to fall
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p. 26
Diminishing Marginal Utility
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p. 27
Cost, Revenue and Profit
Maximization
Measures of Cost
• Fixed Costs
– A.k.a. Overhead
– Ex. – salaries, rent payments, state and local
property taxes
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p. 28
• Variable Costs
– Change when the business’s rate of operation or
output changes
– Ex. Labor cost (hourly), raw materials, freight cost
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p. 29
Applying Cost Principles
• E-Commerce
– Limited overhead cost
• No need to purchase building
• All online accounting, catalogs, etc.
• Break-Even Point
– The level of production that generates just enough revenue to cover its total
operating cost
– Profit Maximization – marginal cost and marginal revenue are equal