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Supply & Demand Chapter 4 & 5 Demand Demand = the desire, ability, & willingness to buy a product Law of Demand = the quantity demanded of a good or service varies inversely with the price When prices go up, demand goes down Likewise, when prices go down, demand goes up Price is an obstacle which discourages consumers from buying Marginal Utility Marginal utility = the extra usefulness or satisfaction one gets from acquiring or using one more of a product The more we use a product we encounter diminishing marginal utility = the extra satisfaction we get from using additional quantities of the product begins to diminish Because of this, we are not willing to pay as much for the 2nd, 3rd, etc as we did the first Willingness & Ability to Buy Sometimes things happen that change a person’s willingness and ability to buy: 1) a change in the quantity demanded 2) a change in demand 1) A change in the quantity of product demanded can be in response to a change in price When prices drop, you pay less for the product and have more income to spend This is called the income effect Consumers have a tendency to replace a more costly item with a cheaper one This is called a substitution effect 2) A change in demand occurs because people are now willing to buy different amounts of the product at the same prices Demand can change because of changes in income, tastes, the price of related goods, expectations, and the number of consumers Income: An increase in income results in a consumer buying more products at each and every price The reverse would also be true Tastes: Many things can change taste: Advertising Fashion trends Media reports Changes in the season New products A .. change in the price of related products can cause a change in demand Some products are substitutes or complements Substitutes = things that can be used in place of other products Example: butter and margarine An increase in the price of butter would cause the demand for margarine to go up Complements = the use of one good increases the use of the other Example: computers and software A decrease in the price of computers means the demand for software will also go up Expectations = the way people think about the future Example: if a tech company announced a new CD that would allow more music to be recorded on it available in another year, consumers might buy fewer of the current CD’s Number of consumers If the number of consumers of a product increases, the demand will cause prices to drop, and vice versa Supply Supply = the amount of a product that would be offered for sale at all possible prices Law of Supply = the principle that suppliers will normally offer more for sale at high prices and less at low prices Changes in Supply Sometimes things happen that cause a change in supply – different amounts of products for sale at all possible prices Things that can change the supply: Cost of inputs Productivity Technology Taxes and subsidies Expectations Government regulations Number of sellers Costs of input: Cost of labor, packaging, goods that make the product change Productivity: When workers work more efficiently there is a larger supply When workers are unmotivated it may decrease supply Technology: Taxes and subsidies: New machines, chemicals, or industrial processes can lower the cost of production or increase productivity When production costs go down, the seller can make more products and charge cheaper prices If the producer’s inventory is taxed, the cost of production goes up Subsidies = government payment to a person, business or group to encourage or protect a certain type of activity These lower the cost of production Milk, corn and wheat farmers usually get subsidies to support their income Expectations: Producers may think the price of their product will go up in the future So they withhold some of their supply If they think the price will go down in the future, they may increase their supply to make as much money as possible right away Government regulations: Government rules can make production prices increase Ex: gov’t mandated air bags on cars Number of sellers: The more producers of a product there are, the bigger the supply is So that usually reduces the prices of products Also provides for more competition Measures of Cost Businesses must analyze costs before making decisions There are three different kinds of costs: Fixed cost Variable cost Marginal cost Fixed costs: Costs that businesses have even if they are idle Also called overhead Examples: salaries, rent or lease payments, property taxes, depreciation on machines Variable costs: Cost that changes when business operations or output changes Examples: pay for hourly workers, electric power, cost of materials to make products Marginal costs: The extra cost when a business produces one additional product This means you are using extra factors of production Measures of Revenue Total revenue = the number of products sold multiplied by the average price per product. Marginal revenue = the extra revenue associated with the production and sale of one additional product. break-even point = the total output or products the business needs to sell in order to cover total costs Profit = the money made when a business makes more money than they spent on costs
