Download The law of demand states The law of demand states that as

The Marketplace (cont.)
• In a market economy, consumers
collectively have a great deal of influence
on prices of all goods and services.
• The demand of a good or service creates
supply.
• A market represents the freely chosen
actions between buyers and sellers.
The Marketplace (cont.)
demand: the amount of a good or
service that consumers are able and
willing to buy at various possible
prices during a specified time period
• A market economy is based on the
principle of voluntary exchange - a
transaction in which a buyer and a seller
exercise their economic freedom by
working out their own terms of exchange.
supply: the amount of a good or
service that producers are able and
willing
g to sell at various p
prices during
g
a specified time period
The Law of Demand
The law of demand states
that as price goes up,
quantity demanded goes
down, and vice versa.
The law
Th
l
off demand
d
d states
t t that
th t as price
i
goes up, quantity demanded goes down. As
price g
p
goes down,, q
quantity
y demanded g
goes
up.
The Law of Demand (cont.)
• Several factors explain the inverse relation
between price and quantity demanded,
or how much people will buy of any item at
a particular price
price.
• Factors include:
– Real income effect
– Substitution effect
The Law of Demand (cont.)
• Diminishing marginal utility:
– Utility - the ability of any good or service
to satisfyy consumer wants
– Marginal utility - an additional amount of
satisfaction
– Law of diminishing marginal utility the additional satisfaction a consumer
gets from purchasing one more unit of a
product will lessen with each additional
unit
it purchased
h
d
real income effect: economic rule
stating that individuals cannot keep
buying the same quantity of a product
if its price rises while their income
stays the same
substitution
b tit ti effect:
ff t economic
i rule
l
stating that if two items satisfy the
same need and the price of one rises,
people will buy more of the other
Graphing the Demand Curve
• Economists can show the relationship
between a change in quantity demanded
and a change in demand using a demand
curve.
Ad
demand
d curve is
i a graph
h th
thatt shows
h
the relationship between the price of an
item and the quantity demanded.
Graphing the Demand Curve (cont.)
• A demand schedule is a table reflecting
quantities demanded at different possible
prices.
• A demand curve shows the quantity
demanded of a good or service at each
possible price
price. Demand curves slope
downward, clearly showing the inverse
relationship.
Pages 178-179
178 179
Determinates of Demand
A change in the demand for a particular
it
item
shifts
hift the
th entire
ti demand
d
d curve to
t
the left or right.
• Factors that can affect demand for a
specific product or service:
– Changes in population
– Changes in income
– Ch
Changes iin people’s
l ’ ttastes
t and
d
preferences
– Th
The availability
il bilit and
d price
i off substitutes
b tit t
– The price of complementary goods
• Th
The decrease
d
in
i the
th price
i off one good
d will
ill
increase the demand for its complementary.
Page 180
Page 180
Page 181
Page 181
Page 182
Page 181
The Price Elasticity of Demand
Elasticity of demand measures how
much
h the
th quantity
tit demanded
d
d d changes
h
when price goes up or down.
The Price Elasticity of Demand (cont.)
• For some goods, a rise or fall in price
greatly affects the amount people are
willing to buy. This economic concept is
referred to as elasticity.
elasticity
• The measure of how much consumers
respond to a given change in price is
referred to as price elasticity of demand.
View: Demand vs. Quantity Demanded
View: Goods with…
The Price Elasticity of Demand (cont.)
elastic demand: situation in which a given
rise or fall in a product’s price greatly affects
the amount that people are willing to buy
inelastic demand: situation in which a
product’s
product
s price change has little impact on
the quantity demanded by consumers
View: Demand vs. Quantity Demanded
View: Goods with…
Page 183
Page 184
Page 185
Profits and the Law of Supply
The law of supply states that as price
goes up, quantity
tit supplied
li d goes up,
and vice versa.
• To understand pricing, you must look at
both demand and supply
supply.
Profits and the Law of Supply (cont.)
quantity supplied: the amount of a
good or service that a producer is
willing and able to supply at a specific
price
– The higher the price of a good, the
greater the incentive is for a p
g
producer to
produce more.
pp y states that as the p
price
• The law of supply
of a good rises, the quantity supplied
also rises. As the price falls, the quantity
supplied also falls
falls.
View: The Law of Supply
The Supply Curve
A supply curve is a graph that shows
th relationship
the
l ti
hi between
b t
price
i and
d
quantity supplied.
The law
Th
l
off supply
l states
t t that
th t as price
i goes
up, quantity supplied also goes up. As price
goes down,, quantity
g
q
y supplied
pp
g
goes down.
supplied
supplied
The Supply Curve (cont.)
• A supply schedule is a table showing
quantities supplied at different possible
prices.
• The supply curve is an upward-sloping
line that shows in graph form the quantities
producers are willing to supply at each
possible price.
Pages 188-189
The Determinants of Supply
A change in the supply of a particular
it
item
shifts
hift the
th entire
ti supply
l curve to
t
the left or right.
The Determinants of Supply (cont.)
• Many factors affect the supply of a specific
product. Four of the major determinants
are:
– The price of inputs
– The
e number
u be o
of firms
s in the
e industry
dus y
– Taxes imposed or not imposed – may
also be called government involvement
View: If Inputs Become Cheaper
View: If Number of Firms Increases
View: If Taxes Increase
The Determinants of Supply (cont.)
– Technology
• Any improvement in technology will increase
supply.
technology: the use of science to
develop new products and new
methods for producing and
distrib ting goods and ser
distributing
services
ices
Page 190
Page 190
View: If Technology Improves Production
Page 190
Page 191
Page 192
Page 191
The Law of Diminishing Returns
When a business wants to expand, it
h to
has
t consider
id how
h
much
h expansion
i
will really help the business.
The Law of Diminishing Returns (cont.)
• Will product output continue to increase
proportionally as more workers are hired?
g returns shows
• The law of diminishing
that as more units of a factor of production
are added to the other factors of
production after a certain point
production,
point, the extra
output for each additional unit hired will
begin
g to decrease.
View: Supply vs. Quantity Supplied
View: Diminishing Returns
Equilibrium Price
In free markets, prices are determined
by
y the interaction of supply
pp y and
demand.
• Demand and supply operate together. As
the price of a good goes down, the
quantity demanded rises and the quantity
supplied falls (and vice versa)
versa).
• The point at which the quantity demanded
and quantity supplied meet is called the
equilibrium price.
Page 193
The point
Th
i t att which
hi h the
th quantity
tit d
demanded
d d
and the quantity supplied meet is called the
equilibrium
q
price.
p
Page 196
Prices as Signals
Under a free-enterprise system, prices
f
function
ti as signals
i
l that
th t communicate
i t
information and coordinate the
activities of producers and consumers.
Prices as Signals (cont.)
• Rising prices signal producers to produce
more and consumers to purchase less.
gp
prices signal
g
p
producers to p
produce
• Falling
less and consumers to purchase more.
• A shortage occurs when at the current
price, the quantity demanded is greater
than the quantity supplied.
• Prices above the equilibrium price reflect a
surplus to suppliers. (quantity supplied >
quantity
tit demanded
d
d d att currentt price.
i
Prices as Signals (cont.)
• When a market economy operates without
restriction, it eliminates shortages and
surpluses.
– When a shortage occurs, the price goes
up to eliminate the shortage.
– When surpluses occur, the price falls to
eliminate the surplus.
Price Controls
Under certain circumstances, the government
sometimes sets a limit on how high or low a price of
a good or service can go.
• A price ceiling is a government-set
maximum price that may be charged for a
particular good or service.
– Eff
Effective
ti price
i ceilings,
ili
and
d resulting
lti
shortages, often lead to non-market
ways
ays o
of d
distributing
s bu g goods a
and
d se
services
ces
such as rationing and leading to the
black market.
Price Controls (cont.)
rationing: the distribution of goods
and services based on something
other than price
black market: “underground” or
ill
illegal
l market
k t iin which
hi h goods
d are
traded at prices above their legal
maximum prices or in which illegal
goods are sold
• Conversely, a price floor, is a
government-set minimum price that can be
charged for goods and services.