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Chapter 7
Supply & Demand
• All consumers have a great influence on
the price of all goods and services
• Demand – the amount of a good or service
that consumers are able and willing to buy
at various possible prices during a
specified period of time
• Supply – the amount of a good or service
that producers are able and willing to sell
at various prices during a specified period
of time
• Market – the process of freely
exchanging goods and services
between buyers and sellers
• Voluntary Exchange – a transaction
in which a buyer and a seller
exercise their economic freedom by
working out their own terms of
exchange (automobiles)
• Demand exists when a person is willing &
able to buy something.
• There is an inverse relationship between
the quantity demanded and the price.
• Law of Demand – economic rule stating
that the quantity demanded & price move
in opposite directions
• As price goes up, quantity demanded goes down.
• As price goes down, quantity demanded goes up.
• Quantity Demanded – the amount of a good
or service that a consumer is willing and
able to purchase at a specific price
• QD influenced by:
• 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 (gasoline
• Substitution Effect – economic rule stating that
if two items satisfy the same need and the price
of one rises, people will buy the other
• Diminishing Marginal Utility
• Utility – the ability of any good or service
to satisfy consumer wants
• Marginal Utility – an additional amount of
• Law of Diminishing Marginal Utility – rule
stating that the additional satisfaction a
consumer gets from purchasing one or
more unit of a product will lessen with
each additional unit purchased (soda)
• Supply and demand are illustrated with
• Demand Schedule – table showing
quantities demanded at different possible
• Demand Curve – downward sloping line
that shows in graph form the quantities
demanded at each possible price
• Refer to graphs on pages 178 & 179
• Quantity demanded is a specific point on a
graph while demand is represented by the
entire graph.
• Determinants of Demand
Change in population
Changes in income
Changes in tastes and preferences
Complementary goods – a product often
used with another product
• Refer to graphs on pages 182 & 183
• Elasticity – economic concept dealing with consumers’
responsiveness to an increase or decrease in the price of
a product
• Price Elasticity of Demand – economic concept that deals
with how much demand varies according to changes in
• Elastic Demand – situation in which the 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 price
change has little impact on the quantity demanded by
• Factors affecting elasticity
• Existence of substitutes (insulin & soda)
• % of budget devoted to that good (pepper & cars)
• Time consumers are given to adjust to price (electricity)
• Law of Supply – economic rule stating that
price and quantity supplied move in the
same direction
• As the price rises for a good, the quantity
supplied generally rises.
• As the price falls, the quantity supplied also
• 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 the greater the profit
• Supply Schedule – table showing
quantities supplied at different
• Supply Curve – upward-sloping line
that shows in graph form the
quantities supplied at each possible
• Be familiar with graphs on pages 188
& 189.
• Law of Diminishing Returns – after a
certain point adding additional
factors of production output
increases at a diminishing rate
• Determinants of Supply
Price of inputs
Number of firms in the industry
Graphs on page 191
Supply & Demand
• As price goes down, quantity
demanded goes up and supply goes
• As price goes up, quantity demanded
goes down and supply goes up.
• Equilibrium Price – the price at
which the amount producers are
willing to supply is equal to the
amount consumers are willing to buy
• Graph on page 195
Supply & Demand
• Shortage – situation in which the
quantity demanded is greater than
the quantity supplied at the current
• Surplus – situation in which quantity
supplied is greater than quantity
demanded at the current price
Supply & Demand
• Price Ceiling – a legal maximum price that
may be charged for a particular good or
• Rationing – the distribution of goods and
services based on something other than
• Black Market – underground or illegal
market in which goods are traded above
their legal price or in which illegal goods
are sold
• Price Floor – a legal minimum price below
which a good or service may not be sold