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Supply and Demand
Goal 8 Notes
Economic Interdependence
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Everything is linked together in economics. One
economic decision will affect other parts of the
economy. Some factors that affect economic
interdependence are:
New products
Consumer income—fixed incomes, layoffs, and pay
raises
Inflation—when the price of goods rise faster than your
income
Cost of resources—gas, electricity, and water
Natural disasters—floods, hurricanes, and earthquakes
Law of Diminishing Returns
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This happens when you want to increase
productivity, so you keep adding one or more of
the factors of production to increase your output.
Your output will increase to a point, but there
will be a point when if you add another factor,
that output will start to decrease.
At this point it is not a benefit to you to keep
spending money on more factors of production.
Diminished Returns
Law of Diminishing Marginal
Utility
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This happens when the product that you
purchase, even at a bargain price, will give
you less satisfaction.
This is because you may become bored,
and tired or overstocked with that product.
Example: 39-cent cheeseburgers, buy one
get two free pizzas, or a low price on toilet
tissue.
Basic Observations about
Consumers
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You can not have it all! Decisions must be made
that involve an opportunity cost (economic
decision).
You are responsible for your decisions. You
must pay your bills (credit Cards).
You should have some information about what
you are buying. The more expensive the product,
the more research you should do. Methods of
research include: the internet, consumer reports,
and advice from friends
 Supply and Demand
Demand
 Is the amount that the consumer will buy.
 It is called consumer sovereignty.
Demand Curve
The Law of Demand
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The Law of Demand states that people
are willing to buy more of a product if the
price is lower. Price and demand move in
opposite directions
This is also known as the price effect.
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Down with Demand!!!!!!!!!
Factors That Shape Demand
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The price effect is the most important
factor.
The quality and durability of a product.
Consumer taste or desire. What's in style.
Types of substitutes
Availability of the product
Season
Normal v Inferior Good
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A normal good- is a product whose
demand increases with rising incomes.
Example: Lexus, BMW, or a cruise trip.
An inferior good- is a product whose
demand decreases with a rising income,
(Generic or Wal-Mart goods).
Substitutions
 Sometimes stores offer generic or off
brands offer lower prices without
compromising quality.
 (Wal-Mart Soda). This is a substitution.
 Another example is Fruit Rings
Substitution effect
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A price increase in one product (Dr.
Pepper) will cause the demand of a
substitute product to increase (Dr.
Thunder).
Complementary good
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When the demand for one product is
linked to the demand of another product.
Examples: VCR and tapes, computers and
disks, and shoes and socks.
Elasticity of Demand
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How much a price change affects the
amount demanded.
Elastic Demand
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When the amount demanded varies greatly
with a price change.
These are wants
Inelastic Demand
 When a price change does not affect the
amount demanded.
 These are needs
 Example, medicine
Supply
 The amount that producers will offer for
sale
Supply Curve
The Law of Supply
 The Law of Supply states that production
or the supply will increase if prices are
higher and the producers are making more
profit (self-interest).
 Supply to the Sky!!!!!!!!!!!!
Change in Supply (causes)
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The major reason is the cost of production.
There is a fixed supply; a limited number of the
product is available. Example: sporting events,
concerts, and hospital beds.
There are substitutes or alternative choices
available.
New businesses.
Government policy- Deregulation, allows more
competition. (Phone companies, airlines,
Microsoft)
Supply and the Consumer
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Surplus- is an oversupply. This will usually
result in lower prices.
Shortage- is a lack in supply. This will usually
result in higher prices. However, these high
prices may not last long because new producers
will enter the market seeking high profits. If a
shortage is severe enough, then rationing could
take place.
Rationing is selling a product in limited
quantities.
Market Clearing Price
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The Market- is anyplace where producers and
consumers make exchanges. In capitalism, the
price is usually set in a free market.
Market Price- is the price that satisfies both
producers and consumers. It is also called the
equilibrium price.
The market price is affected by the balancing
between supply and demand, shortage V.
surplus. These cycles usually vary on a regular
basis.
Market Clearing Price
Profit and Competition
 Profit- is income after all the expenses have
been paid
Normal Profit- is the amount of profit needed to break even.
Economic Profit- is profit in excess of the break even point.
Operating expenses
Red- means that a business is operating at a loss.
Black- means that a business is operating with a profit
Competition
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Competition- is the rivalry between
businesses to attract customers. Here are
some benefits of businesses trying to
attract customers.
Why Do We Need Competition?
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The efficient use of resources.
Controls prices
Better quality and service
Encourage research and development
Competition is Adam Smith’s Invisible
Hand.
Non-price Competition
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Advertising.
Catchphrases
Endorsements
Exploiting fears
Sex appeal
Numerical claims
Bargain appeal
Bandwagon
Product improvement
Styles and Services
Location or availability
The Circular Economic Flow of
Money and Goods
 This chart explains how money and goods
are exchanged between consumers
producers and the growers of crops in the
factor market.
Circular Flow of Money
The Business Cycle
 The business cycle is a measure of the
strength of the economy.
 There are 4 cycles of the business cycle.
 Peak
 Recession
 Depression
 Recovery
Peak
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Is the highest phase of the business cycle.
It is the top of the roller coaster
A peak is also known as a boom time.
This period is marked by low interest rates,
low unemployment rates, and low inflation.
 There is a high consumer confidence and a
high GDP.
Recession
 Is when there is a decline in the GDP for 6
months.
 The economy is starting to shrink.
 Unemployment is rising along with interest
rates as well as inflation.
 Consumer confidence is falling.
Depression
 Is the lowest phase on the business cycle.
 It is also known as a trough period.
 There is high unemployment, inflation, and
interest rates.
 There is no consumer confidence, and the
GDP is in a steady decline.
 We had a “great depression” in 1929 in the
US.
Recovery
 Is a rebound after a recession or a
depression.
 Interest rates, unemployment rates, and
inflation are falling.
 Consumer confidence is beginning to climb.
 The GDP is beginning to increase.
Business Cycle
Economic Indicators
 These are certain parts of the economy that we use
to determine the health of the nation’s economy.
 The Business Cycle shows this graphically.
 The main indicators are: inflation, unemployment,
interest rates, GDP, and Consumer confidence.
 The most important id the GDP.
Gross Domestic Product
 This is the measure of all new finished goods and
services produced in the US every year.
 Finished- Something you buy that is not an
ingredient in another product.
 Good- A product that you buy that yo ucan
physically touch (A cheeseburger).
 Service- Something that is provided for you
(haircut).