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DEMAND DEMAND OR EFFECTIVE DEMAND… 3 COMPONENTS… 1. wants 2. the ability to buy 3. the willingness to buy Graphing Supply and Demand… I. Graph A. PRICE is always on the vertical axis B. QUANTITY is always on the horizontal axis. P Q II. The Law of Demand… As price increases, the quantity of goods and services purchased decreases and vice versa a. DEMAND: quantities of a product that people are willing and able to purchase at various possible prices at a particular TIME and PLACE b. Demand is expressed as a series of prices and quantities in the form of a DEMAND SCHEDULE DEMAND CURVES… I. CHANGE IN QUANTITY DEMANDED: (movement along the curve) A change in the price of the good itself D graph for oranges (decrease in the price of oranges) II. CHANGE IN DEMAND A shift to the right or left of the ENTIRE CURVE…the quantity demanded at each price changes A. to the RIGHT—increase in demand B. to the LEFT—decrease in demand (increase in demand) D D1 SHIFT VARIABLES… 1. the price of substitute goods 2. the price of complementary goods 3. changes in income 4. changes in taste 5. changes in population 6. expectation/anticipation of future price changes Why are demand curves downward sloping to the right? A. Substitution effect—change in the mix of goods purchased as a result of increasing and decreasing relative prices B. Income effect—the effect that increasing or decreasing prices has on the buying power of income (when prices rise, you have less buying power) Product: hamburger Event: the price of hot dogs increases D The demand for hamburgers would shift to the right due to a change in the Price of a SUBSTITUTE good Change in Quantity demanded Product: refrigerators Event: the price of refrigerators decreases Original price New price D Q Q demanded at new price There is a change in the quantity demanded for refrigerators…At the lower price, there is a greater quantity demanded…this is a movement along the original demand curve. The curve doesn’t shift … UTILITY… Marginal Utility—the amount of satisfaction a person gets from one additional unit of a product Diminishing Marginal Utility—as additional units of a product are consumed during a given period of time, the additional satisfaction decreases SUPPLY… I. Change in QUANTITY SUPPLIED: movement along the curve (change in the price of the good itself) s Graph for chi a pets Event: the price for chi a pets fall II. Change in Supply: a shift to the left or right of the entire supply curve—the quantity supplied at each and every price changes A. shift to the right—increase in supply B. shift to the left—decrease in supply S S1 Shift variables for supply… 1. entrance/exit of firms within an industry 2. price of the factors of production used to produce the good (CELL, taxes, subsidies, govt. regulations) 3. weather/disaster 4. technology 5. expectation of future price change PRACTICE PROBLEMS… Product: Cars Event: price of steel increasess S1 s Decrease in supply due to a change in cost of production for firms Product: Grapes Event: California grape pickers strike for higher wages s Decrease in supply due to an increase in the cost of production for firms Product: Major League Baseballs Event: a new machine stitches baseballs better and in one-tenth the time of hand stitching s Increase in supply due to an advancement in technology Product: bananas Event: due to a genetic mutation, the monkey population explodes in Central America s Decrease in supply due to a disaster Product: steel Event: the EPA relaxes air pollution standards s Increase in supply due to a decrease in the cost of production for firms Product: Peanuts Event: the price of peanuts rises s There will be a change in the quantity supplied of peanuts—there will be a larger quantity supplied at the higher price. The supply curve doesn’t shift because it’s just a change in the price of peanuts Marginal Analysis Productivity: a measure of efficiency, the way in which inputs are combined to produce outputs An increase in productivity would be greater output from the same amount of inputs Diminishing marginal product: as more of one input is added to a fixed amount of other inputs, the marginal product decreases Supply and Demand together Product: Pizza Event: the price of tomato sauce increases s P1 P d Q1 Q The supply decreased due to an increase in the cost of production for firms. Resulting in an increase in the equilibrium price and a decrease in the equilibrium quantity supplied and demanded Supply and demand together Product: cars Event: incomes rise in the U.S. s P1 P d Q d1 Q1 The demand for cars increases due to an increase in income. Resulting in an increase in the equilibrium price and an increase in the equilibrium quantity demanded and supplied