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Ch. 4 - Demand
Sect. 1 - Understanding Demand
Demand The desire to own something and the ability to pay for it
Law of Demand The lower the price of a good, the higher the quantity demanded
- the higher the price, the lower the quantity demanded
Demand Curve A graph that represents the law of demand for a given good or
service
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Price $
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Demand Curve
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Law of Demand
Sect. 2 - Shifts in the Demand Curve
Ceteris paribus Latin for “all other things held constant” - a demand curve is
accurate only as long as this is true
- Increase in demand - shifts demand curve to the right
- Decrease in demand - shifts demand curve to the left
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Price $
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Increase in Demand
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Quantity
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Decrease in Demand
Price $
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Sect. 2 - Shifts in the Demand Curve
Ceteris paribus Latin for “all other things held constant” - a demand curve is
accurate only as long as this is true
- Increase in demand - shifts demand curve to the right
- Decrease in demand - shifts demand curve to the left
Causes of shift in demand curve:
Change in Income Increased income increases demand for “normal goods”
- decreases demand for “inferior goods”
Sect. 2 - Shifts in the Demand Curve
Ceteris paribus Latin for “all other things held constant” - a demand curve is
accurate only as long as this is true
- Increase in demand - shifts demand curve to the right
- Decrease in demand - shifts demand curve to the left
Causes of shift in demand curve:
Change in income Increased income increases demand for “normal goods”
- decreases demand for “inferior goods”
Quick Check:
If your income increases, your demand for inferior
decrease
goods will _____________?
If your income decreases, your demand for normal
decrease
goods will _____________?
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Change in population / demographics Increase or decrease will shift demand curve
Consumer expectations Expectations about the future can affect our demand
for certain goods
Example: Hurricane is coming
Change in tastes and advertising Fads and promoted goods
Demand Curve for Fad Items
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Demand Curve for Fad Items
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Change in population / demographics Increase or decrease will shift demand curve
Consumer expectations Expectations about the future can affect our demand
for certain goods
Example: Hurricane is coming
Change in tastes and advertising Fads and promoted goods
Change in Demand Curve
Substitute Goods Goods that are used in place of another good
- as the price of a good increases consumers buy less of it
- so the demand for its substitute increases
Decrease in Quantity
Demanded for Butter
Increase in Demand
for Margarine
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Price $
Price $
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Quantity
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Compliments Two goods that are bought and used together
- as the price of a good increases consumers buy less of it
- so the demand for its compliment also decreases
Decrease in Quantity
Demanded for
Hotdogs
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Decrease in Demand
for Buns
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Price $
Price $
B
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Quantity
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Quick Check:
If the price of a good increases, the demand for a
increase
substitute good will _____________?
If the price of a good decreases, the demand for a
increase
compliment good will _____________?
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Section 3 - Elasticity of Demand
Elasticity of Demand A measure of how consumers respond to price changes
Elastic - demand is very sensitive to price change
small change in price = large change in quantity demanded
Inelastic - demand is not very sensitive to price change
large change in price = small change in quantity demanded
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Elastic or Inelastic?
Elastic - Small change in price = large
change in quantity demanded
Price $
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Price $
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Elastic or Inelastic?
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Inelastic - Large change in price =
small change in quantity demanded
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Quantity
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Section 3 - Elasticity of Demand
Elasticity of Demand A measure of how consumers respond to price changes
Elastic - demand is very sensitive to price change
small change in price = large change in quantity demanded
Inelastic - demand is not very sensitive to price change
large change in price = small change in quantity demanded
Calculating Elasticity of Demand Elasticity =
Percentage change in quantity demanded
Percentage change in price
Greater than 1 = elastic
Less than 1 = inelastic
Elasticity of 1 = Unitary Elastic
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% change in quantity demanded - 50
% change in price - 33
= 1.5 (elastic)
Price $
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% change in quantity demanded - 100
= 4 (elastic)
% change in price - 25
Price $
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Quantity
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% change in quantity demanded - 20
% change in price - 50 = .4 (inelastic)
Price $
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Quantity
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% change in quantity demanded - 25
% change in price - 33 = .75 (inelastic)
Price $
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Quantity
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Section 3 - Elasticity of Demand
Elasticity of Demand A measure of how consumers respond to price changes
Elastic - demand is very sensitive to price change
small change in price = large change in quantity demanded
Inelastic - demand is not very sensitive to price change
large change in price = small change in quantity demanded
Calculating Elasticity of Demand Elasticity =
Percentage change in quantity demanded
Percentage change in price
Greater than 1 = elastic
Less than 1 = inelastic
Elasticity of 1 = Unitary Elastic
Factors Affecting Elasticity Availability of Substitutes Less substitutes = less elastic demand
More substitutes = more elastic demand
Luxury vs. Necessity Pepsi / Coke vs. prescription medicine
Elasticity
Ch. 5 - Supply
Sect. 1 - Understanding Supply
Supply -
The amount of goods or services available
Law of Supply -
Producers offer more of a good as its price increases
and less as its price falls
Market entry -
Rising prices draw new firms into a market and add to
the quantity supplied of a good
Supply Curve A graph that represents the law of supply for a good or service
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Price $
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Quantity
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Supply Curve
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Price $
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Supply Curve A graph that represents the law of supply for a good or service
Supply Curve
Supply Curve A graph that represents the law of supply for a good or service
Elasticity of Supply -
How firms respond to changes in the price of a good
- Supply is inelastic in the short term
- More elastic in the long term
Sect. 2 - Costs of Production
Marginal Product of Labor The change in output from hiring one more worker
- measures the change in output at the margin
Increasing Marginal Returns When the marginal product of labor increases as the
number of workers increases
Diminishing Marginal Returns When the marginal product of labor decreases as the
number of workers increases
Sect. 2 - Costs of Production
Marginal Product of Labor The change in output from hiring one more worker
- measures the change in output at the margin
Increasing Marginal Returns When the marginal product of labor increases as the
number of workers increases
Diminishing Marginal Returns When the marginal product of labor decreases as the
number of workers increases
Fixed Costs A cost that does not change no matter how much of a good is
produced.
- cost of the building, machinery, rent, property taxes
Variable Costs Costs that rise or fall depending on the quantity produced
- the cost of raw materials, labor, electricity
Total Cost Fixed costs + variable costs
Production Costs
Fixed Costs A cost that does not change no matter how much of a good is
produced.
- cost of the building, machinery, rent, property taxes
Variable Costs Costs that rise or fall depending on the quantity produced
- the cost of raw materials, labor, electricity
Total Cost Fixed costs + variable costs
Marginal Cost The additional cost of producing one more unit
Marginal Revenue -
The additional income from selling one more unit
- Does not change because each unit sells for the same price
Total Revenue The price of each unit X total units sold
Output The best level of output is where marginal revenue is equal to
marginal cost
(new marginal price)
(marginal price)
Optimum Output
Oil
Changes
per Hour
Fixed
Cost
0
$35
$0
$35
$0
$20
$0
$–35
1
$35
$11
$46
$11
$20
$20
$–26
2
$35
$20
$55
$20
3
$35
$24
$59
$20
4
$35
$31
$66
$20
5
$35
$40
$75
$20
6
$35
$51
$86
$20
7
$35
$64
$99
$20
8
$35
$82
$117
$20
9
$35
$107
$142
$20
10
$35
$137
$172
$20
Variable Total
Cost
Cost
Marginal Marginal Total
Profit
Cost Revenue Revenue
Oil
Changes
per Hour
Fixed
Cost
0
$35
$0
$35
$0
$20
$0
$–35
1
$35
$11
$46
$11
$20
$20
$–26
2
$35
$20
$55
9
$20
3
$35
$24
$59
4
$20
4
$35
$31
$66
7
$20
5
$35
$40
$75
9
$20
6
$35
$51
$86
11
$20
7
$35
$64
$99
13
$20
8
$35
$82
$117
18
$20
9
$35
$107
$142
25
$20
10
$35
$137
$172
30
$20
Variable Total
Cost
Cost
Marginal Marginal Total
Profit
Cost Revenue Revenue
Oil
Changes
per Hour
Fixed
Cost
0
$35
$0
$35
$0
$20
$0
$–35
1
$35
$11
$46
$11
$20
$20
$–26
2
$35
$20
$55
9
$20
40
3
$35
$24
$59
4
$20
60
4
$35
$31
$66
7
$20
80
5
$35
$40
$75
9
$20
100
6
$35
$51
$86
11
$20
120
7
$35
$64
$99
13
$20
140
8
$35
$82
$117
18
$20
160
9
$35
$107
$142
25
$20
180
10
$35
$137
$172
30
$20
200
Variable Total
Cost
Cost
Marginal Marginal Total
Profit
Cost Revenue Revenue
Oil
Changes
per Hour
Fixed
Cost
0
$35
$0
$35
$0
$20
$0
$–35
1
$35
$11
$46
$11
$20
$20
$–26
2
$35
$20
$55
9
$20
40
-15
3
$35
$24
$59
4
$20
60
1
4
$35
$31
$66
7
$20
80
14
5
$35
$40
$75
9
$20
100
25
6
$35
$51
$86
11
$20
120
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7
$35
$64
$99
13
$20
140
41
8
$35
$82
$117
18
$20
160
43
9
$35
$107
$142
25
$20
180
38
10
$35
$137
$172
30
$20
200
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Variable Total
Cost
Cost
Marginal Marginal Total
Profit
Cost Revenue Revenue
Marginal Cost The additional cost of producing one more unit
Marginal Revenue -
The additional income from selling one more unit
- Does not change because each unit sells for the same price
Total Revenue The price of each unit X total units sold
Output The best level of output is where marginal revenue is equal to
marginal cost
Sect. 3 - Changes in Supply
Effect of Rising Costs A rise in the cost of inputs will cause a fall in supply because
the good is more expensive to produce
- a fall in the cost of an input will cause an increase in supply
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Price $
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Decrease in Supply
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1
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Quantity
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5
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Price $
Increase in Supply
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Quantity
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Sect. 3 - Changes in Supply
Effect of Rising Costs A rise in the cost of inputs will cause a fall in supply because
the good is more expensive to produce
- a fall in the cost of an input will cause an increase in supply
Technology Advances in technology can lower production costs
- causes a rightward shift in the supply curve
Sect. 3 - Changes in Supply
Effect of Rising Costs A rise in the cost of inputs will cause a fall in supply because
the good is more expensive to produce
- a fall in the cost of an input will cause an increase in supply
Technology Advances in technology can lower production costs
- causes a rightward shift in the supply curve
Subsidy A government payment that supports a business or market
- A payment to increase or decrease production
Excise Tax A tax on the production or sale of a good
- Increases cost - reduces supply
Regulation Government intervention in a market that increases production
cost - reduces supply
Where Firms Produce Transportation costs - cost to transport raw materials vs. cost
to transport finished good
Ch. 6 - Prices
Sect. 1 - Combining Supply and Demand
Equilibrium -
The point at which the demand for a good is equal to supply
Equilibrium
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Price $
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Equilibrium
Ch. 6 - Prices
Sect. 1 - Combining Supply and Demand
Equilibrium -
The point at which the demand for a good is equal to supply
Disequilibrium When quantity supplied is not equal to quantity demanded
Shortage When quantity demanded is greater than quantity supplied
- solved by raising price and increasing production
Shortage
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Price $
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Quantity
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Ch. 6 - Prices
Sect. 1 - Combining Supply and Demand
Equilibrium -
The point at which the demand for a good is equal to supply
Disequilibrium When quantity supplied is not equal to quantity demanded
Shortage When quantity demanded is greater than quantity supplied
- solved by raising price and increasing production
Surplus When quantity supplied is greater than quantity demanded
- solved by lowering price and decreasing production
Surplus
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Price $
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Quantity
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Ch. 6 - Prices
Sect. 1 - Combining Supply and Demand
Equilibrium -
The point at which the demand for a good is equal to supply
Disequilibrium When quantity supplied is not equal to quantity demanded
Shortage When quantity demanded is greater than quantity supplied
- solved by raising price and increasing production
Surplus When quantity supplied is greater than quantity demanded
- solved by lowering price and decreasing production
Price Ceiling Maximum price that can legally be charged for a good or
service
Price Ceiling
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Price $
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Shortage
1
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Quantity
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Price Ceiling Maximum price that can legally be charged for a good or
service
Price Floor Minimum price that must be paid for a good or service
Price Floor
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Surplus
Price $
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Quantity
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Price Ceiling
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Price $
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Shortage
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Quantity
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Price Floor
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Surplus
Price $
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Quantity
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Price $
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Price $
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Price Ceiling Maximum price that can legally be charged for a good or
service
Price Floor Minimum price that must be paid for a good or service
Minimum Wage -
Minimum price that an employer can pay a worker for one
hour of labor - set by federal government
Minimum Wage
10
$8.00
Wage $
$6.00
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2
0
10
30
40
20
Quantity of Workers
50
10
$8.00
Wage $
$6.00
4
2
0
10
30
40
20
Quantity of Workers
50
Minimum Wage
Price Ceiling Maximum price that can legally be charged for a good or
service
Price Floor Minimum price that must be paid for a good or service
Minimum Wage -
Minimum price that an employer can pay a worker for one
hour of labor - set by federal government
Sect. 2 - Changes in Market Equilibrium
Increase in Supply A shift to the right in the supply curve will change the
equilibrium price and quantity
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Price $
4
X
3
New Equilibrium
2
1
0
1
2
3
Quantity
4
5
Digital Cameras
Price Ceiling Maximum price that can legally be charged for a good or
service
Price Floor Minimum price that must be paid for a good or service
Minimum Wage -
Minimum price that an employer can pay a worker for one
hour of labor - set by federal government
Sect. 2 - Changes in Market Equilibrium
Increase in Supply A shift to the right in the supply curve will change the
equilibrium price and quantity
Supply Curve Shift
Decrease in Supply When factors cause a supply curve to shift to the left
- An increase in the costs of resources to produce a good
- An increase in labor costs
5
Price $
4
3 New Equilibrium
X
2
1
0
1
2
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Quantity
4
5
Decrease in Supply When factors cause a supply curve to shift to the left
- An increase in the costs of resources to produce a good
- An increase in labor costs
Increase in Demand Shift in demand curve to the right
- Leads to a shortage / new equilibrium price
5
4
Price $
New Equilibrium
3
X
2
1
0
1
2
3
Quantity
4
5
Decrease in Supply When factors cause a supply curve to shift to the left
- An increase in the costs of resources to produce a good
- An increase in labor costs
Increase in Demand Shift in demand curve to the right
- Leads to a shortage / new equilibrium price
Decrease in Demand Shift in demand curve to the left
- Leads to a surplus / new equilibrium price
5
4
Price $
X
3
New Equilibrium
2
1
0
1
2
3
Quantity
4
5
Decrease in Supply When factors cause a supply curve to shift to the left
- An increase in the costs of resources to produce a good
- An increase in labor costs
Increase in Demand Shift in demand curve to the right
- Leads to a shortage / new equilibrium price
Decrease in Demand Shift in demand curve to the left
- Leads to a surplus / new equilibrium price
Draw and label graphs for each including demand &
supply curves, shift arrows, equilibrium points, and if
price and quantity increase or decrease.
1) Increase in demand
2) Decrease in demand
3) Increase in supply
4) Decrease in supply
Demand Curve Shift
Sect. 3 - The Role of Price
Price as an Incentive Financial reward motivates both consumers and producers
- rising prices for producers / falling prices for consumers
Rationing Response to a shortage - forced decrease in demand
- Resources used where most needed
Black Market When producers and consumers conduct business outside of
Govt. control of price or quantity
- Illegal - throws the system out of balance
The End