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Chapter 4,5,6,7 Supply and Demand Demand willingness and ability to purchase Law of Demand • principle stating that when prices are high less will be demanded and when prices are low; more will be demanded • ex. Ice cream – when it is expensive, we don’t buy it. When it is cheap; we stock up. • This is from the viewpoint of the consumer! • Price - Demand • Price - Demand • The arrows are moving in different directions. • Law of demand = different directions = both start with D!!!) Demand Schedule • Table that shows the quantity demanded at every price Quantity Price 300 4 200 5 90 10 45 15 30 20 20 25 Demand Curve • Downward sloping graph showing the quantity demanded at every possible price in the market Demand Curve 30 25 20 15 10 5 0 0 50 100 150 200 250 300 350 Changes in Demand Curve • Income effect – Change in quantity demanded because of a change in the consumer’s real income when the price of a commodity changes • Substitution effect – a change in price = a relative change in price compared to other products consumers will buy it instead of something else Changes in Demand Caused by: •Consumer income •Consumer tastes •Price on relate products Increase in Demand – Shifts Right Substitutes • Goods or services that can be used in place of one another • ex. Tape/glue Complements • Goods or services when used together increase in usefulness or value • ex. Mashed potatoes and gravy. Peanut butter and fluff… Marginal utility • Marginal always means extra. • Utility is usefulness or satisfaction. • So, marginal utility = extra usefulness • Marginal product - extra output (THIS DOES NOT MEAN SURPLUS) Principle of Diminishing Marginal Utility • Observation that people receive less and less satisfaction for every additional unit of a product consumed. • A classmate ate chocolate chip cookies until he didn’t want anymore. This student paid for every cookie he ate. The amount he paid decreased as he continued to eat the cookies. • This illustrated the point of decreasing SATISFACTION! Paradoxical Demand • Where there is a high demand for a product or where the demand for a product increases even though the price for that product increases • Contradiction to the law of demand because it says they would buy less. • Usually occurs with substituting Paradoxical Demand Curve • This acts “contrary” to the demand. • It does so because it is concerned with “inferior goods.” Inferior goods are items that low income families purchase. Elastic • A change in price causes a change in demand. • Ex. Chewing Gum becomes cheaper or more expensive and our demand is affected Inelastic • A change in price has little or no affect on demand. • Ex. Eye glasses become cheaper or more expensive. We still purchase them. • Milk, gas, water, heating oil… Supply • Stuff (quantity) Law of Supply • Principle that states that more will be brought to market when the price is high and less when the price is low. • This is from the viewpoint of the producer or supplier. • Price - Supply • Price - Supply • Law of Supply = same direction = both start with S!!!) Supply Curve • Up-ward sloping graph showing the quantity Supplied at every possible price in the market • Opposite the Demand curve Supply Curve 30 25 20 15 10 5 0 0 50 100 150 200 250 300 350 Changes on Supply • Effected by: – Cost of Inputs – Productivity – Technology – Number of sellers – Taxes and Subsidies Increase in Supply – Shifts Right • Surplus - supply exceeds demand • Shortage - demand exceeds supply • Market equilibrium - intersection point of the demand and supply curve Break- Even point • Amount of output needed for a firm to recover its production cost. • Ex. Monster Mitts cost me $80 to produce. At $8 a glove, I have to sell 10 in order to “break even!” • Point that must be sold before a firm begins to see a profit – Cost of producing a prototype and then mass producing/marketing/distributing it. 3 Stages of Production • Increasing –Each additional workers contributes more than the previous worker and increases output • Diminishing – Production keeps growing but by smaller and smaller amounts as workers are added • Negative – total output begins to decrease because the cost of labor is greater than output produced. Law of Variable Proportions • Principle that dictates that if one factor or ingredient is changed; the entire output is affected. • Ex. Mrs. Paul accidentally put a cup of salt in her batter rather than a cup of sugar. – She changed one ingredient/factor and it changed the taste of the whole batter Principle of Diminishing Returns • economic law stating that additional units of input add less and less to the total product. • Ex. hot chocolate mix – Add the packet of powdered cocoa mix to 3 cups of water instead of ¾ cup as was stated in the instructions. – What do you get? - less and less hot chocolate flavor…less total product.