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Supply and Demand
Demand
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Is the desire to own something and the ability to pay for
it.
Law of demand: Consumers buy more of a good when
its price decreases and less when its price increases.
Would you buy a slice of pizza for lunch if it cost $1?
(Would you buy more than one?)
Would you buy a slice of pizza for lunch if it cost $5?
As the price of pizza gets higher fewer of us are willing
to buy it.
The substitution effect
When the price of pizza rises, pizza
becomes more expensive compared to
other foods such as tacos.
 So as the price of a slice of pizza rises,
consumers become more and more likely
to buy one of the alternatives as a
substitute for pizza.
 This causes a drop in the amount of pizza
demanded.
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The Income Effect
When the price of pizza (movie tickets, shoes,
DVDs) increases your limited budget just wonted
buy as much as we used to.
 Economists measure consumption in the amount
of a good bought, not the amount of money
spent to buy it.
 Although people spend more of their money on
pizza when the price goes up, the quantity
demanded goes down.
 Also, if the price of the pizza falls you all of a
sudden feel wealthier, as a result you buy more
pizza.
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Demand Schedule
The law of demand explains how the price
of any item affects the quantity demanded
of that item.
 A demand schedule is a table that lists the
quantity of a good that a person will
purchase at each price in the market.
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Price Elasticity
Elastic: Change in price of an article causes the
change in number of people who wish to buy
the product (Wii, dvd)
 Inelastic: Change in price doesn’t result in the
change in the number of buyers (gasoline and
milk).
 Two reasons for elastic or inelastic: percentage
of income spent on an item when money spent
on an item is small in relation to total
expenditures the demand is usually inelastic.
 Whether or not there is a substitute available.
Lack of substitute means inelastic demand.
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Demand Curve Shifts
Because of changes in factors other than
price: Income, increase in demand,
decrease in demand, consumer
expectations, population, consumer tastes
and advertising.
 Movement on the demand curve means
the there is change in the quantity
demanded in an item (think back to pizza
example).
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Video on Supply and Demand
Diminishing Marginal Utility
Selecting from alternative ways of
spending their income. Consumers try to
get the most satisfactory combination of
goods and services.
 Marginal Utility: extra usefulness or
satisfaction a person gets from acquiring
one more unite of a product.
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 Example:
how much satisfaction would you
get from a single glass of ice-cold lemonade
when it was 110 degrees.
What is supply?
Supply: may be defined as a schedule of
quantities that would be offered for sale at all
possible prices that could prevail in the market.
 Supply schedule: tells the quantities offered at
each and every possible market price.
 Supply Curve: Slopes upward and to the right to
reflect the tendency of supplies to offered
greater quantities for sale at higher prices. It is
the opposite of the demand curve.
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Law of Supply
The law states that the quantity supplied varies
directly with its price.
 If the price is high, suppliers will offer greater
quantities for sale.
 Change in quantity supplied: Is the change in
the amount offered for sale response to a
change in price.
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Ex: 350 t-shirts are supplied when the price is $30
each, if the price decreases to $24, then 300 t-shirts
are supplied. If the price changes to 21, 240 t-shirts
are supplied.
Reasons for Change in Supply
Cost of inputs
 Productivity
 Technology
 Number of sellers
 Taxes and Subsidies
 Expectations
 Governmental Regulations
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Comparing Demand and Supply
Activity
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If quantities are being purchases the
concept is demand elasticity. If quantities
are being brought to market for sale, the
concept is supply elasticity.
Three Stages of Production
Increasing Returns: first five workers,
each worker producing more than the
previous.
 Diminishing Returns: Total production
keeps groups growing but in smaller
amounts.
 Negative Returns: Too many workers have
been hired and they get in each other’s
way.
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Diminishing Marginal Utility
Whatever amount you get is the marginal
utility of that particular glass of lemonade.
 The lemonade example illustrates the
principle of diminishing of marginal utility.
The principle states that the more units of
a certain economic product a person
acquires the less eager that person is to
buy more.
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