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Economics Chapter 7 Supply and Demand Section 1: Demand • Voluntary exchange, agreeing on terms • Demand in economics, the different amounts we will purchase at various prices. • Market • Law of demand, how people react to changing prices. – Inverse relationship Factors in purchasing • Diminishing Marginal Utility – Utility, the power that a good or service has to satisfy a want. – Law of diminishing marginal utility, You get more satisfaction from each additional purchase of an item, but the utility will diminish for each additional unit. – One candy bar is great, two are better, three is good, four is too much for that price. Factors continued • Real Income Effect – No one will be able to buy everything they want. – Real Income Effect, people can not keep buying the same amount of a product if the price rises. – This can work in reverse also, the price declines, your real income increases. Factors continued • Substitution Effect • Substitute, two items that are not exactly the same but satisfy the same need. • If the price of one drops people will purchase, substitute, that item. • Example, butter and margarine Section 2: The Demand Curve and the Elasticity of Demand • As the price goes down, the demand goes up. • Quantity demanded is usually measured by the year. • Assume a constant-quality unit. • If demand increases, the curve shifts to the right. Price elasticity of demand • Elasticity is how responsive consumers are to price changes on given items. • Elastic Demand, price changes greatly affect the amount bought. A brand of coffee, rise in price makes consumers go to a substitute. • Inelastic demand, price change does not affect substantially. Electricity, salt 3 factors in elacticity • 1. The existence of substitutes. • 2. The percentage of a person’s total budget devoted to the purchase of that good. • 3. How much time we allow for the consumer to adjust to the change in price. Determinants of Demand • • • • Changes in population and income. Changes in taste. Substitutes available. The use of complimentary goods. – More bread bought = more butter sold. Section 3: the Law of Supply and the Supply curve • The willingness and ability of producers to provide goods and services at different prices. • As price rises, the quantity supplied rises. • Profit drives this concept. The Law of diminishing returns • After some point, when adding additional units to the factors of production, there will be a decrease in the amount of units per factor. • Example, hiring workers to the point of more workers versus machines. Less output. The Supply Curve • The supply curve works exactly opposite of the demand curve. • On a graph, the curve rises as you go left to right. • Higher cost = more supply. The determinants of Supply. – 1. The price of inputs, if the price of inputs drops, more can be produced at the same price, ( shift to the left on the curve). – 2. Technology – 3. Taxes – 4. Number of firms in the industry. Section 4: Putting Supply and demand together • Equilibrium price- The price of any good or service will find the level at which the quantity demanded and the quantity supplied are balanced. • Shortage, The quantity demanded is higher than the quantity supplied. The price is below the equilibrium price (EP). • Surpluses occur when more is produced than demanded, above the EP. Section 4 • Market forces take care of shortages and surpluses when no government is involved • Price controls- Government – Price ceilings • Rationing • Black Market – Price Floors