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Demand and Supply Chapter 3 Demand demand is a schedule that shows the various amounts of a product consumers are WILLING and ABLE to BUY at each specific price at a specific time. Demand Schedule: listing that shows the # demanded at different prices Demand Schedule for Donuts Price Quantity $2 0 $1.50 1 $1.00 3 $.75 6 $.50 15 $.25 25 Demand Curve: the schedule on a graph See graph on document camera Law of Demand There is an inverse relationship between price & quantity demanded – If price , demand – If price , demand Marginal Utility: Extra satisfaction from getting one more unit of a product Diminishing marginal utility: the extra satisfaction we get from one more unit begins to diminish – i.e., the third donut, yields less extra satisfaction than the first. Demand Curve Always Downward sloping—indicating lower quantity demanded at higher prices, higher quantities at lower prices Change in PRICE reflects movement along the curve = change in quantity demanded If a change in demand is NOT caused by a change in PRICE, the entire curve will shift = change in demand Determinants that affect demand (other than price) Consumer tastes # of buyers Income Prices of related goods – Substitute goods – Complementary goods Expectations Demand Schedule for Donuts Price Quantity1 Quantity2 $2 0 1 $1.50 1 3 $1.00 3 6 $.75 6 15 $.50 15 25 $.25 25 35 Demand has increased so the curve has shifted to the right. Income Effect: Lower prices increase the purchasing power of money income enabling the consumer to buy more at lower prices Substitution Effect: a lower price gives an incentive to substitute the lower-priced good for the higher priced good Supply Supply is a schedule that shows the amount of a product a producer is WILLING and ABLE to produce and SELL at each specific price at a specific time. Law of supply Producers will produce and sell more of their product at a high P than at a low P. There is a direct relationship in P and Q supplied – If price , supply will – If price , supply will Explanation of the Law of Supply Given product costs, a higher P means greater profits and thus an incentive to increase the Q supplied. Supply Curve Supply Schedule for cakes Upward sloping— indicating higher Qs supplied at higher P, lower Qs at lower P P (Price) Q (Quantity) $20 15 $15 10 $10 8 $5 3 Supply Curve for cakes See board or document camera Change in PRICE reflects movement along the curve = change in quantity supplied If a change in supply is NOT caused by a change in PRICE, the entire curve will shift = change in supply Determinants that affect supply (other than price) Resource prices Technology Taxes and subsidies Price of related goods Expectations Number of sellers Supply Schedule for cakes $ Q1 Q2 20 15 10 15 10 8 10 8 5 5 3 1 Market Equilibrium Quantity supplied = quantity demanded – Where the two curves intersect Prices above equilibrium = surplus of supply Prices below equilibrium = shortage of supply Market Clearing or Market Price is another name for equilibrium Price Floors: a legally determined price at or above the equilibrium price (can’t go below) Price Ceiling: a legally established maximum price for a good or service (can’t go above)