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

0 Quantity Price $

0 Quantity Price $ Demand Curve

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

0 Quantity Price $ Increase in Demand

0 Quantity Price $ Decrease in 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 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”

13 Quick Check: If your income increases, your demand for inferior goods will _____________? If your income decreases, your demand for normal goods will _____________? decrease

Change in population / demographics - Increase or decrease will shift demand curve Consumer expectations - E xpectations about the future can affect our demand for certain goods Example: Hurricane is coming Change in tastes and advertising - Fads and promoted goods

0 Quantity Price $ Demand Curve for Fad Items

0 Quantity Price $ Demand Curve for Fad Items

Change in population / demographics - Increase or decrease will shift demand curve Consumer expectations - E xpectations 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

0 Quantity Price $ A B 4 Decrease in Quantity Demanded for Butter Quantity Price $ Increase in Demand for Margarine 0

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

0 Quantity Price $ A B 4 Decrease in Quantity Demanded for Hotdogs Quantity Price $ Decrease in Demand for Buns 0

25 Quick Check: If the price of a good increases, the demand for a substitute good will _____________? If the price of a good decreases, the demand for a compliment good will _____________? increase

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

0 Quantity Price $ Elastic or Inelastic? Elastic - Small change in price = large change in quantity demanded

0 Quantity Price $ Elastic or Inelastic? Inelastic - Large change in price = small change in quantity demanded

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 - Percentage change in quantity demanded Percentage change in price Greater than 1 = elastic Less than 1 = inelastic Elasticity of 1 = Unitary Elastic Elasticity =

0 Quantity Price $ % change in quantity demanded - % change in price - = 1.5 (elastic) 50 33

0 Quantity Price $ % change in quantity demanded - % change in price - = 4 (elastic)

0 Quantity Price $ % change in quantity demanded - % change in price - =.4 (inelastic) 20 50

0 Quantity Price $ % change in quantity demanded - % change in price - =.75 (inelastic) 25 33

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 - Percentage change in quantity demanded Percentage change in price Greater than 1 = elastic Less than 1 = inelastic Elasticity of 1 = Unitary Elastic Elasticity =

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

0 Quantity Price $

0 Quantity Price $ Supply Curve

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

(marginal price) (new marginal price)

Optimum Output

Oil Changes per Hour Fixed Cost Variable Cost Total Cost Marginal Cost Marginal Revenue Total Revenue Profit 0$35$0$35$0$20$0$–35 1$35$11$46$11$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

Oil Changes per Hour Fixed Cost Variable Cost Total Cost Marginal Cost Marginal Revenue Total Revenue Profit 0$35$0$35$0$20$0$–35 1$35$11$46$11$20 $–26 2$35$20$559$20 3$35$24$594$20 4$35$31$667$20 5$35$40$759$20 6$35$51$8611$20 7$35$64$9913$20 8$35$82$11718$20 9$35$107$14225$20 10$35$137$17230$20

Oil Changes per Hour Fixed Cost Variable Cost Total Cost Marginal Cost Marginal Revenue Total Revenue Profit 0$35$0$35$0$20$0$–35 1$35$11$46$11$20 $–26 2$35$20$559$2040 3$35$24$594$2060 4$35$31$667$2080 5$35$40$759$ $35$51$8611$ $35$64$9913$ $35$82$11718$ $35$107$14225$ $35$137$17230$20200

Oil Changes per Hour Fixed Cost Variable Cost Total Cost Marginal Cost Marginal Revenue Total Revenue Profit 0$35$0$35$0$20$0$–35 1$35$11$46$11$20 $–26 2$35$20$559$ $35$24$594$ $35$31$667$ $35$40$759$ $35$51$8611$ $35$64$9913$ $35$82$11718$ $35$107$14225$ $35$137$17230$

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

0 Quantity Price $ Decrease in Supply

0 Quantity Price $ Increase in Supply

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

0 Quantity Price $ Demand Supply 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

0 Quantity Price $ Demand Supply Shortage

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

0 Quantity Price $ Demand Supply Surplus

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

0 Quantity Price $ Shortage Demand Supply Price Ceiling

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

0 Quantity Price $ Surplus Demand Supply Price Floor

0 Quantity Price $ Shortage Demand Supply Price Ceiling

0 Quantity Price $ Surplus Demand Supply Price Floor

0 Quantity Price $ Demand Supply

0 Quantity Price $ Demand Supply

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

0 Quantity of Workers Wage $ $6.00 $ Demand for Labor Supply of Labor Minimum Wage

0 Quantity of Workers Wage $ $6.00 $ Demand for Labor Supply of Labor

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

Quantity Price $ New Equilibrium X Demand Supply

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

0 Quantity Price $ New Equilibrium X Demand Supply

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

0 Quantity Price $ New Equilibrium X Demand Supply

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

0 Quantity Price $ New Equilibrium X Demand Supply

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