SUPPLY AND DEMAND CH 4 SEC 2 CH 5 SEC 1 CH 6 SEC 2

Chapter 4 Section 2 The Law of Demand

I. Explain the causes of a change in quantity demanded. A. Microeconomics Branch of economics that deals with behavior and decision making by small units such as an individual or business.

I. Explain the causes of a change in quantity demanded. B. Demand Combination of desire, ability, and willingness to buy a product. C. Law of Demand The demand for an economic product varies inversely with its price. When prices goes up, demand goes down When prices go down, demand goes up

What is a demand schedule What is a demand schedule? The numerical representation of the inverse relationship between price and quantity.

Can you show me a model? A demand curve the graphic representation of the inverse relationship between price and quantity demanded a demand schedule that has been graphed D

I. Explain the causes of a change in quantity demanded. D. Change in the quantity demanded A change in the quantity of the product purchased in response to a change in price. Move from one point on the demand curve to a new point on the same demand curve. Income Effect and Substitution Effect

What is the difference between demand and quantity demanded A quantity demanded is determined by price A change in price will cause a change in quantity demanded Graphically, it is a movement from one point on the curve to another

I. Explain the causes of a change in quantity demanded. D. Change in the quantity demanded Income Effect Change in quantity demanded because of a change in the consumer’s real income due to a change in price. Substitution Effect Change in quantity demanded because of a change in the relative price of the product.

II. Describe the factors that could cause a change in demand. Consumers demand different amounts at every price, causing the demand curve to shift to the left or the right Demand increases – shift right Demand decreases – shift left Income, tastes, related products

Well, what is a change in demand? Demand is the whole curve. It is determined by the five non-price determinants. A change in one of those will cause a change in demand. Graphically, it is a shift of the entire curve Price D3 D2 D1 Quantity

II. Describe the factors that could cause a change in demand. Consumer Income If income increases, you buy more If income decreases, you buy less Consumer Taste If you prefer something, you buy more If you dislike something, you buy less

II. Describe the factors that could cause a change in demand. Prices of related products Substitutes Products that can be used in place of other products – Coke vs. Pepsi Complements Products that tend to be used together – Coffee and Cream

III. Understand diminishing marginal utility. A. Marginal Utility Extra usefulness or satisfaction from acquiring one more unit of a product. B. Diminishing Marginal Utility The more units of a certain economic product a person acquires, the less eager that person is to buy more.

Chapter 5 Section 1 The Law of Supply

I. Understand the meaning and concept of supply. A. Supply Schedule of quantities offered for sale at all possible prices in a market. B. Law of Supply Economic principle stating that the quantity supplied varies directly with its price Price goes up, supply goes up Price goes down, supply goes down

II. Explain difference between supply schedule and curve. C. Supply Schedule Quantity demand on the x axis - Price per unit on the y axis. Points to be plotted. D. Supply Curve Slopes upward and to the right.

Supply Schedule

Can you show me a model? A supply curve The graphic representation of the direct relationship between price and quantity supplied. It is a supply schedule that has been graphed

III. Explain change in quantity supplied. A. Change in the quantity supplied Quantity supplied Amount that producers bring to the market at any one price. Change in the quantity supplied Change in amount offered for sale in response to a change in price. Move from one point on the supply curve to a new point on the same supply curve.

What is the difference between supply and quantity supplied? Quantity supplied is determined by price. A change in price will cause a change in quantity supplied. Graphically, it is a movement from one point on a supply curve to another. S Price P2 P1 Q1 Q2 Quantity

IV. Specify the reasons for a change in supply. A. Changes in supply Producers offer different amounts of products for sale at all possible prices in the market. Supply increases – shift right Supply decreases – shift left Number of reasons for shifts

So, what’s the story on changes in supply? Supply is the whole curve. It is determined by the five non-price determinants of supply. A change in one of those will cause a change in supply Graphically, it is a shift of the curve S1 Price S3 Quantity

IV. Specify the reasons for a change in supply. A. Changes in supply 1) Costs of Inputs – what its takes to make the product 2) Productivity - efficiency increases supply 3) Technology – can be good or bad 4) Number of sellers – competition

IV. Specify the reasons for a change in supply. A. Changes in supply 5) Taxes and Subsidies Taxes increase the costs to make the product Subsidies are government payments to an individual or business to encourage or protect a certain type of economic activity.

IV. Specify the reasons for a change in supply. A. Changes in supply 6) Expectations – if a supplier thinks prices are going up they will withhold supply. 7) Government regulations – restricts supply.

How Prices are Determined Chapter 6 Section 2 How Prices are Determined

I. Understand how prices are determined in competitive markets. A. The Adjustment Process 1) Moves toward market equilibrium Situation in which prices are relatively stable and the quantity supplied is equal to quantity demanded.

Demand and Supply S Equilibrium Pe D Qe

I. Understand how prices are determined in competitive markets. A. The Adjustment Process 2) Surplus Situation in which the quantity supplied is greater than the quantity demanded at a given price. If there is a surplus, the price is likely to decrease.

Surplus S Qs>Qd Surplus D Amount of the surplus Qd Qs

I. Understand how prices are determined in competitive markets. A. The Adjustment Process 3) Shortage Situation in which the quantity demanded is greater than the quantity supplied at a given price. If there is a shortage, the price is likely to increase.

Shortage Amount of the shortage S Qd>Qs Shortage D Qd Qs

I. Understand how prices are determined in competitive markets. A. The Adjustment Process 4) Equilibrium Price The price that creates neither a shortage nor a surplus. Intersection of supply and demand curves. Price where q supplied is = q demanded

II. Explain the importance of an economic model. A. Economic Model A set of assumptions that can be used to help analyze behavior and predict outcomes. 1) Listed in a table 2) Illustrated with a graph 3) Stated algebraically

Changes in Demand S Pe3 Pe1 Pe2 D3 D2 D1 Qe2 Qe1 Qe3

Changes in Supply S2 S Pe2 S3 Pe1 Pe3 D Qe3 Qe2 Qe1

Changes in Demand and Supply Pe D2 D1 Qe2 Qe1

Changes in Demand and Supply Pe2 Pe1 D2 D1 Qe2 Qe1