Topic 3 Supply and demand Mr. Kallusingh

Law of supply and demand Law of Demand- the quantity demanded of a good or service varies inversely with the price; if price goes up demand goes down or if price goes down demand goes up Law of Supply- the principle that suppliers will offer more at higher prices and less for sale at lower prices

Determinants of Demand Income Effect- change in quantity demanded because of a change in price that alters consumers real income Substitution Effect- change in quantity demanded because of the change in relative price of the product; concert vs. cd

Determinants of Demand Consumer Income- the more money a person makes, the more likely they will become to spend it Consumer Tastes- can change due to advertising, news reports, fashion trends, new products, weather seasons, etc Complements- if computer prices go down more software is purchased Substitutes- if butter price goes up people buy margarine

Determinants of supply Cost of Inputs- if cost of producing goes down expect to see more products, cost goes up less products Productivity- if workers work more efficient then expect more product as well as the inverse Technology- new machine, chemical, or process can increase the amount supplied

Determinants of supply Taxes and Subsidies- if taxes go up cost goes up production goes down and the inverse; if the government provides subsidies to a company their production should increase because the cost of producing has gone down and the inverse Government Regulations- usually tighter government regulations supply goes down and the inverse

Price Elasticity A measure of responsiveness that tells us how a dependent variable such as quantity responds to a change in an independent variable such as price Elastic- is when there is a drastic change due to a small change, supply or demand Inelastic- is when the change is small or equal, supply or demand

Market equilibrium A situation in which prices are relatively stable and the quantity of goods or services supplied are equal to the quantity demanded

Cost of Production Fixed Cost- the cost a business incurs even if it remains idle; rent, taxes, salaries, cost of maintenance, etc Variable Cost- cost that changes when a business rate or output changes; price of raw materials or changes in labor prices Marginal Cost- the cost of producing one more item; can be based on materials or labor Total Cost- the sum of fixed and variable cost

Price Controls Price Ceiling- the maximum legal price that can be charged for a single product Price Floor- the lowest legal price that can be paid for a good or service

Marginal Cost analysis Is when a company determines how much more to produce in order to make the most profit The marginal cost the amount to produce one more unit and the marginal benefit/ revenue is the amount made by that one more unit Profit-maximizing quantity of output is when the marginal cost and marginal revenue are equal