Chapter 7 Supply & Demand

Demand All consumers have a great influence on the price of all goods and services Demand – the amount of a good or service that consumers are able and willing to buy at various possible prices during a specified period of time Supply – the amount of a good or service that producers are able and willing to sell at various prices during a specified period of time

Demand Market – the process of freely exchanging goods and services between buyers and sellers Voluntary Exchange – a transaction in which a buyer and a seller exercise their economic freedom by working out their own terms of exchange (automobiles)

Demand Demand exists when a person is willing & able to buy something. There is an inverse relationship between the quantity demanded and the price. Law of Demand – economic rule stating that the quantity demanded & price move in opposite directions As price goes up, quantity demanded goes down. As price goes down, quantity demanded goes up.

Demand Quantity Demanded – the amount of a good or service that a consumer is willing and able to purchase at a specific price QD influenced by: Real Income Effect – economic rule stating that individuals cannot keep buying the same quantity of a product if its price rises while their income stays the same (gasoline Substitution Effect – economic rule stating that if two items satisfy the same need and the price of one rises, people will buy the other Diminishing Marginal Utility

Demand Utility – the ability of any good or service to satisfy consumer wants Marginal Utility – an additional amount of satisfaction Law of Diminishing Marginal Utility – rule stating that the additional satisfaction a consumer gets from purchasing one or more unit of a product will lessen with each additional unit purchased (soda)

Demand Supply and demand are illustrated with graphs. Demand Schedule – table showing quantities demanded at different possible prices Demand Curve – downward sloping line that shows in graph form the quantities demanded at each possible price Refer to graphs on pages 178 & 179 Quantity demanded is a specific point on a graph while demand is represented by the entire graph.

Demand Determinants of Demand Change in population Changes in income Changes in tastes and preferences Substitutes Complementary goods – a product often used with another product Refer to graphs on pages 182 & 183

Demand Elasticity – economic concept dealing with consumers’ responsiveness to an increase or decrease in the price of a product Price Elasticity of Demand – economic concept that deals with how much demand varies according to changes in price Elastic Demand – situation in which the rise or fall in a product’s price greatly affects the amount that people are willing to buy Inelastic Demand – situation in which a product’s price change has little impact on the quantity demanded by consumers Factors affecting elasticity Existence of substitutes (insulin & soda) % of budget devoted to that good (pepper & cars) Time consumers are given to adjust to price (electricity)

Supply Law of Supply – economic rule stating that price and quantity supplied move in the same direction As the price rises for a good, the quantity supplied generally rises. As the price falls, the quantity supplied also falls. Quantity Supplied – the amount of a good or service that a producer is willing and able to supply at a specific price The higher the price the greater the profit incentive.

Supply Supply Schedule – table showing quantities supplied at different prices Supply Curve – upward-sloping line that shows in graph form the quantities supplied at each possible price Be familiar with graphs on pages 188 & 189.

Supply Law of Diminishing Returns – after a certain point adding additional factors of production output increases at a diminishing rate Determinants of Supply Price of inputs Number of firms in the industry Taxes Technology Graphs on page 191

Supply & Demand As price goes down, quantity demanded goes up and supply goes down As price goes up, quantity demanded goes down and supply goes up. Equilibrium Price – the price at which the amount producers are willing to supply is equal to the amount consumers are willing to buy Graph on page 195

Supply & Demand Shortage – situation in which the quantity demanded is greater than the quantity supplied at the current price Surplus – situation in which quantity supplied is greater than quantity demanded at the current price

Supply & Demand Price Ceiling – a legal maximum price that may be charged for a particular good or service Rationing – the distribution of goods and services based on something other than price Black Market – underground or illegal market in which goods are traded above their legal price or in which illegal goods are sold Price Floor – a legal minimum price below which a good or service may not be sold