Unit Three ECONOMICS DemandandSupply

PA Standards E; G; D; E; F

DEMAND Amount of a good or service that a consumer is willing and able to buy at various possible prices during a given time period. willing and able

QUANTITY DEMANDED Amount of a good or service that a consumer is willing and able to buy at each particular price during a given time period. each particular price

The Law of Demand An increase in a good’s price causes a decrease in the quantity demanded; a decrease causes an increase.

1. Income Effect Purchasing power refers to the amount of money people have to spend on goods and services

1. Income Effect Income Effect refers to the increase or decrease in purchasing power caused by a change in price

2. Substitution Effect Tendency of consumers to substitute a similar, lower-priced product for another product that is more expensive

Substitute Goods replace a more expensive, or brand- name good

Complementary Goods are commonly used with other goods

Product Substitute Good Complementary Good ButterMargarineBread SteakHamburgerA-1 Digital Camera Disposable Cam Batteries

3. Diminishing Marginal Utility Decrease in the utility (usefulness) of a good as more units are consumed (usefulness)

Demand Schedule A list of the quantity of goods that consumers are willing and able to buy at a series of possible prices

Demand Curve A graph which plots the information from a demand schedule; it shows the relationship between price & demand

Determinants of Demand Non-price factors that influence the amount of demand for a good or service

Determinants of Demand Consumer Tastes and Preferences Consumer Expectations

Determinants of Demand Market Size -- decisions by private businesses -- government policy -- new technology

Determinants of Demand Income -- generally, as income rises, so does demand -- income relates to purchasing power

Determinants of Demand Prices of Related Goods -- ?? Substitutes ?? -- ?? Complements ??

Elasticity of Demand The degree to which changes in a good’s price affect the quantity demanded by consumers

Elastic Demand A small change in a good’s price causes a major, opposite change in the quantity demanded.

Elastic Demand Elasticity of demand if… …the product is not a necessity

Elastic Demand Elasticity of demand if… …there are readily available substitutes

Elastic Demand Elasticity of demand if… …the product’s cost represents a large portion of consumers’ incomes

Inelastic Demand A change in a good’s price has little impact on the quantity demanded.

Inelastic Demand Inelasticity of demand if… …the product is a necessity

Inelastic Demand Inelasticity of demand if… …there are few or no readily available substitutes

Inelastic Demand Inelasticity of demand if… …the product’s cost represents a small portion of consumers’ incomes

Elasticity for a product varies depending on the specificity of the market— you can look at the big picture (general market) or the close-up picture (specific market)

The more time that passes following a price change, the more elastic a product’s demand becomes

Measuring Elasticity Total Revenue (total receipts) is the total income that a business receives from selling its products

Total Revenue & Elastic Demand A drop in a company’s total revenue from a price increase indicates elastic demand for a product.

Total Revenue & Inelastic Demand An increase in a company’s total revenue because of a price increase indicates inelastic demand for the product.

To maximize revenue, the seller must determine at what point pricing choice brings the highest revenue

SUPPLY The quantity of goods and services that producers are willing to offer at various possible prices during a given time period.

QUANTITY SUPPLIED The amount of a good or service that a producer is willing to sell at each particular price.

Producers supply more goods and services when they can sell them at higher prices and fewer goods and services when they must sell them at lower prices. Law of Supply

Profit Amount of money remaining after producers have paid costs

Costs of Production Business expenses involved in the manufacture of a product

Profit influences specific and general markets--new manufacturers will enter a profitable market; current manufacturers will increase production

A list of each quantity of a product that producers are willing to supply at various market prices Supply Schedule

Supply Curve It plots on a graph the relationship between a good or service and the quantity supplied

Elasticity Of Supply The degree to which price changes affect the quantity supplied

Elastic Supply A small change in price causes a major change in the quantity supplied

Elastic Supply Elastic supply if… …the product can be produced quickly

Elastic Supply Elastic supply if… …the product can be produced inexpensively

Elastic Supply Elastic supply if… …production uses few, readily available resources

Inelastic Supply When a good’s price has little impact on the quantity supplied

Inelastic Supply Inelastic supply if… …the product is expensive to produce …the product requires time to be produced

Inelastic Supply Inelastic supply if… …production uses resources not readily available

Determinants of Supply Non-price factors that move the entire supply curve

Determinants of Supply Prices of Resources Competition Technology

Determinants of Supply Producer Expectations Government Action --tax --subsidy --regulation

Making Production Decisions Productivity The amount of a good or service produced per unit of input

Total Product All of the product a company makes in a given period of time—with a given amount of input

Marginal Product Change in output generated by adding one more unit of input

Law of Diminishing Returns As more of one input is added to a fixed supply of other resources, productivity increases up to a point, but at some point marginal product will diminish.

Increasing Marginal Returns Stage of production when addition of units raises returns. More workers, more product

Diminishing Marginal Returns Stage of production when addition of units reduces returns. More workers, declining marginal product

Negative Marginal Returns Stage of production when addition of units lowers returns. More workers, negative marginal product

Costs of Production Costs that do not change as the level of output changes Fixed Costs depreciation overhead

Costs of Production Costs that change as the level of output changes Variable Costs

Costs of Production Sum of fixed and variable costs Total Costs

Costs of Production Additional costs of producing one more unit of product Marginal Costs

End of Chapters 3 & 4 End of Chapters 3 & 4