Demand

What is Demand Demand- the desire, ability and willingness to buy a product Demand- the desire, ability and willingness to buy a product

Illustrating Demand Quantity is always the horizontal axis, and is expressed as the letter Q Price is always the vertical axis, and is expressed as the letter P

The Demand Schedule- A listing that shows the quantities demanded of a product Price Price $30 $ Quantity Demanded Quantity Demanded

Graphing A Demand Curve Q P $ A B C

A Change in Quantity Demanded P Q A movement along the demand curve shows a change in the quantity demanded

LAW OF DEMAND AS THE PRICE OF AN ITEM RISES AND OTHER FACTORS REMAIN UNCHANGED, THE QUANTITY DEMANDED BY BUYERS WILL FALL AS THE PRICE OF AN ITEM RISES AND OTHER FACTORS REMAIN UNCHANGED, THE QUANTITY DEMANDED BY BUYERS WILL FALL AS THE PRICE OF AN ITEM FALLS THE QUANTITY DEMANDED WILL INCREASE AS THE PRICE OF AN ITEM FALLS THE QUANTITY DEMANDED WILL INCREASE

Individual and Market Demand Curves A Market Demand Curve- The demand curve that shows the quantities demanded by everyone who is interested in purchasing a product. A Market Demand Curve- The demand curve that shows the quantities demanded by everyone who is interested in purchasing a product. An Individual Demand curve- The demand curve that shows the quantity demanded from a specific person. An Individual Demand curve- The demand curve that shows the quantity demanded from a specific person. ID1 + ID2+ ID3 = MD ID1 + ID2+ ID3 = MD

WHAT AFFECTS DEMAND? THE PRINCIPLE OF DIMINISHING MARGINAL UTILITY THE PRINCIPLE OF DIMINISHING MARGINAL UTILITY THE INCOME EFFECT THE INCOME EFFECT SUBSTITUTION EFFECT SUBSTITUTION EFFECT ATTITUDES AND PREFERENCES ATTITUDES AND PREFERENCES

Marginal Utility The extra usefulness or satisfaction a person gets from acquiring or using one more unit of a product The extra usefulness or satisfaction a person gets from acquiring or using one more unit of a product

PRINCIPLE OF DIMINISHING MARGINAL UTILITY AS AN INDIVIDUAL OBTAINS MORE AND MORE UNITS OF AN ITEM DURING A SPECIFIED TIME PERIOD, HE OR SHE WILL OBTAIN LESS AND LESS UTILITY (SATISFACTION) FROM EACH ADDITIONAL UNIT. AS AN INDIVIDUAL OBTAINS MORE AND MORE UNITS OF AN ITEM DURING A SPECIFIED TIME PERIOD, HE OR SHE WILL OBTAIN LESS AND LESS UTILITY (SATISFACTION) FROM EACH ADDITIONAL UNIT.

INCOME EFFECT THE ABILITY TO PURCHASE MORE OR LESS OF AN ITEM WITH A GIVEN AMOUNT OF MONEY BECAUSE OF A CHANGE IN PRICE THE ABILITY TO PURCHASE MORE OR LESS OF AN ITEM WITH A GIVEN AMOUNT OF MONEY BECAUSE OF A CHANGE IN PRICE PEOPLE’S INCOME EFFECTS THEIR ABILITY TO BUY GOODS AND SERVICES PEOPLE’S INCOME EFFECTS THEIR ABILITY TO BUY GOODS AND SERVICES

SUBSTITUTION EFFECT THE TENDENCY FOR CONSUMERS TO SUBSTITUTE HIGHER PRICED ITEMS FOR LESS EXPENSIVE ITEMS THE TENDENCY FOR CONSUMERS TO SUBSTITUTE HIGHER PRICED ITEMS FOR LESS EXPENSIVE ITEMS WHEN YOU BUY PRODUCTS AT THE STORE DO YOU COMPARE PRICES FOR SIMILAR PRODUCTS? WHEN YOU BUY PRODUCTS AT THE STORE DO YOU COMPARE PRICES FOR SIMILAR PRODUCTS?

Change in Demand A Change in demand is a shift in demand curve when people are now willing to buy different amounts of a product at the same prices. A Change in demand is a shift in demand curve when people are now willing to buy different amounts of a product at the same prices. A shift to the right shows an increase in demand. A shift to the right shows an increase in demand. A shift to the left shows a decrease in demand. A shift to the left shows a decrease in demand.

P Q Line 1 Line 2 A 1 A 2 Shift in Demand

Factors that can Change Demand Consumer Income Consumer Income Consumer Tastes Consumer Tastes Substitutes- products that can be used in place of another Substitutes- products that can be used in place of another Complements- the use of one item increases the utility of another Complements- the use of one item increases the utility of another Change in Expectations Change in Expectations Number of Consumers Number of Consumers

Elasticity of Demand Elasticity- a measure of the responsiveness that tells us how a dependent variable such as quantity responds to an independent variable such as price Elasticity- a measure of the responsiveness that tells us how a dependent variable such as quantity responds to an independent variable such as price In other words....the amount of change in the quantity demanded based on factors such as price. In other words....the amount of change in the quantity demanded based on factors such as price.

Elastic Demand A change in price causes a larger CQD A change in price causes a larger CQD P Q Change in Price 8 to 7 Change in Qd 4 to 8 % of Change QD > %Change P

Inelastic Demand P Q Change in Price 8 to 7 Change in QD 2 to 4 The smaller the % of CQD compared to the % of Change in Price, is the level of inelasticity of a product Inelastic- a given change in price causes a relatively smaller change in QD

Unit or Unitary Elastic Demand P Q Change in Price 8 to 7 Change in QD 2 to 3 A Given change in price causes a proportional Change in Quantity Demanded 1 to 1 change

Factors Determining Elasticity Can the Purchase be Delayed? Can the Purchase be Delayed? Are Adequate Substitutes Available? Are Adequate Substitutes Available? Does the Purchase Use a Large Portion of Income? Does the Purchase Use a Large Portion of Income?

Determine Elasticity Individual Choices Individual Choices Gasoline Gasoline Staple items like Milk Staple items like Milk World Series tickets World Series tickets The New Korn CD The New Korn CD

Business Choices Business Choices Chicken for KFC Chicken for KFC Chicken for a Mexican Restaurant Chicken for a Mexican Restaurant Steel to Produce New Automobiles Steel to Produce New Automobiles A New Company Car A New Company Car Class Sets of Books for a Classroom Class Sets of Books for a Classroom Individual Books for each student Individual Books for each student

Supply

LAW OF SUPPLY AS THE PRICE OF AN ITEM RISES AND OTHER FACTORS REMAIN UNCHANGED, THE QUANTITY SUPPLIED BY SUPPLIERS WILL RISE. AS THE PRICE OF AN ITEM RISES AND OTHER FACTORS REMAIN UNCHANGED, THE QUANTITY SUPPLIED BY SUPPLIERS WILL RISE. AS THE PRICE OF AN ITEM FALLS THE QUANTITY SUPPLIED BY SUPPLIERS WILL FALL. AS THE PRICE OF AN ITEM FALLS THE QUANTITY SUPPLIED BY SUPPLIERS WILL FALL.

Supply Schedule Similar to a Demand Schedule, except that a Supply Schedule is a listing of the various quantities of a particular product supplied at all possible prices. Similar to a Demand Schedule, except that a Supply Schedule is a listing of the various quantities of a particular product supplied at all possible prices.

Graphing Supply Curve Q P

Change in Quantity Supplied P Q

EQUILIBRIUM PRICE THE PRICE AT WHICH THE QUANTITY DEMANDED IS EXACTLY EQUAL TO THE QUANTITY SUPPLIED. THE PRICE AT WHICH THE QUANTITY DEMANDED IS EXACTLY EQUAL TO THE QUANTITY SUPPLIED.

P Q D S Equilibrium Price

SURPLUS A SITUATION THAT RESULTS WHEN THE QUANTITY SUPPLIED EXCEEDS THE QUANTITY DEMANDED. A SITUATION THAT RESULTS WHEN THE QUANTITY SUPPLIED EXCEEDS THE QUANTITY DEMANDED. WHAT DO STORES DO IF THEY CANNOT SELL THEIR GOODS ON THE SHELF? WHAT DO STORES DO IF THEY CANNOT SELL THEIR GOODS ON THE SHELF?

P Q D S Equilibrium Price Surplus

SHORTAGE A SITUATION THAT RESULTS WHEN THE QUANTITY DEMANDED EXCEEDS THE QUANTITY SUPPLIED? A SITUATION THAT RESULTS WHEN THE QUANTITY DEMANDED EXCEEDS THE QUANTITY SUPPLIED? IF A BUSINESS SELLS OUT OF A PARTICULAR ITEM, WHAT DOES IT DO? IF A BUSINESS SELLS OUT OF A PARTICULAR ITEM, WHAT DOES IT DO?

P Q D S Equilibrium Price Surplus Shortage

Change in Supply Factors that can change Supply Factors that can change Supply Cost of Inputs Cost of Inputs Productivity Productivity Technology Technology Taxes and Subsidies Taxes and Subsidies Changes in Expectations Changes in Expectations Government Regulations Government Regulations Number of Sellers Number of Sellers

Model Example P Q D S

Increase in Supply = Shift to the Right P Q D S1 S

Decrease in Supply = Shift to the Left P Q D S1 S

Theory of Production

Stages of Production Stage One Production- First workers cannot work efficiently, too many resources for each worker. Stage of Increasing Returns Stage One Production- First workers cannot work efficiently, too many resources for each worker. Stage of Increasing Returns Stage Two Production- Total production keeps growing, but by smaller increments Stage Two Production- Total production keeps growing, but by smaller increments Stage Three Production- Output increases at a diminished rate, as more workers are added. “Law of Diminishing Returns” Stage Three Production- Output increases at a diminished rate, as more workers are added. “Law of Diminishing Returns”