SUPPLY AND DEMAND

LAW OF DEMAND PRICES CHANGE AND PEOPLE BUY MORE OR LESS OF A PRODUCT. MUST BE WILLING AND ABLE TO BUY

DIMINISHING MARGINAL UTILITY UTILITY = SATISFACTION BUYING STOPS WHEN PRICE > UTILITY

THE DEMAND CURVE AS PRICE GOES UP, QUANTITY DEMANDED GOES DOWN

Demand Curve Slices of pizza per day Price per slice (in dollars)

DEMAND PRACTICE A LOCAL VIDEO STORE BEGINS TO DROP ITS PRICES. WHEN DVD’S RENT FOR $4.00 APIECE, THE STORE RENTS 200 IN A WEEKEND. FOR EVERY $0.50 THE PRICE DROPS, THE STORE RENTS 25 MORE DVD’S. DRAW A SCHEDULE AND CURVE ILLUSTRATING THIS.

SHIFT OF THE CURVE CETERIS PARIBUS SUBSTITUTES COMPLEMENTARY GOODS POPULATION

DEMAND CURVE SHIFTS CONSUMER TASTES AND ADVERTISING INCOME (NORMAL GOODS VS. INFERIOR GOODS)

ELASTICITY RESPONSIVENESS OF CONSUMERS TO PRICE CHANGE.

DETERMINANTS OF ELASTICITY SUBSTITUTES PERCENTAGE OF BUDGET TIME TO ADJUST TO PRICE CHANGE NECESSITY V. LUXURY

FIGURING ELASTICITY ELASTICITY = % CHANGE IN QTY. DEMANDED % CHANGE IN PRICE

ELASTICITY OF DEMAND YES = ELASTIC NO= INELASTIC CORNGASINSULIN DELAY PURCHASE? SUBS? BIG % OF INCOME?

LAW OF SUPPLY AS THE PRICE RISES FOR A GOOD, QUANTITY SUPPLIED RISES

PROFIT INCENTIVE HIGHER PRICES MAKE US WANT TO SELL MORE!

PRODUCTION COSTS FIXED COSTS VARIABLE COSTS TOTAL COSTS MARGINAL COST

LAW OF DIMINISHING MARGINAL RETURNS MARGINAL PRODUCT OF LABOR

DECIDING OUTPUT PROFIT= REVENUE – COST MARGINAL REVENUE = MARGINAL COST SHUT DOWN DECISION REVENUE<VARIABLE COST

Market Supply Curve Price (in dollars) Output (slices per day) Supply

ELASTICITY OF SUPPLY LESS TIME = LESS ELASTIC

SUPPLY CURVE SHIFTS PRICE OF INPUTS TECHNOLOGY NUMBER OF FIRMS

SUPPLY CURVE SHIFTS GOVERNMENT INFLUENCE FUTURE PRICE EXPECTATION IMPORT RESTRICTIONS

A local shoe factory produces 100 pairs of shoes each week, which sell for $20 a pair. Demand is high, and as the price rises, the factory produces 25 more pairs for every $5 increase. Draw a supply schedule and curve illustrating this. SUPPLY CURVE PRACTICE

$800 $600 $400 $200 0 Price QUANTITY EQUILIBRIUM POINT supply Demand E

CHANGE IN EQUILIBRIUM Price QUANTITY EQUILIBRIUM POINT supply Demand E $10 $8 $6 $4 New demand c b E2

SHORTAGE: SUPPLY<DEMAND

SURPLUS: SUPPLY>DEMAND

GOVERNMENT INTERVENTION PRICE CEILINGS RENT CONTROL PRICE FLOOR MINIMUM WAGE

PRICES IN THE FREE MARKET INCENTIVES SIGNALS FLEXIBILITY PROFIT INCENTIVE