Students will explain how the Law of Demand, prices, and profit work to determine production and distribution in an economy

Law of demand- consumers will buy more of a good when the price decreases and less when the price increases. Law of demand- consumers will buy more of a good when the price decreases and less when the price increases. 1. How is demand determined? a. The substitution effect- consumers react to a price increase in a product by finding a cheaper product to replace it with. b. The income effect- a person will change their consumption of a good or service as a result of a change in income.

Demand Schedules Individual Demand Schedule Price of a slice of pizza Quantity demanded per day Market Demand Schedule Price of a slice of pizza Quantity demanded per day $.50 $1.00 $1.50 $2.00 $2.50 $ $.50 $1.00 $1.50 $2.00 $2.50 $ Demand schedule- is a table that lists the quantity of a good you will buy at each different price. Demand schedule- is a table that lists the quantity of a good you will buy at each different price. A market demand schedule- lists the quantity of a good all consumers in a market will buy at each different price. A market demand schedule- lists the quantity of a good all consumers in a market will buy at each different price.

Market Demand Curve Slices of pizza per day Price per slice (in dollars) Demand Demand Curve- slopes downward to indicate consumer demand at certain prices Demand Curve- slopes downward to indicate consumer demand at certain prices

1. Income- Change in income affects demand of goods, as a consumers income increases they demand more, as it decreases they demand less goods. 1. Income- Change in income affects demand of goods, as a consumers income increases they demand more, as it decreases they demand less goods. Examples- Luxury Cars/Electronics/Take Out 2. Consumer Expectation- if consumers believe a good will increase or decrease, demand will be effected. 2. Consumer Expectation- if consumers believe a good will increase or decrease, demand will be effected. Examples- Gas Prices after Hurricane IKE/Toys

3. Change in population- changes in the size of a population will affect the demand for a good. 3. Change in population- changes in the size of a population will affect the demand for a good. Example- Food/Housing/Medication 4. Consumer Tastes/Advertising- advertising determines trends and affects the demand for goods 4. Consumer Tastes/Advertising- advertising determines trends and affects the demand for goods Examples- Toys/Clothing/Music 5. Price of Related Goods- the demand for one good is affected by the demand for another good. (Complements)- Hamburgers and Hamburger Buns (July 4 th ) 5. Price of Related Goods- the demand for one good is affected by the demand for another good. (Complements)- Hamburgers and Hamburger Buns (July 4 th )

Elasticity of Demand- is the measure of how consumers will react to a change in price. Elasticity of Demand- is the measure of how consumers will react to a change in price. 1. Inelastic Demand- A decrease in price will lead to only a small change in demand, or no change at all. Also can be your personal choice that makes something inelastic. Example- Food/Gas 2. Elastic Demand- a small change in price leads to a large change in demand Example- Luxury Goods

1. Availability of Substitutes- If there are few substitutes for a good, then demand will not likely decrease as price increases. The opposite is also usually true. Examples- Home cooked Buffalo Wings vs. American Deli Wings 2. Relative Importance- how much of your budget you spend on the good. Examples- Dinner out/ Gym.

3. Necessities versus Luxuries- Whether a person considers a good to be a necessity or a luxury has a great impact on the good’s elasticity of demand for that person. Examples- Plasma T.V. 4. Change over Time- Demand sometimes becomes more elastic over time because people can eventually find substitutes. Examples- Touch phones/Mp3 players/

Elasticity of Demand can hurt a firms income. Impact- If they make a product that has elasticity. Then raising the price will cause their income to fall. Impact- If they make a product that has elasticity. Then raising the price will cause their income to fall.

How do supply and demand create balance in the marketplace? How do supply and demand create balance in the marketplace? What are differences between a market in equilibrium and a market in disequilibrium? What are differences between a market in equilibrium and a market in disequilibrium? What are the effects of price ceilings and price floors? What are the effects of price ceilings and price floors?

Price per slice Equilibrium Point Finding Equilibrium Price of a slice of pizza Quantity demanded Quantity supplied Result Combined Supply and Demand Schedule $ $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $.50 Slices of pizza per day Supply Demand Equilibrium- when the quantity supplied and demand come together. (Market Clearing Price) $2.00 $2.50 $ Surplus from excess supply $ Equilibrium Equilibrium Price a Equilibrium Quantity $ Shortage from excess demand

Disequilibrium- if the price or supply of the good is anywhere but at equilibrium. Disequilibrium- if the price or supply of the good is anywhere but at equilibrium. What causes disequilibrium? What causes disequilibrium? 1. SURPLUS- there is more supplied than demanded, sellers HAVE to cut prices to sell products 2. SHORTAGE- consumers demand more than what is supplied Buyers and Sellers will force the market to return to equilibrium

Price Ceiling- the maximum you can legally charge for a product. Problem is that it causes shortages for the product. It is always below the market equilibrium price. CAUSES SHORTAGES Price Ceiling- the maximum you can legally charge for a product. Problem is that it causes shortages for the product. It is always below the market equilibrium price. CAUSES SHORTAGESExamples 1. Rent Control Price Floor- the minimum price set for a good by the government. This is always higher than the market equilibrium price. Problem is that buyers don’t buy at the new price, while suppliers are willing to supply more at the new price. CAUSES SURPLUS Price Floor- the minimum price set for a good by the government. This is always higher than the market equilibrium price. Problem is that buyers don’t buy at the new price, while suppliers are willing to supply more at the new price. CAUSES SURPLUSExamples 1. Minimum Wage

Price per slice Equilibrium Point Finding Equilibrium Price of a slice of pizza Quantity demanded Quantity supplied Result Combined Supply and Demand Schedule $ $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $.50 Slices of pizza per day Supply Demand $2.00 $2.50 $ Surplus from excess supply $ Equilibrium Equilibrium Price a Equilibrium Quantity $ Shortage from excess demand

1.Prices are Signals- communicates to both buyers and sellers whether goods or services are scarce or easily available. Prices can encourage or discourage production. 2. Signals for Suppliers- High Price= MAKE MORE (GO) Low Price= MAKE LESS (STOP) Low Price= MAKE LESS (STOP) 3. Signals for Buyers- High price= DON’T BUY (STOP). Low Prices=BUY (GO) Low Prices=BUY (GO) 4. Flexibility- Prices can be easily increased or decreased to solve problems of excess supply or excess demand.