Supply and Demand.  Voluntary exchange, agreeing on terms  Demand in economics, the different amounts we will purchase at various prices.  Market 

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Presentation transcript:

Supply and Demand

 Voluntary exchange, agreeing on terms  Demand in economics, the different amounts we will purchase at various prices.  Market  Law of demand, how people react to changing prices. ◦ Inverse relationship

 Diminishing Marginal Utility ◦ Utility, the power that a good or service has to satisfy a want. ◦ Law of diminishing marginal utility, You get more satisfaction from each additional purchase of an item, but the utility will diminish for each additional unit. ◦ One candy bar is great, two are better, three is good, four is too much for that price.

 Real Income Effect ◦ No one will be able to buy everything they want. ◦ Real Income Effect, people can not keep buying the same amount of a product if the price rises. ◦ This can work in reverse also, the price declines, your real income increases.

 Substitution Effect  Substitute, two items that are not exactly the same but satisfy the same need.  If the price of one drops people will purchase, substitute, that item.  Example, butter and margarine

 As the price goes down, the demand goes up.  Quantity demanded is usually measured by the year.  Assume a constant-quality unit.  If demand increases, the curve shifts to the right.

 Elasticity is how responsive consumers are to price changes on given items.  Elastic Demand, price changes greatly affect the amount bought. A brand of coffee, rise in price makes consumers go to a substitute.  Inelastic demand, price change does not affect substantially. Electricity, salt

 1. The existence of substitutes.  2. The percentage of a person’s total budget devoted to the purchase of that good.  3. How much time we allow for the consumer to adjust to the change in price.

 Changes in population and income.  Changes in taste.  Substitutes available.  The use of complimentary goods. ◦ More bread bought = more butter sold.

 The willingness and ability of producers to provide goods and services at different prices.  As price rises, the quantity supplied rises.  Profit drives this concept.

 After some point, when adding additional units to the factors of production, there will be a decrease in the amount of units per factor.  Example, hiring workers to the point of more workers versus machines. Less output.

 The supply curve works exactly opposite of the demand curve.  On a graph, the curve rises as you go left to right.  Higher cost = more supply.

◦ 1. The price of inputs, if the price of inputs drops, more can be produced at the same price, ( shift to the left on the curve). ◦ 2. Technology ◦ 3. Taxes ◦ 4. Number of firms in the industry.

 Equilibrium price- The price of any good or service will find the level at which the quantity demanded and the quantity supplied are balanced.  Shortage, The quantity demanded is higher than the quantity supplied. The price is below the equilibrium price (EP).  Surpluses occur when more is produced than demanded, above the EP.

 Market forces take care of shortages and surpluses when no government is involved  Price controls- Government ◦ Price ceilings  Rationing  Black Market ◦ Price Floors