1. Economics Honors UNIT II Microeconomics: Demand, Supply, Price Chapters 4, 5, & 6

2. PART 1 Chapter 4: Demand

3. What is DEMAND? What Is the Law of Demand? The law of demand states that consumers buy more of a good when its price decreases and less when its price increases. The Substitution Effect and Income Effect The substitution effect occurs when consumers react to an increase in a good’s price by consuming less of that good and more of other goods. The income effect happens when a person changes his or her consumption of goods and services as a result of a change in real income.

4. The Demand Curve A demand curve is a graphical representation of a demand schedule.A demand curve is a graphical representation of a demand schedule. When reading a demand curve, assume all outside factors, such as income, are held constant.When reading a demand curve, assume all outside factors, such as income, are held constant. Market Demand Curve 3.00 2.50 2.00 1.50 1.00.50 0 050100150 200250 300 350 Slices of pizza per day Price per slice (in dollars)

5. Shifts in Demand Shifts in Demand occur for reasons other than PRICE!

6. Prices of Related Goods Complements are two goods that are bought and used together. Example: skis and ski bootsComplements are two goods that are bought and used together. Example: skis and ski boots Substitutes are goods used in place of one another. Example: skis and snowboardsSubstitutes are goods used in place of one another. Example: skis and snowboards

7. Illustrating a Shift in Demand Positive shifts in demand are to the right Negative shifts in demand are to the left. Market Demand Curve 3.00 2.50 2.00 1.50 1.00.50 0 050100150 200250 300 350 Slices of pizza per day Price per slice (in dollars)

8. Name a product you really, really, really, really, need:

9. Demand for a good that is very sensitive to changes in price is elastic.Demand for a good that is very sensitive to changes in price is elastic. Demand for a good that consumers will continue to buy despite a price increase is inelastic.Demand for a good that consumers will continue to buy despite a price increase is inelastic. What Is Elasticity of Demand? Elasticity of demand is a measure of how consumers react to a change in price.

10. Calculating Elasticity Elasticity of Demand Elasticity is determined using the following formula: Elasticity = Percentage change in quantity demanded Percentage change in price To find the percentage change in quantity demanded or price, use the following formula: subtract the new number from the original number, and divide the result by the original number. Ignore any negative signs, and multiply by 100 to convert this number to a percentage: Percentage change = Original number – New number Original number x 100

11. Graphing Elasticity

12. Factors Affecting Elasticity

13. WHY IS DEMAND IMPORTANT??? ????????????????????

14. UNIT 2: Chapter 5 SUPPLY

15. To understand supply you must think like a _________________________

16. Supply 1.Definition: 2.Law of Supply: 3.Profit:

17. The Supply Curve A market supply curve is a graph of the quantity supplied of a good by all suppliers at different prices.A market supply curve is a graph of the quantity supplied of a good by all suppliers at different prices. Graphical representation of the law of supplyGraphical representation of the law of supply Market Supply Curve Price (in dollars) Output (slices per day) 3.00 2.50 2.00 1.50 1.00.50 0 0500100015002000250030003500

18. Elasticity of supply is a measure of the way quantity supplied reacts to a change in price. An elastic supply is very sensitive to changes in price.An elastic supply is very sensitive to changes in price. If supply is not very responsive to changes in price, it is considered inelastic.If supply is not very responsive to changes in price, it is considered inelastic. Elasticity of Supply

19. ?????What is the only reasons you (as a producer)would not make more of a product if you knew the price was going up????? TIME COST

20. TIME The Short RUN In the short run, a firm cannot easily change its output level, so supply is inelastic. The Long RUN In the long run, firms are more flexible, so supply can become more elastic.

21. COSTS! !!!! AH!!

22. The Costs of Production A fixed cost is a cost that does not change, regardless of how much of a good is produced. Examples: rent and salariesA fixed cost is a cost that does not change, regardless of how much of a good is produced. Examples: rent and salaries Variable costs are costs that rise or fall depending on how much is produced. Examples: costs of raw materials, some labor costs.Variable costs are costs that rise or fall depending on how much is produced. Examples: costs of raw materials, some labor costs. The total cost equals fixed costs plus variable costs.The total cost equals fixed costs plus variable costs. The marginal cost is the cost of producing one more unit of a good.The marginal cost is the cost of producing one more unit of a good.

23. COST QUESTIONS 1.Using 5.6 and 5.7: How many workers should you hire in your beanbag factory. 2.Using figure 5.9: How many bean bags per hour should you make? Why? 3.All of #7 on page 114 4.#15 on page 123

25. Hey Kyle Cunningham! What would happen to your supply curve if the costs for your CAR WASH business suddenly decreased???????

26. Shifts in Supply REASONS: 1. REASONS: a. rising/decreasing costs- b. technology- c. government- taxes, subsidies, regulation, deregulation d. future prices- e. number of suppliers- Market Supply Curve Price (in dollars) Output (slices per day) 3.00 2.50 2.00 1.50 1.00.50 0 0500100 0 150 0 200 0 250 0 300 0 350 0

27. What is the importance of understanding SUPPLY??????