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Economics – Supply and Demand

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1 Economics – Supply and Demand
Chapters 4, 5 & 6

2 Demand The Law of Demand As Price Increases, Demand Decreases
As Price Decreases, Demand Increases

3 Law of Demand Substitution Effect Income Effect
Lower Priced Alternatives Income Effect “Feeling” rich, “Feeling” poor

4 Individual Demand Schedule Market Demand Schedule
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 $3.00 5 4 3 2 1 $.50 $1.00 $1.50 $2.00 $2.50 $3.00 300 250 200 150 100 50

5 Price per slice (in dollars)
The Demand Curve Market Demand Curve 3.00 2.50 2.00 1.50 1.00 .50 50 100 150 200 250 300 350 Slices of pizza per day Price per slice (in dollars) Price P Quantity Demanded Q Ceteris Paribus Outside Factors can Change the Curve Demand

6 Shifting Demand Advertising Consumer Income Consumer Expectations
Superior Goods Vs Inferior Goods Consumer Expectations Consumer Tastes

7 Price of Related Goods Complements Substitutes

8 Elasticity of Demand Elastic Demand Inelastic Demand

9 Graphic Representation

10 Factors Affecting Elasticity
Availability of Substitutes Time Volume Purchased Necessities Vs Luxuries Needs vs. Wants

11 Supply The Law of Supply As Price Increases, Supply Increases,
As Price Decreases, Supply Decreases

12 Price per slice of pizza Slices supplied per day
Supply Schedule $.50 1,000 Price per slice of pizza Slices supplied per day Market Supply Schedule $1.00 1,500 $1.50 2,000 $2.00 2,500 $2.50 3,000 $3.00 3,500

13 Output (slices per day)
Supply Curve Price P Quantity Supplied Q Market Supply Curve Price (in dollars) Output (slices per day) 3.00 2.50 2.00 1.50 1.00 .50 500 1000 1500 2000 2500 3000 3500 Supply

14 Elasticity of Supply Elastic Supply Inelastic Supply

15 Elasticity of Supply and Time
Short Run Products that take little time to make Ex- Music Long Run Products that take long periods of time to make Ex- Oranges

16 Labor and Output Marginal Product of Labor Increasing Returns
Diminishing Returns Negative Returns Marginal Product of Labor Labor (number of workers) Output (beanbags per hour) Marginal product of labor 1 4 2 10 6 3 17 7 4 23 6 5 28 31 3 7 32 1 8 –1

17 Costs of Production Output Costs Revenues Profits Costs Revenues
Revenue - Cost Costs Fixed Cost Variable Costs Total Costs Fixed Cost + Variable Cost Marginal Costs Revenues Marginal Revenue Total Revenue Marginal Revenue X Output

18 Costs of Production Production Costs Total revenue Profit
Marginal revenue Marginal cost Total cost Variable cost Fixed cost Output (per hour) $–36 –20 21 40 1 2 3 4 $0 24 48 72 96 $24 $8 5 $36 44 51 56 8 12 15 20 36 57 72 84 93 5 6 7 8 120 144 168 192 24 9 12 15 63 99 27 36 48 98 92 79 216 240 264 288 24 19 30 37 36 9 10 11 12 82 106 136 173 118 142 172 209

19 Shutdown Decisions The goal of all business is profit
Marginal Revenues > Marginal Costs Operating a Failing Business Fixed Costs do not disappear Total Revenues > Variable Costs

20 Changes in Supply Technology Scarcity & Shortage The Government
Subsidies Excise Taxes Regulation Future Expectations Globalization

21 Combined Supply and Demand Schedule
Equilibrium Price per slice Equilibrium Point Finding Equilibrium Price of pizza Quantity demanded Quantity supplied Result Combined Supply and Demand Schedule $ .50 300 100 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $.50 Slices of pizza per day 50 150 200 250 350 Supply Demand $2.00 $2.50 $3.00 150 100 50 250 300 350 Surplus from excess supply $1.00 250 150 Shortage from excess demand $1.50 200 Equilibrium Equilibrium Price a Equilibrium Quantity

22 Disequilibrium Disequilibrium Government Intervention Excess Demand
Excess Supply Government Intervention Price Ceilings Ex- Rent Control Price Floors Ex- Minimum Wage


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