1. Chapter 2 Demand and Supply
GR. 12 ECONOMICS (CIA4U1)
M. NICHOLSON

2. Markets and Circular Flows
Households / Consumers
Businesses
Factor / Resource Market
Product Market

3. The Role of Demand What is Demand?
Demand: the relationship between the various possible prices of a product and the quantities of that product consumers are willing to purchase
Quantity demanded: the amount of a product consumers are willing to purchase at each price

4. The Role of Demand Law of Demand:
Law of demand: states that there is an inverse relationship between a product’s quantity demanded and it price
Demand schedule: a table that shows possible combinations of prices and quantities demanded of a product
Demand curve: a graph that expresses possible combinations of prices and quantities demanded of a product
Change in quantity demanded: the effect of a price change on quantity demanded

5. The Role of Demand Change in Demand:
Market Demand: the sum of all consumers’ quantity demanded for product at each price
Demand determinants: factors that can cause an increase or decrease in a product’s demand
Increase in demand: an increase in the quantity demanded of a product at all prices
Decrease in demand: a decrease in the quantity demanded of a product at all prices

6. Demand Determinants: Consumer’s taste Personal income
Normal goods: products whose demand changes directly with income
Inferior goods: products whose demand changes inversely with income
Change in price of other products
Substitute goods: products that can be consumed in place of one another
Complementary goods: products that are consumed together
Consumers expectation concerning price
Population increase/decrease

7. Price Elasticity of Demand:
Price elasticity of demand: the responsiveness of a product’s quantity demanded to a change in its price
Elastic demand: demand for which a % of change in a product’s price causes a larger % change in Qd
Inelastic demand: demand for which % of change in a product’s price causes a smaller % change in Qd
Perfectly elastic demand: demand for which a product’s price remains constant regardless of Qd
Perfectly inelastic demand: demand for which a product’s Qd remains constant regardless of price

8. Factors that affect price elasticity of demand:
Portion of consumer incomes
Access to substitutes
Necessities vs luxuries

9. Price Elasticity of Demand + Supply:
Supply: the relationship between the various possible prices of a product and the quantities of the product that businesses are willing to supply
Quantity supplied: the amount of a product businesses are willing to supply at each price
Market supply: the sum of the producers’ quantities supplied at each price

10. The Law of Supply:
Law of supply: states that there is a direct relationship between a product’s quantity supplies and its price
Supply schedule: a table that shows possible combinations of prices and quantities supplied of a product
Supply curve: a graph that expresses possible combinations of prices and Qs
Change in quantity supplied: the effect of a price change on Qs
Supply determinants: factors that can cause an increase or decrease a product’s supply
Increase in supply: an increase in the Qs of a product at all prices
Decrease in supply: a decrease in the Qs of a product at all prices

11. Supply Determinants: Change in cost of production
Increased productivity
Government subsides
Taxes
Change in # of producers in market
Climatic conditions

12. Price Elasticity of Supply:
Price elasticity of supply: the responsiveness of a product’s quantity supplied to a change in price
Elastic supply: supply for which a % change in a product’s price causes a larger % change in Qs
Inelastic supply: supply for which a % change in a product’s price causes a smaller % change in Qs

13. Factors that Affect Supply Elasticity:
Immediate run: the production period during which none of the resources required to make a product can be varied
Perfectly inelastic supply: supply for which a product’s Qs remains constant regardless of price
Short run: the production period during which at least one of the resources required to make a product cannot be varied
Long run: the production period during which all resource required to make a product can be varied, and businesses may either enter or leave the industry
Constant-cost industry: an industry that is not a major user of any single resource
Increasing-cost industry: an industry that is a major user of at least one resource
Perfectly elastic supply: supply for which a product’s price remains constant regardless of Qs

14. Marginal Utility
William Stanley Jevons: developed the law of diminishing marginal utility
As a consumer purchases more units of a particular product in a give time period, that consumer’s extra satisfaction from each additional unit falls
MU/P1 = MU/P2

15. Elasticity
Elastic
Inelastic
Unitary
Demand / Supply
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