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Published byDamian Byrd Modified over 9 years ago
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Demand
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Demand Demand: o the desire to own something and the ability to pay for it The Law of Demand states that as prices decrease people are willing to buy more. As price increases people are willing to buy less o (inverse relationship)
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Demand Market Demand Curves Show how people ’ s buying habits will change at certain prices ONLY Show a specific market only Assume no other factors change (just price)
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Why Would There Be a Shift in Demand? 1.Consumer ’s income changes As income increases, demand increases. 2.Consumer Expectations: if shortage is expected, demand increases 3.Population Size: Population increases, demand increases 4.Consumer Taste: If a good becomes popular, demand increases
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Why Would There Be a Shift in Demand? 5. Change in Price of Related Goods: Compliments: goods bought together (ex. PB&J) Compliment good price increases, the good ’ s demand decreases Substitutes: goods used in place of one another (ex. skis and snowboards) If a substitute price increases, the good ’s demand increases
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Demand ELASTICITY of DEMAND: o How much the quantity demanded will change if the price rises or falls.
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Demand ELASTIC DEMAND: demand that is very sensitive to a change in price o goods that one might stop buying or cut back on as price increased (SUVs, Luxury items)**on a graph this demand curve will be FLAT
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Demand INELASTIC DEMAND: demand that is not very sensitive to a change in price o goods that you would buy at any price; there are few if any substitutes for these goods. o Examples: milk, gas, prescription drugs on a graph this demand curve would be very steep.
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Supply
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Supply Supply: o is the amount of goods or services available The Law of Supply states the higher the price, the larger the quantity produced (think like a producer now; at a higher price, firms earn additional revenue and more firms will have incentive to enter the market)
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Supply Supply Schedule: o show only how price of goods changes the quantity supplied (all other factors remain constant) Elasticity of Supply o is a measure of the way suppliers respond to a change in price
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Supply Inelastic Supply o a small increase in price has a small effect on supply (orange farmers – suppliers must plant more trees every 2 years to produce more fruit and supply doesn’t change in the short term)
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Why Would There Be a Shift in Supply? 1.Change in the Price of an Input: Rise in input cost means decrease in supply because it is too expensive to make, and a fall in input cost will increase supply at all price levels. 2.Technology – lowers cost and increases supply. 3.Government subsidy: payment by the gov ’ t that supports a business or market. Subsidies increase supply. 4.Increase or Decrease in taxes: increasing taxes decreases supply, decreasing taxes increases supply
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Why Would There Be a Shift in Supply? 5. Government Regulation: (emission control on cars, FDA nutritional codes on food products) Usually increases cost of production 6.Future expectation of Prices: expect the price to go up the supplier will store goods to sell more in future 7.Number of suppliers: as more suppliers enter a market to produce a good the market supply of the good will rise (and the opposite)
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Supply & Demand Together Forever.
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A Fully labeled Supply & Demand Graph P Q D1D1 S1S1 Equilibrium Price: the price at which the amount producers are willing to supply is equal to the amount consumers are willing to buy P1P1 Q1Q1 Market Clearing Price E1E1
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Orange Juice P Q D1D1 S1S1 E1E1 PRICE ____ QUANTITY____ BECAUSE OF A CHANGE IN SUPPLY P1P1 Q1Q1 S2S2 E2E2 P2P2 Q2Q2
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Coca-Cola P Q D1D1 S1S1 E1E1 PRICE ____ QUANTITY____ BECAUSE OF A CHANGE IN DEMAND P1P1 Q1Q1 D2D2 E2E2 P2P2 Q2Q2
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Video Games P Q D1D1 S1S1 E1E1 PRICE ____ QUANTITY____ BECAUSE OF A CHANGE IN DEMAND P1P1 Q1Q1 D2D2 E2E2 P2P2 Q2Q2
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Clothing P Q D1D1 S1S1 E1E1 PRICE ____ QUANTITY____ BECAUSE OF A CHANGE IN SUPPLY P1P1 Q1Q1 S2S2 E2E2 P2P2 Q2Q2
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Price Ceiling An artificial barrier that creates a maximum price for a good/service Tries to keep prices low but creates shortage P Q D1D1 S1S1 MCP E1E1 Price Ceiling
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Example: Price Ceiling 1) In New York City the government controlled the rent on some apartments so that they could not be more than $1000 a month. This made everyone want those cheap apartments, but there wasn ’ t enough of them for everyone who wanted one. o What is this called?_________________
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The quick way to remember Ceiling = max price = shortage
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Price Floor An artificial barrier that creates a minimum price for a good/service Tries to keep businesses happy but creates surplus P Q D1D1 S1S1 MCP E1E1 Price Floor
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Example: Price Floor 1) In July the minimum wage in North Carolina will go up to $7.25. It will be illegal to pay someone less than that for any type of job. But many businesses can ’ t afford to pay their workers $7.25 an hour. This will mean people are going to lose their jobs. o What will happen to the available supply of labor?_________________ o What is this called? __________________
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The quick way to remember Floor = min price = surplus
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Floor or Ceiling? Remember… Floor = minimum price Ceiling = maximum price 1. The Congress wanted to help America ’ s 3 big car companies (Ford, GM & Chrysler) make more profit. They said that new cars could not be sold for less than $30,000. o Is this a price floor or a price ceiling? o What will happen to the supply of cars?
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Floor or Ceiling? Remember… Floor = minimum price Ceiling = maximum price 2. The Congress wanted people to be able to afford gas this summer so they said that no gas could be sold above $1.25 a gallon. But during the summer the demand for gas is always higher because people travel more. o Is this a price floor or a price ceiling? o What will happen to the supply of gasoline?
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