1. Economics Unit 2 How the Market Works!
Chapter 4: Demand
Chapter 5: Supply
Chapter 6: Prices

2. Understanding Demand Demand Law of Demand
the desire to own something and the ability to pay for it
Law of Demand
consumers buy more of a good when its price decreases and less when its price increases.

3. Effects on Demand Substitution effect Income Effect
when consumers react to an increase in a goods price by consuming less of that good and more of other goods
hybrid cars
Income Effect
the change in consumption resulting from a change in real income
lottery winner

4. Demand Curve

5. What Can Change Your Demand?
Change in Income
Normal Good- a good that consumers demand more of when incomes increase
More steak, less hamburger
Inferior Good- a good that consumers demand less of when their incomes increase
Less Ramen Noodles, more progressive soup

6. What will shift the demand curve?
Income
Consumer expectations
Consumer tastes and advertising
Price of related goods

7. What will shift the demand curve?
Income
What % of your income will you spend on something?
Consumer expectations
Will the price rise today, or tomorrow?
Will the price fall today, or tomorrow?
Consumer tastes and advertising
What is popular today?
Price of related goods
What is the price of gas?
What is the price of cable for your television?

8. What Can Change Your Demand?
Price of Related Goods
Complements-two goods are bought and used together
Ski’s
Boots
Poles
Bindings
Substitutes-goods used in place of one another
Ski’s and snowboards

9. Supply Supply law of supply the amount of available goods
tendency of suppliers to offer more of a good at a higher price

10. Cost of Production Marginal Product of labor
Marginal Product of Labor (5.6) is the change in output from hiring one more worker (increases, decreases).

11. Marginal Product of Labor
Labor (# of workers) Marginal Product Output

12. Cost of Production Increasing Marginal Return
is the level of production in which the marginal product of labor increases as the number of workers increase.
Diminishing Marginal Return
is the level of production in which the marginal production of labor decreases as the number of workers increases.
Capital MUST EQUAL Labor
Negative Marginal Returns
reverses the productivity of the operation (workers in each others way).

13. Cost of Production Fixed Cost
a cost that does not change, no matter how much of a good is produced
Rent
Machinery repairs
Property taxes
Salaried workers
Manager
Desks
Chairs

14. Cost of Production Variable Cost
a cost that rises and falls depending on how much is produced
Electricity
Heat bills
Capital to produce the goods
Office supplies
Paper
Pens and pencils
Hourly workers

15. Cost of Production Total Cost – fixed cost plus variable cost
The amount of money required to run the firm
Marginal Cost – the cost of producing one more unit of a good (5.9)
With beanbags – lower with specialties of the 1st and 3rd, then increases
More workers --- fixed production Facility

16. Setting Output How many employees to hire?
Remember, goal is to maximize profits!
Highest profit? Total Revenue /vs/ Total Costs

17. Setting Output Marginal Revenue and Marginal Cost
is an additional income from selling one more unit of a good; sometimes equal to the price.
***The ideal level of output is when marginal revenue equals marginal cost.

18. The Shut Down Decision When do you shut down an operation facility?
variable costs – costs when the facility is up and running.
fixed costs – owner pays whether the factory is open or closed.
Stay open if the benefit of operating (total revenue) is greater than the variable costs!!!
Total Revenue > Variable Costs

19. Chapter 6 Prices Section 1 Objective: Section 2 Objective:
to identify the nature of prices in regards to supply/demand
Section 2 Objective:
to identify how change in the market affects equilibrium
Section 3 Objective:
to identify the role of prices.

20. Combining Supply and Demand
Balancing the Market
Buyers and Sellers = Equilibrium (market clearing)
Demand and Supply

21. Defining Equilibrium
Equilibrium -the point at which quantity demanded and quantity supplied are equal.
At equilibrium, the market for a good is stable
Disequilibrium – occurs when the quantity supplied is not equal to quantity demanded.
every price that is not at equilibrium is at disequilibrium!

22. Disequilibrium
Excess Demand – is when the quantity demanded is more than the quantity supplied.
low prices encourage excess demand
as long as there is excess demand, suppliers will keep raising the price until the market cannot handle it.

23. Disequilibrium
Excess Supply – is when the quantity supplied is more than the quantity demanded.
sellers do not like to waste their resources on excess supply, especially when the excess cannot be stored.

24. Changes in Market Equilibrium
Changes in Price
market wants equilibrium price and quantity
Excess demand leads to higher prices.
Higher prices lead to rising supply and quantity demanded to fall.
Excess supply will cause price cuts and quantity demand to rise

25. Changes in Market Equilibrium
Shifts in the supply curve
advances in technology
new government taxes/subsidies
changes in the prices of raw materials and labor
a shift in the supply curve will create a new equilibrium

26. Changes in Market Equilibrium
Understanding a shift in supply
Early 1980s – CD player cost $1000
In 1987 – CD player cost $300
Today – CD player costs ???
Machines today have more feature and are better than the machines of the early 1980s
Also, the price to produce and manufacture has gone down, so this passes on the savings to us.
Demand is also not as high, either.

27. Changes in Market Equilibrium
Finding a New Equilibrium
Surplus – situation in which quantity supplied is greater than quantity demanded; also, known as excess supply
Excess supply will lead to decreased prices, which will lead to an increase in demand.
Changing Equilibrium
Equilibrium changes as the market conditions change (demand/supply).
Sales, Rebates, Price Changes

28. Changes in Market Equilibrium
Problem of Excess Demand
Ipod’s or PS3’s
Shortage
situation in which quantity demanded is greater than quantity supplied.
Search Costs
the financial and opportunity costs consumers pay when searching for a good or service.

29. The Role of Prices Prices in the Free Market 
gives the consumer choices (bartering)
The Advantages of Prices 
Price as an incentive can cause consumers to buy more, which can cause producers to make more.
Prices as Signals
At low prices, people buy………at high prices, people tend not to buy.
Low prices tend to slow production, whereas high prices increase production

30. The Role of Prices Flexibility
Prices are more flexible than output levels. (Short/Long Run)
Supply Shock – is a sudden shortage of a good (excess demand).
Rationing – is dividing up goods or services using criteria other than price.
*this can be expensive and time consuming

31. The Role of Prices Price System is “Free” Rationing and Shortages
The market can control prices without the use of government
Rationing and Shortages
Former Soviet Union /vs/ The United States
Communism /vs/ Wartime
Black Market – is a market in which goods are sold illegally
Ex: Stealing TV's and Selling them
Importing Illegal OR Prescribed Drugs and selling them