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Chapter 21
Law of
Supply and Demand
Demand
Demand- The desire, willingness, and the ability to buy a product
Demand Schedule- A table that lists the various quantities of a product or service someone is willing to buy over a range of prices
Demand Curve- A graph that shows the amount of the product that would be bought at all possible prices on the market
DEMAND
Demand
Law of Demand- As price increases, demand decreases or as price decreases, demand increases
Utility- The pleasure, usefulness, or satisfaction from a product
Diminishing Utility- Additional utility decreases the more we get
Factors Affecting Demand
1) When there is a change in the number of consumers…
More consumers increases demand Less consumers means less demand Affected by birthrate, disease, war, migration,
and immigration
Factors Affecting Demand
2) Changes in consumers’ income… Increases in income leads to an increase in
demand Less income means less demand
Factors Affecting Demand
3) Changes in consumers’ taste… More popular a product the more demand The “must buy” of a season Advertising is the key
Factors Affecting Demand
4) Changes in consumers’ expectations… If afraid the economy will decline, demand
decreases If the economy is good, people buy more Demand is affected when people wait for new
technology If people expect shortages, they stock up
increasing demand Weather issues can affect demand
Factors Affecting Demand
5) Changes in Substitutes… A substitute is a competing product If price for the competition drops, demand for
that product will also drop Newer or better competition will also lower
demand
Factors Affecting Demand
6) Changes in complements… A complement is a product that is used with
another product Ex: game systems and games, peanut butter
and jelly If the demand for one increases, the demand for
the other also increases
Demand Elasticity
Demand Elasticity-The extent to which a change in the price of a product causes a change in the demand
Elastic Demand-A change in price causes a large change in the demand
Ex: a sale on a car will cause a large change in demand
Happens when there is an attractive substitute Expensive items When the purchase can be put off till later
Demand Elasticity
Inelastic Demand-A change in price has little effect on demand Demand for turkey at Thanksgiving Occurs when there are few substitutes ex:
medicine Inexpensive item also have inelastic demand
Supply
Supply-The various quantities of a good or service that producers are willing to sell at all possible prices. This is the opposite of demand.
Supply Schedule-A table that lists all the various quantities supplied by producers at all given prices
Supply Curve-A graph that shows the amount of a product that would be supplied at all available prices
SUPPLY
Supply
Law of Supply-As the price increases, the amount that a producer is willing to supply will also increase
Profit Motive
Profit Motive-The driving force that encourages individuals and organizations to increase the material well being Businesses invest time, $, and capital in order to make
even more $ To cover costs they must charge more for the product that
it cost them to make it. Always are trying to make a profit-the $ left over after all
expenses are paid May use profits to increase worker salaries or hire new
workers May invest in new equipment or supplies May simply keep it for themselves
Factors Affecting Supply
1) Changes in the cost of raw materials As prices for raw materials increases, the
amount supplied will decrease As the prices of raw materials drop, more will be
supplied, probably at the same price
2) Changes in taxes An increase in taxes will decrease the supply as
it will increase the production cost of that item A decrease in taxes in taxes will increase the
supply
Factors Affecting Supply
3) Productivity The more efficient the production process is, the
more that will be supplied If production costs increase, then less will be
supplied
Factors Affecting Supply
4) Changes in technology -the methods or processes used to make goods and services
Technology can speed up the production process increasing the supply
Can also cut production costs which also increase supply
EX: Scanners at store, quicker check outs plus they can track inventory more accurately
Factors Affecting Supply
5) Changes in government policies Stricter government regulations increase
production costs and lower supply Looser government regulations decrease
production costs and increase supply Laws that increase wages also increase
production costs and lead to a decrease in supply or to a workers being laid off
Factors Affecting Supply
6) Changes in government subsidies -a payment to an individual or group for certain actions
Ex: Government pays farmers $2 for every bushel of corn they produce, this lowers production costs, encourages farmers to stay in the market, and also encourages new farmers to enter the market, thus increasing the supply
If subsidies are repealed, production costs go up and supply goes down
Government may also pay producers not to produce a product, thus lowering the supply
Factors Affecting Supply
Supply Elasticity Supply Elasticity-The measure of how the quantity
supplied of a good or service changes in response to changes in price Big changes in supply are said to have elastic supply If changes in price have little affect on supply, supply
is inelastic All depends on how quickly a producer can adjust their
production process Ex: Oil production is inelastic because it can’t be
changed quickly to adjust to the market (they can’t find a new site, dig a new well, or build a new refinery)
Ex: Candy is elastic since they production process can quickly be changed to meet an increase in demand (put on another shift, hire more workers, start a second production line)
Supply and Demand at Work
Surplus
Surplus-The amount by which quantity supplied is higher than the quantity demanded Means that the price is too high People are unwilling or unable to pay in enough
numbers to make producers happy Sellers must lower their price or find incentives to
increase sales
Shortage
Shortage-the amount by which the quantity demanded is higher than the quantity supplied The price is too low Price must rise to maximize profit
Equilibrium Price
Equilibrium Price-When the quantity demanded and the quantity supplied are equal This is where maximum profits are found Will stay there until some factor changes
Price Controls
Price Controls-When the government sets the price of a product to ensure a fair price (a price that does not favor producers or consumers) May be a price ceiling-a max that producers may
charge. EX: A landlord may charge only up to a certain price for rent
May set a price floor-a minimum price that can be charged. EX: minimum wage for workers
Advantages of Prices as a way to answer the basic economic
questions 1) Prices are neutral Favor neither the producer or consumer Competition forces both sides to compromise
on a fair market value
2) Prices are flexible Allows us to react quickly to unforeseen events Can quickly get back to normal after unexpected
price “shocks”
Advantages of Prices as a way to answer the basic economic
questions3) Prices are familiar We use them everyday, we understand them We can compare unrelated goods
4) Prices give us freedom of choice Allows producers to make a wide range of
products at various prices Gives all opportunities to get involved in the
economy