Chapter 4,5,6,7

Supply and Demand

Demand

willingness and ability to purchase

Law of Demand • principle stating that when prices are high less will be

demanded and when prices are low; more will be demanded

• ex. Ice cream – when it is expensive, we don’t buy it. When it is cheap; we stock up.

• This is from the viewpoint of the consumer!• Price - Demand • Price - Demand • The arrows are moving in different directions. • Law of demand = different directions = both start with D!!!)

Demand Schedule

• Table that shows the quantity demanded at every price

Quantity Price

300 4

200 5

90 10

45 15

30 20

20 25

Demand Curve

• Downward sloping graph showing the quantity demanded at every possible price in the market

0 50 100 150 200 250 300 3500

5

10

15

20

25

30

Demand Curve

Changes in Demand Curve

• Income effect – Change in quantity demanded because of a change in the consumer’s real income when the price of a commodity changes

• Substitution effect – a change in price = a relative change in price compared to other products consumers will buy it instead of something else

Changes in DemandCaused by:•Consumer income•Consumer tastes•Price on relate products

Increase in Demand – Shifts Right

Substitutes

• Goods or services that can be used in place of one another

• ex. Tape/glue

Complements

• Goods or services when used together increase in usefulness or value

• ex. Mashed potatoes and gravy. Peanut butter and fluff…

Marginal utility

• Marginal always means extra. • Utility is usefulness or satisfaction.• So, marginal utility = extra usefulness

• Marginal product - extra output (THIS DOES NOT MEAN SURPLUS)

Principle of Diminishing Marginal Utility

• Observation that people receive less and less satisfaction for every additional unit of a product consumed.

• A classmate ate chocolate chip cookies until he didn’t want anymore. This student paid for every cookie he ate. The amount he paid decreased as he continued to eat the cookies.

• This illustrated the point of decreasing SATISFACTION!

Paradoxical Demand

• Where there is a high demand for a product or where the demand for a product increases even though the price for that product increases

• Contradiction to the law of demand because it says they would buy less.

• Usually occurs with substituting

Paradoxical Demand Curve

• This acts “contrary” to the demand.• It does so because it is concerned with

“inferior goods.” Inferior goods are items that low income families purchase.

Elastic

• A change in price causes a change in demand.

• Ex. Chewing Gum becomes cheaper or more expensive and our demand is affected

Inelastic

• A change in price has little or no affect on demand.

• Ex. Eye glasses become cheaper or more expensive. We still purchase them.

• Milk, gas, water, heating oil…

Supply

• Stuff (quantity)

Law of Supply

• Principle that states that more will be brought to market when the price is high and less when the price is low.

• This is from the viewpoint of the producer or supplier.

• Price - Supply • Price - Supply • Law of Supply = same direction = both start with

S!!!)

Supply Curve

• Up-ward sloping graph showing the quantity Supplied at every possible price in the market

• Opposite the Demand curve

0 50 100 150 200 250 300 3500

5

10

15

20

25

30

Supply Curve

Changes on Supply

• Effected by:– Cost of Inputs– Productivity– Technology– Number of sellers– Taxes and Subsidies

Increase in Supply – Shifts Right

• Surplus - supply exceeds demand

• Shortage - demand exceeds supply

• Market equilibrium - intersection point of the demand and supply curve

Break- Even point

• Amount of output needed for a firm to recover its production cost.

• Ex. Monster Mitts cost me $80 to produce. At $8 a glove, I have to sell 10 in order to “break even!”

• Point that must be sold before a firm begins to see a profit– Cost of producing a prototype and then mass

producing/marketing/distributing it.

3 Stages of Production

• Increasing –Each additional workers contributes more than the previous worker and increases output

• Diminishing – Production keeps growing but by smaller and smaller amounts as workers are added

• Negative – total output begins to decrease because the cost of labor is greater than output produced.

Law of Variable Proportions

• Principle that dictates that if one factor or ingredient is changed; the entire output is affected.

• Ex. Mrs. Paul accidentally put a cup of salt in her batter rather than a cup of sugar. – She changed one ingredient/factor and it changed

the taste of the whole batter

Principle of Diminishing Returns

• economic law stating that additional units of input add less and less to the total product.

• Ex. hot chocolate mix– Add the packet of powdered cocoa mix to 3 cups

of water instead of ¾ cup as was stated in the instructions.

– What do you get? - less and less hot chocolate flavor…less total product.