The quantity of a good or service that producers are willing
and able to offer for sale at various prices Aka-the amount of
stuff available for purchase What is Supply?
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An economic law stating that as the price of a good or service
increases, the quantity supplied increases, and vice versa.
Generally producers are happier to offer goods and services at
higher prices that at lower prices. What is the law of supply?
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Demand is the willingness and ability to buy specific
quantities of a good or service at various prices What is
demand?
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The law of demand states that as the price of a good or service
increases, the quality demanded decreases and vice versa. Generally
consumers are happier to buy goods and services at lower prices
than at higher prices. What is the Law of Demand?
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Factors (other than the price of the good or service) which can
influence supply are called determinants and include: In cost of
production In Technology in government policy in the # of suppliers
in expectations of producers/businesses Calamity/Disaster What are
the determinants of supply?
Slide 8
Factors (other than the price of the good or service) which can
influence demand are called determinants. in consumers incomes in
consumers preferences in the prices of related goods or services
(complements or substitutes) in the number of consumers in a market
in the expectations of buyers. What are the determinants of
demand?
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Complementary good-a product that is used/consumed jointly with
another product. Ex. Creamer and coffee, hamburgers and buns These
goods usually have more value paired with its compliment than when
used separately. Substitute good- a product that satisfies the same
basic want as another product. Substitute goods maybe used in place
of one another. Flip flops and sandals, coke and pepsi
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The interaction of supply and demand determine price
Determining Price
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Equilibrium The equilibrium price of a good or service is the
one price at which quantity supplied equals quantity demanded.
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Ticos Taco Truck
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If the price is above the equilibrium price, buyers will
purchase less than is available, and suppliers will offer more,
creating a surplus. When a surplus exists, prices will decrease
until they reach the equilibrium price. If the price is below the
equilibrium price, buyers will want to buy more than is available,
and suppliers will want to supply less, creating a shortage. When a
shortage exists, buyers will bid the price up until it reaches
equilibrium price. How is Equilibrium Reached?
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When one of the determinants of demand changes, the demand
curve will shift, resulting in a new equilibrium price and
quantity. When one of the determinants of supply changes, the
supply curve will shift, resulting in a new equilibrium price and
quantity. Equilibrium For All
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Prices provide a signal to both buyers and sellers. For
example, rising oil prices provide an incentive for consumers to
drive less or buy more efficient cars and an incentive to producers
to find more oil. Rising prices for labor provide an incentive for
employers to substitute robots or other technology for labor. How
does a price change affect incentives for buyers and sellers?
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Elasticity describes the degree to which buyers and sellers
respond to price changes. The more elastic supply or demand, the
more responsive consumers and producers are to price changes (e.g.,
prices go up 10% and quantity demand goes down by 20%). The more
inelastic supply or demand, the less responsive producers are to
price changes. Price inelasticity means that consumers or producers
are not very responsive to price changes (e.g., prices go up by 10%
and quantity demanded goes down by 2%). What is elasticity?
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Determined by: Availability of the raw materials needed for
production Available production capacity Time period required to
produce more of the good or service. For example, the supply of
seats in a football stadium is fixed; thus the supply is inelastic
(higher prices offered for tickets will not produce more seats in
the short run). Video Video Elasticity of Supply
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Elastic if more people will be willing to supply the service at
a higher price. Ex: more people will be willing to mow lawns if
they get paid a lot of money Inelastic if there is an increase in
the price and the supply does not increase. Ex: an increase in the
price of strawberries, farmers cannot increase their production
immediately Supply will be
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Formula
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Typical for goods that: Are Necessary if a good is necessary
for human life, comfort or luxury then the demand is constant or
inelastic (** people will pay what they can if they need / want it)
Have No Good Substitutes has no reasonable substitutes, and/or Are
inexpensive relative to ones income (example: insulin, electricity,
salt) video Elasticity of Demand
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Elastic-% change in Q demanded is greater than the % change in
price Inelastic-% change in Q demanded is less than the % change in
price Unitary elastic-% change in Q demanded is equal to the %
change in price Perfectly elastic-% change in Q demanded is
infinite in relation to the % change in price Perfectly inelastic-
Q demanded does not change as the price changes Types of
elasticity
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% change in quantity demanded % change in price Formula
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A price ceiling sets the highest price that can be charged for
a good or service. The price is generally set below the equilibrium
price and results in a shortage. Rent control is an example of
setting a price ceiling. Some cities instituted rent controls when
housing prices were rising rapidly and current city residents could
no longer afford rent. Rent controls have resulted in a shortage of
apartments because they require owners to accept a price that is
lower than the equilibrium price. Rather than accept the low price,
owners often convert the apartments to condominiums and sell them,
thus decreasing the supply of available apartments. What are
government-enforced price ceilings ?
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A price floor sets the lowest price at which one can buy a good
or service. Price floors are generally set above the equilibrium
price and result in a surplus Milk support pricing is an example of
setting a price floor. Government wanted to be sure that dairy
farmers would be guaranteed a price high enough to keep them in
business. Since the price is higher than the equilibrium price,
consumers buy less milk and dairy farmers supply more milk,
creating a surplus of milk Video What are the effects of
government-enforced price floors?