SUPPLY AND DEMAND

LAW OF DEMANDPRICES CHANGE AND PEOPLE BUY MORE OR LESS OF A PRODUCT.

MUST BE WILLING AND ABLE TO BUY

DIMINISHING MARGINAL UTILITY

UTILITY = SATISFACTIONBUYING STOPS WHEN PRICE > UTILITY

THE DEMAND CURVE

AS PRICE GOES UP, QUANTITY DEMANDED GOES DOWN

Demand Curve

3.00

2.50

2.00

1.50

1.00

.50

0

0 50 100 150 200 250 300 350

Slices of pizza per day

Pri

ce p

er s

lic

e (i

n d

oll

ars)

DEMAND PRACTICEA LOCAL VIDEO STORE BEGINS TODROP ITS PRICES. WHEN DVD’S

RENT FOR $4.00 APIECE, THE STORE RENTS 200 IN A WEEKEND. FOR EVERY $0.50 THE PRICE DROPS, THE STORE RENTS 25 MORE DVD’S. DRAW A SCHEDULE AND CURVE ILLUSTRATING THIS.

SHIFT OF THE CURVE

CETERIS PARIBUSSUBSTITUTESCOMPLEMENTARY GOODSPOPULATION

DEMAND CURVE SHIFTSCONSUMER TASTES AND ADVERTISING

INCOME (NORMAL GOODS VS. INFERIOR GOODS)

ELASTICITY

RESPONSIVENESS OF CONSUMERS TO PRICE CHANGE.

DETERMINANTS OF ELASTICITYSUBSTITUTESPERCENTAGE OF BUDGETTIME TO ADJUST TO PRICE CHANGE

NECESSITY V. LUXURY

FIGURING ELASTICITY

ELASTICITY = % CHANGE IN QTY. DEMANDED

% CHANGE IN PRICE

ELASTICITY OF DEMANDYES = ELASTICNO= INELASTIC CORN GAS INSULIN

DELAY PURCHASE?SUBS?

BIG % OF INCOME?

LAW OF SUPPLYAS THE PRICE RISES FOR A GOOD, QUANTITY SUPPLIED RISES

PROFIT INCENTIVE

HIGHER PRICES MAKE US WANT TO SELL MORE!

PRODUCTION COSTSFIXED COSTSVARIABLE COSTSTOTAL COSTSMARGINAL COST

LAW OF DIMINISHING MARGINAL RETURNS

MARGINAL PRODUCT OF LABOR

DECIDING OUTPUTPROFIT= REVENUE – COSTMARGINAL REVENUE = MARGINAL COST

SHUT DOWN DECISIONREVENUE<VARIABLE COST

Market Supply Curve

Pri

ce

(in

do

lla

rs)

Output (slices per day)

3.00

2.50

2.00

1.50

1.00

.50

0

0 500 1000 1500 2000 2500 3000 3500

Supply

ELASTICITY OF SUPPLY

LESS TIME = LESS ELASTIC

SUPPLY CURVE SHIFTSPRICE OF INPUTSTECHNOLOGYNUMBER OF FIRMS

SUPPLY CURVE SHIFTSGOVERNMENT INFLUENCE FUTURE PRICE EXPECTATION

IMPORT RESTRICTIONS

A local shoe factory produces 100 pairs of shoes each week, which sell for $20 a pair. Demand is high, and as the price rises, the factory produces 25 more pairs for every $5 increase. Draw a supply schedule and curve illustrating this.

SUPPLY CURVE PRACTICE

$800

$600

$400

$200

0Pri

ce

QUANTITY

EQUILIBRIUM POINT

1 2 3 4 5

supply

Demand

E

CHANGE IN EQUILIBRIUMP

ric

e

QUANTITY

EQUILIBRIUM POINT

1 2 3 4 5

supply

Demand

E

$10

$8

$6

$4

New demand

c

b

E2

SHORTAGE: SUPPLY<DEMAND

SURPLUS: SUPPLY>DEMAND

GOVERNMENT INTERVENTIONPRICE CEILINGS

RENT CONTROLPRICE FLOOR

MINIMUM WAGE

PRICES IN THE FREE MARKET

INCENTIVESSIGNALSFLEXIBILITYPROFIT INCENTIVE