Download - Chapter 4,5,6,7
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.