economics chapter 7 supply and demand. section 1: demand activity in the market based on voluntary...

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Economics Chapter Economics Chapter 7 7 Supply and Demand Supply and Demand

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Page 1: Economics Chapter 7 Supply and Demand. Section 1: Demand  Activity in the market based on voluntary exchange.  Law of demand, how people react to changing

Economics Chapter Economics Chapter 77Supply and DemandSupply and Demand

Page 2: Economics Chapter 7 Supply and Demand. Section 1: Demand  Activity in the market based on voluntary exchange.  Law of demand, how people react to changing

Section 1: DemandSection 1: Demand

Activity in the market based on Activity in the market based on voluntary voluntary exchange.exchange.

Law of demandLaw of demand, how people react to , how people react to changing prices in terms of how much changing prices in terms of how much they can purchase.they can purchase.

DemandDemand in economics, the different in economics, the different amounts we will purchase at various amounts we will purchase at various prices.prices.

Page 3: Economics Chapter 7 Supply and Demand. Section 1: Demand  Activity in the market based on voluntary exchange.  Law of demand, how people react to changing

Factors in purchasingFactors in purchasing

Diminishing Marginal UtilityDiminishing Marginal Utility UtilityUtility, the power that a good or service has , the power that a good or service has

to satisfy a want.to satisfy a want. Law of diminishing marginal utilityLaw of diminishing marginal utility, You , You

get more satisfaction from each additional get more satisfaction from each additional purchase of an item, but the utility will purchase of an item, but the utility will diminish for each additional unit.diminish for each additional unit.

One candy bar is great, two are better, three One candy bar is great, two are better, three is good, four is too much for that price.is good, four is too much for that price.

Page 4: Economics Chapter 7 Supply and Demand. Section 1: Demand  Activity in the market based on voluntary exchange.  Law of demand, how people react to changing

Factors continuedFactors continued

Real Income EffectReal Income Effect No one will be able to buy everything they No one will be able to buy everything they

want.want. Real Income EffectReal Income Effect, people can not keep , people can not keep

buying the same amount of a product if the buying the same amount of a product if the price rises.price rises.

This can work in reverse also, the price This can work in reverse also, the price declines, your real income increases. declines, your real income increases.

Page 5: Economics Chapter 7 Supply and Demand. Section 1: Demand  Activity in the market based on voluntary exchange.  Law of demand, how people react to changing

Factors continuedFactors continued

Substitution EffectSubstitution Effect SubstituteSubstitute, two items that are not exactly , two items that are not exactly

the same but satisfy the same need.the same but satisfy the same need. If the price of one drops people will If the price of one drops people will

purchase, substitute, that item.purchase, substitute, that item. Example, butter and margarineExample, butter and margarine

Page 6: Economics Chapter 7 Supply and Demand. Section 1: Demand  Activity in the market based on voluntary exchange.  Law of demand, how people react to changing

Section 2: The Demand Section 2: The Demand Curve and the Elasticity of Curve and the Elasticity of DemandDemand

As the price goes down, the demand As the price goes down, the demand goes up.goes up.

Quantity demanded is usually measured Quantity demanded is usually measured by the year.by the year.

Assume a constant-quality unit.Assume a constant-quality unit. If demand increases, the curve shifts to If demand increases, the curve shifts to

the right. the right.

Page 7: Economics Chapter 7 Supply and Demand. Section 1: Demand  Activity in the market based on voluntary exchange.  Law of demand, how people react to changing

Price elasticity of Price elasticity of demanddemand

Elasticity is how responsive consumers Elasticity is how responsive consumers are to price changes on given items.are to price changes on given items.

Elastic Demand, price changes greatly Elastic Demand, price changes greatly affect the amount bought. A brand of affect the amount bought. A brand of coffee, rise in price makes consumers go coffee, rise in price makes consumers go to a substitute.to a substitute.

Inelastic demand, price change does not Inelastic demand, price change does not affect substantially. Electricity, saltaffect substantially. Electricity, salt

Page 8: Economics Chapter 7 Supply and Demand. Section 1: Demand  Activity in the market based on voluntary exchange.  Law of demand, how people react to changing

3 factors in elacticity3 factors in elacticity

1. The existence of substitutes.1. The existence of substitutes. 2. The percentage of a person’s total 2. The percentage of a person’s total

budget devoted to the purchase of that budget devoted to the purchase of that good.good.

3. How much time we allow for the 3. How much time we allow for the consumer to adjust to the change in consumer to adjust to the change in price.price.

Page 9: Economics Chapter 7 Supply and Demand. Section 1: Demand  Activity in the market based on voluntary exchange.  Law of demand, how people react to changing

Determinants of DemandDeterminants of Demand

Changes in population and income.Changes in population and income. Changes in taste.Changes in taste. Substitutes available.Substitutes available. The use of complimentary goods.The use of complimentary goods.

More bread bought = more butter sold.More bread bought = more butter sold.

Page 10: Economics Chapter 7 Supply and Demand. Section 1: Demand  Activity in the market based on voluntary exchange.  Law of demand, how people react to changing

Section 3: the Law of Supply Section 3: the Law of Supply and the Supply curveand the Supply curve

The willingness and ability of The willingness and ability of producers to provide goods and producers to provide goods and services at different prices.services at different prices.

As price rises, the quantity As price rises, the quantity supplied rises.supplied rises.

Profit drives this concept.Profit drives this concept.

Page 11: Economics Chapter 7 Supply and Demand. Section 1: Demand  Activity in the market based on voluntary exchange.  Law of demand, how people react to changing

The Law of diminishing The Law of diminishing returnsreturns

After some point, when adding After some point, when adding additional units to the factors of additional units to the factors of production, there will be a decrease in production, there will be a decrease in the amount of units per factor.the amount of units per factor.

Example, hiring workers to the point of Example, hiring workers to the point of more workers versus machines. Less more workers versus machines. Less output.output.

Page 12: Economics Chapter 7 Supply and Demand. Section 1: Demand  Activity in the market based on voluntary exchange.  Law of demand, how people react to changing

The Supply CurveThe Supply Curve

The supply curve works exactly opposite The supply curve works exactly opposite of the demand curve.of the demand curve.

On a graph, the curve rises as you go left On a graph, the curve rises as you go left to right.to right.

Higher cost = more supply.Higher cost = more supply.

Page 13: Economics Chapter 7 Supply and Demand. Section 1: Demand  Activity in the market based on voluntary exchange.  Law of demand, how people react to changing

The determinants of The determinants of Supply.Supply.

1. 1. The price of inputsThe price of inputs, if the price of inputs , if the price of inputs drops, more can be produced at the same drops, more can be produced at the same price, ( shift to the left on the curve).price, ( shift to the left on the curve).

2. 2. Technology Technology 3. 3. TaxesTaxes 4. Number of firms in the industry4. Number of firms in the industry..

Page 14: Economics Chapter 7 Supply and Demand. Section 1: Demand  Activity in the market based on voluntary exchange.  Law of demand, how people react to changing

Section 4: Putting Supply Section 4: Putting Supply and demand togetherand demand together

Equilibrium price-Equilibrium price- The price of any good or The price of any good or service will find the level at which the quantity service will find the level at which the quantity demanded and the quantity supplied are demanded and the quantity supplied are balanced.balanced.

ShortageShortage, The quantity demanded is higher , The quantity demanded is higher than the quantity supplied. The price is below than the quantity supplied. The price is below the equilibrium price (EP).the equilibrium price (EP).

SurplusesSurpluses occur when more is produced than occur when more is produced than demanded, above the EP.demanded, above the EP.

Page 15: Economics Chapter 7 Supply and Demand. Section 1: Demand  Activity in the market based on voluntary exchange.  Law of demand, how people react to changing

Section 4Section 4

Market forces take care of shortages and Market forces take care of shortages and surpluses when no government is surpluses when no government is involvedinvolved

Price controls- GovernmentPrice controls- Government Price ceilingsPrice ceilings

RationingRationing Black MarketBlack Market

Price FloorsPrice Floors