Teach a parrot the terms "supply and demand" and you've got an economist.”-

Thomas Carlyle

MicroeconomicsLooks at how individuals and small

companies act and make decisions.

DemandDemand is the different amounts people will

purchase at all prices.

There are three elements needed in order for demand to take place:A person must want to purchase the product.A person must have the money or ability to

purchase the product.A person must be willing to spend money on

the product.

Demand ScheduleDemand schedules show prices and quantities

demanded at each price.

Price Number of drinks demanded

$.50 1,000

$.75 800

$1.00 600

$1.25 400

$1.50 200

Demand CurvesIllustrates the information contained in the

demand schedule.Demand curves slope downward from left to

right.Demand curves show the quantity demanded

for a certain product by an individual.Market Demand curves show the quantity

demanded for everyone interested in buying the product.

Law of DemandAn Economic principle that states as the

price drops consumers purchase more, as the price rises, consumers purchase less.

Change in Quantity DemandedA change in quantity demanded occurs when

there is a change in price. The demand curve does not move, the

amount demanded moves along the demand curve.

Change in quantity demandedThere are two basic causes for a change in

quantity demanded:

1.Income Effect-a change in price that alters real income. Example:

2.Substitution Effect-relative price of the product. Example:

Change in DemandSometimes something other than price causes

demand as a whole to increase or decrease.A change in demand results in a new demand

curve shifted right or left. shift to right demand increases

shift to left demand decreases

D3 D1 D2

Five factors affect product demand1. Consumer income

normal vs. inferior goods2. Consumer tastes3. Substitute /complimentary goods4. Change in expectations5. Number of consumers

Utility/marginal utilityWhen a person purchases a product, the person

thinks about how much use or satisfaction (utility) he/she will get out of the product.

Marginal Utility-extra usefulness satisfaction one gets from one more unit of the good. Example:

Diminishing marginal Utility-the more units of a good one has, the less eager they are to buy more. Example:

Elasticity-The measure of how much a change in the price will affect how much a person will purchase.

Elastic Demand-a small change in price causes a large demand change.Example:Inelastic Demand-people want the same amount at higher or lower prices.Example:

.

Determinants of Demand ElasticityCan the purchase be delayed? Is it necessary

right now?

Are substitutes available?

Is a large portion of income used?

Exceptions to the Law of DemandParadoxical DemandConsumers demand

more when its price rises, and lower in demand when the price falls.

This applies to consumer who consider the good “essential.”

As its price increases, the consumers have to spend a greater portion of their income to maintain the same level of consumption. Since they cannot now afford the more expensive substitutes, they end up buying more of the same good. The opposite happens when its price falls

Exceptions to the Law of DemandPersonalization Fallacy—Someone will

purchase the items even if you won’t.

Time Period MisunderstandingItems were

cheaper in 1970 than today. But, you must compare the percent of income spent on the item or convert to current dollars.

Cost of a new home:  $26,600.00 

  Median Household Income:  $8,734.00 

Cost of a first-class stamp:  $0.06 

Adjusted for inflation-$.33

Cost of a gallon of regular gas:  $0.36

Adjusted for inflation-$1.98

 Cost of a dozen eggs:  $0.62 

Adjusted for inflation -$3.40

Cost of a gallon of Milk:  1.15 

Adjusted for inflation-$3.41

Exceptions to the Law of DemandPrestige purchases

Demand stays the same no matter what the price. These items are rarely if ever on sale.

Example: Rolex Watches

Say’s Law

Say's law states that supply creates its own demand and over-production is impossible.

SupplySupply is the amount of a product produced at

all prices.

We are now shifting focus and looking at the producers or the supply side of the economy.

Law of SupplyA microeconomic law stating that, all other factors being

equal, as the price of a good or service increases, the quantity of goods or services offered by suppliers increases and vice versa.

Producers supply more at a higher price because selling a higher quantity at a higher price increases revenue.

Time is a factor. So it is important to try and determine whether a price change that is caused by demand will be temporary or permanent.

Supply ScheduleA Supply

Schedule is a list of different amounts of a product that the manufacturer supplies at all prices that are possible.

Price Number of drinks supplied

$.50 200

$.75 400

$1.00 600

$1.25 800

$1.50 1000

Supply CurveA supply curve is a graphic

representation of supply.

Supply curves slope upward from left to right.

Supply CurveS1

Change in Quantity SuppliedThis occurs when a change in price brings a

change in the quantity offered for sale.The supply curve does not move, the price

changes along the curve.

Change in supplyThis occurs when the supply curve shifts left or

right.

S3 S1 S2

Factors causing a change in supply1. Cost of imputs(materials)-changes in cost of

land, labor and capital.2. Productivity of workers --are workers

happy or unhappy?3. Technology-new technology increases

production.4. Number of sellers

1. More increase supply2. Less decrease supply

Factors causing a change in supply5. Taxes and subsidies-money is diverted to

taxes can increase or decrease supply.6. Expectations-companies stockpile goods,

can increase prices. Sudden demand can decrease supply and cause shortages.

7. Government regulations-more regulations can decrease supply as time/money is diverted to meet regulatory requirements.

8. Unforseen or acts of nature-hurricanes, fire, flooding, war can impact supply. These are beyond the control of business.

Elasticity of SupplyElasticity measures how quantity supplied

responds to small price changes.

Elastic supply-producers can increase output without a rise in cost or a time delay

Inelastic-firms find it hard to change production in a given time period

Elasticity of SupplyStocks in a warehouse –

businesses with plentiful stocks can supply quickly and easily onto the market when demand changes

An empty restaurant – plenty of spare

capacity to meet any rise in demand!

Supply and DemandPrice Number of drinks

demandedNumber of drinks supplied

$.50 1,000 200

$.75 800 400

$1.00 600 600

$1.25 400 800

$1.50 200 1,000

Supply and Demand determine pricesMarket Equilibrium is the

situation where quantity demanded=quantity supplied.

Shortages occur when quantity supplied is less than quantity demanded.

Surpluses occur when quantity supplied is greater than quantity demanded.

The equilibrium or market clearing price reflects neither a surplus or shortage.

Market equilibrium

Theory of ProductionTheory of production relates the factors of

production to goods and services produced.

Short Run-brief production period. Example: Easter Candy production

Long Run-long enough to adjust to resource availability.

Example: Imported raw materials for chocolate is more expensive for Hershey.

Business CostsFixed costs are what a

business has to pay monthly, ususally the fluctuate very little monthly

Examples include rent.

Variable costs can change monthly.

Examples include utilities, raw materials, shipping costs.

Business CostsExpansion costs change

as the amount of locations increase.

Example- a factory expansion to another city.

Sunk costs are unrecoverable past expenditures.

Example-new computer software, new computers.

E-commerceDoing business over the

internet creates lower fixed costs for businesses.

This does not mean that all costs are cheaper.

Break even pointTotal revenue(TR)=total costs(TC)

The point above the break even point is when a business will start to show a profit.

Prices as signalsPrice is the value of a

product in money. Prices are flexible as they react to the market.

Rationing is an alternative to pricing. Persons receive coupons for a set amount of a good.

A rebate is a price reduction in the form of a coupon, refund of purchase price.

PricingPrice Ceiling is the maximum legal price.

Price Floor is the lowest legal price.

Loss Leader is an item priced below cost to attract customers.

Target price is a price floor for farm products.

Review--Supply and demand

Shifting curves

Market equilibrium