Unit Three

ECONOMICS

Demand and

Supply

PA Standards

6.2.12E; 6.2.12.G; 6.3.12.D; 6.3.12.E; 6.3.12.F

DEMANDAmount of a good or

service that a consumer is willing and able to buy at

various possible prices during a given time

period.

willing and able

QUANTITY DEMANDED Amount of a good or

service that a consumer is willing and able to buy at

each particular price during a given time

period.

each particular price

The Law of DemandAn increase in a good’s

price causes a decrease in the

quantity demanded; a decrease causes an

increase.

1. Income EffectPurchasing power

refers to the amount of money

people have to spend on goods

and services

1. Income Effect

Income Effect refers to the increase or decrease in

purchasing power caused by a

change in price

2. Substitution Effect

Tendency of consumers to

substitute a similar, lower-priced

product for another product that is

more expensive

Substitute Goods replace a more expensive, or

brand-name good

Complementary Goods are

commonly used with other goods

Product Substitute Good Complementary Good

Butter Margarine Bread

Steak Hamburger A-1

Digital CameraDisposable

CamBatteries

3. Diminishing Marginal Utility

Decrease in the utility (usefulness) of a good as more

units are consumed

(usefulness)

Demand Schedule

A list of the quantity of goods that

consumers are willing and able to buy at a series of possible prices

Demand CurveA graph which plots the information from a demand schedule;

it shows the relationship between

price & demand

Determinantsof Demand

Non-price factors that influence the amount of demand for a good

or service

Determinants of Demand

Consumer Tastes and Preferences

Consumer Expectations

Determinants of Demand

Market Size

-- decisions by private businesses-- government

policy-- new technology

Determinants of Demand

Income

-- generally, as income rises, so does demand-- income relates to purchasing power

Determinants of Demand

Prices of Related Goods-- ?? Substitutes ??

-- ?? Complements ??

Elasticityof Demand

The degree to which changes in a good’s

price affect the quantity demanded

by consumers

Elastic Demand

A small change in a good’s price causes a

major, opposite change in the

quantity demanded.

Elastic Demand

Elasticity of demand if…

…the product is not a necessity

Elastic Demand

Elasticity of demand if…

…there are readily available substitutes

Elastic Demand

Elasticity of demand if……the product’s cost

represents a large portion of consumers’

incomes

Inelastic Demand

A change in a good’s price has little impact

on the quantity demanded.

Inelastic Demand

Inelasticity of demand if…

…the product is a necessity

Inelastic Demand

Inelasticity of demand if…

…there are few or no readily available

substitutes

Inelastic Demand

Inelasticity of demand if……the product’s cost

represents a small portion of consumers’

incomes

Elasticity for a product varies

depending on the specificity of the

market—you can look at the big picture

(general market) or the close-up picture

(specific market)

The more time that passes following a price change, the

more elastic a product’s demand

becomes

Measuring Elasticity

Total Revenue (total receipts) is the total

income that a business receives from selling its

products

Total Revenue & Elastic Demand

A drop in a company’s total

revenue from a price increase indicates

elastic demand for a product.

Total Revenue & Inelastic Demand

An increase in a company’s total revenue

because of a price increase indicates

inelastic demand for the product.

To maximize revenue, the seller must

determine at what point pricing choice brings the highest

revenue

SUPPLY

The quantity of goods and services that

producers are willing to offer at various possible

prices during a given time period.

QUANTITY SUPPLIED

The amount of a good or service that a producer is willing to sell at each

particular price.

Producers supply more goods and services

when they can sell them at higher prices and

fewer goods and services when they must

sell them at lower prices.

Law of Supply

Profit

Amount of money remaining after

producers have paid costs

Costs of Production

Business expenses involved in the

manufacture of a product

Profit influences specific and general

markets--new manufacturers will enter a profitable market; current

manufacturers will increase production

A list of each quantity of a product that producers are willing to supply at

various market prices

Supply Schedule

Supply CurveIt plots on a graph

the relationship between a good or

service and the quantity supplied

ElasticityOf Supply

The degree to which price changes affect the quantity supplied

Elastic Supply

A small change in price causes a major change in

the quantity supplied

Elastic Supply

Elastic supply if…

…the product can be produced quickly

Elastic Supply

Elastic supply if…

…the product can be produced

inexpensively

Elastic Supply

Elastic supply if…

…production uses few, readily available

resources

Inelastic Supply

When a good’s price has little impact on

the quantity supplied

Inelastic Supply

Inelastic supply if…

…the product is expensive to produce

…the product requires time to be

produced

Inelastic Supply

Inelastic supply if…

…production uses resources not readily

available

Determinantsof Supply

Non-price factors that move the entire

supply curve

Determinants of Supply

Prices of Resources

Competition

Technology

Determinants of Supply

Producer Expectations

Government Action--tax

--subsidy--

regulation

Making Production DecisionsProductivity

The amount of a good or service produced

per unit of input

Total Product

All of the product a company makes in a

given period of time—with a given amount of

input

Marginal Product

Change in output generated by adding

one more unit of input

Law of Diminishing ReturnsAs more of one input is

added to a fixed supply of other resources,

productivity increases up to a point, but at some point marginal product will diminish.

Increasing Marginal Returns

Stage of production when addition of units raises

returns.

More workers, more product

DiminishingMarginal Returns

Stage of production when addition of units

reduces returns.More workers, declining marginal product

NegativeMarginal Returns

Stage of production when addition of units

lowers returns.More workers, negative marginal product

Costs of Production

Costs that do not change as the level of

output changes

Fixed Costs

depreciation

overhead

Costs of Production

Costs that change as the level of output changes

Variable Costs

Costs of Production

Sum of fixed and variable costs

Total Costs

Costs of Production

Additional costs of producing one

more unit of product

Marginal Costs

End of Chapters 3 & 4