Chapter Introduction Section 1 Demand Section 2 Factors

Chapter Introduction Section 1: Demand Section 2: Factors Affecting Demand Section 3: Supply and the Supply Curve Section 4: Demand Supply at Work Visual Summary

Two forces work together in markets to establish prices for all the goods and services we buy. They are demand— the desire, willingness, and ability to buy a good or service, and supply—the quantities of a good or service that producers are willing to sell at all possible market prices.

Section 1: Demand Supply and demand in a market interact to determine price and the quantities bought and sold. Demand is the desire, willingness, and ability to buy a good or service.

Section 2: Factors Affecting Demand Supply and demand in a market interact to determine price and the quantities bought and sold. Several factors can cause market demand for a product or service to change.

Section 3: Supply and the Supply Curve Supply and demand in a market interact to determine price and the quantities bought and sold. Supply is the willingness and ability to produce and sell a good or service.

Section 4: Demand Supply at Work Supply and demand in a market interact to determine price and the quantities bought and sold. In our economy, the forces of supply and demand work together to establish prices.

Guide to Reading Big Idea Supply and demand in a market interact to determine price and quantities bought and sold.

Guide to Reading Content Vocabulary • demand • law of demand • demand schedule • market demand • demand curve • utility • marginal utility Academic Vocabulary • identify • illustrate • likewise

Have you ever bought something just because it was cheap? A. Yes B. No A. A B. B

An Introduction to Demand is the desire, willingness, and ability to buy a good or service.

An Introduction to Demand (cont. ) • Demand is the desire, willingness, and ability to buy a good or service. • Demand schedule: – Lists how much of a product someone would be willing to buy at different prices

An Introduction to Demand (cont. ) • Demand curve: – Graph showing how much of a product would be bought at all possible prices

An Introduction to Demand (cont. ) • The law of demand – Quantity demanded and price move in opposite directions – A common sense approach to demand

Do you agree that people often wish to buy things that they are unable to purchase? A. Agree B. Disagree A. A B. B

Market Demand Market demand is the total demand of all consumers for a product or service.

Market Demand (cont. ) • Market demand is the total demand of all consumers for a product or service. • Determining market demand for an item involves research. The Law of Demand

Market Demand (cont. ) • Utility: – The pleasure a product provides – Not all objects have utility for all people

Market Demand (cont. ) • Diminishing marginal utility—product pleasure decreases with increased consumption • Explains why prices fall as consumers buy more of an item.

Do you think you would be willing to pay the same amount for a second copy of an item? A. Yes B. No A. A B. B

Guide to Reading Big Idea Supply and demand in a market interact to determine price and the quantities bought and sold.

Guide to Reading Content Vocabulary • substitute • complement • demand elasticity Academic Vocabulary • immigration • phenomenon

Do you think that people should wait a certain period of time before making a large purchase? A. Yes B. No A. A B. B

Changes in Demand Several different factors can cause market demand for a good or service to change.

Changes in Demand (cont. ) • Demand changes over time due to many forces. • Changes in demand: – More consumers enter the market – Incomes, tastes, and expectations change – Prices of related goods change – Can be shown with market demand curve

Changes in Demand (cont. ) • Changes in population: – More consumers means higher demand – Fewer consumers means lower demand – Can be affected by immigration – May also be affected by birth and death rates or migration to other areas

Changes in Demand (cont. ) • Changes in income: – High wages give people more money to spend – Low wages give people less money to spend

Changes in Demand (cont. ) • Changes in taste: – Advertising boost – Popularity fades over time

Changes in Demand (cont. ) • Changes in expectations: – Knowledge about future products – Worry about future events A Change in Demand

Changes in Demand (cont. ) • Product-Related Changes: – Changes in quality – Changes in substitutes – As price of product goes up, demand for its substitute will also go up. Change in Demand for Substitutes

Changes in Demand (cont. ) – Changes in complements (products used together) – As demand for one product goes up or down, so will demand for its complements. • Change in quantity demanded tracks the movement along a given demand curve.

Which of the following expectations would make you change your current spending habits? A. New fuel technology due in ten years B. Changes in clothing style C. An upcoming presidential election D. The release of a new video game system A. B. C. D. A B C D

Elasticity of Demand elasticity is the extent to which a change in price causes a change in the quantity demanded.

Elasticity of Demand (cont. ) • Demand elasticity is the extent to which price changes affect demand. • Causes of Elastic Demand: – Attractive substitutes – Ability to postpone purchase

Elasticity of Demand (cont. ) • Causes of Inelastic Demand: – Few or no substitutes (e. g. , medicine) • Demand for luxuries more elastic than demand for necessities

Do you agree that gasoline has an inelastic demand? A. Agree B. Disagree A. A B. B

Guide to Reading Big Idea Supply and demand in a market interact to determine price and the quantities bought and sold.

Guide to Reading Content Vocabulary • supply • market supply • law of supply • productivity • supply schedule • technology • supply curve • profit • subsidy • supply elasticity

Guide to Reading Academic Vocabulary • motive • restrict

Do you agree that producers should always provide a greater supply of a product than they think they will really need? A. Agree B. Disagree A. A B. B

An Introduction to Supply is the quantities of a good or service that producers are willing to sell at all possible market prices.

An Introduction to Supply (cont. ) • Supply is the quantity of goods and service for sale. • Supply is the opposite of demand.

An Introduction to Supply (cont. ) • The law of supply: – As prices go up, so do supplies of goods; as prices go down, so do supplies – Law illustrated by a supply schedule The Law of Supply

Do you know why diamonds, a luxury item, costs more than water, which is need for survival? A. Yes B. No A. A B. B

Graphing the Supply Curve As with the law of demand, special tables and graphs can show the law of supply.

Graphing the Supply Curve (cont. ) • Special graphs and tables can show the law of supply. • A supply curve graphically shows the amount of a product that would be supplied at all possible prices in the market.

Graphing the Supply Curve (cont. ) • Profit motive: – Pushes producers to try to make money above costs – Profits can be invested many ways: • Increase wages • Invest in business

Graphing the Supply Curve (cont. ) • Acquire more space • Buy new equipment • Hire more workers • Keep money

Graphing the Supply Curve (cont. ) • Market supply: – Slope follows individual trends – Upward slope shows that producers prefer to sell more items at higher prices – Most important influence is price

If you were a business owner, what would you do with your profits? A. Increase workers wages B. Buy more equipment C. Hire more workers D. Spend it on a personal vacation A. B. C. D. A B C D

Changes in Supply increases or decreases depending on many different factors.

Changes in Supply (cont. ) • Different factors cause increases and decreases in overall supply. • The cost of resources: – When the price of resources falls, supply goes up. – When the price of resources goes up, supply falls. Shifts in the Supply Curve

Changes in Supply (cont. ) • Productivity: – When productivity increases, costs go down. – When productivity decreases, costs go up.

Changes in Supply (cont. ) • Technology: – Can lower costs of production and increase supply

Changes in Supply (cont. ) • Government policies: – Usually restrict supply – Taxes • Higher taxes lower supply • Lower taxes increase supply

Changes in Supply (cont. ) • Subsidies: – Lower production costs • Expectations: – Producers may adjust supply to meet expected demand

Changes in Supply (cont. ) • Number of Suppliers: – More suppliers cause more supply – Fewer suppliers cause less supply

Which of the following do you think has the greatest impact on supply? A. Cost of resources B. Technology C. Expectations D. Number of suppliers A. B. C. D. A B C D

Elasticity of Supply elasticity measures how the quantity supplied of a good or service changes in response to changes in price.

Elasticity of Supply (cont. ) • Supply elasticity measures how the quantity of a good or service changes in response to price. • Depends on the speed at which producers can adjust supply to meet higher prices. – Inelastic supply cannot easily add more supply when prices are high. – Elastic supply can quickly increase production when prices go up.

Which of the following supplies would be the hardest to increase quickly? A. Beef B. Gold C. Water D. Corn A. B. C. D. A B C D

Guide to Reading Big Idea Supply and demand in a market interact to determine price and the quantities bought and sold.

Guide to Reading Content Vocabulary • surplus • price ceiling • shortage • price floor • equilibrium price • minimum wage Academic Vocabulary • mechanism • purchase • focus

Do you think an economy would work if everything cost the same price? A. Yes B. No A. A B. B

Markets and Prices The forces of supply and demand work together in markets to establish prices.

Markets and Prices (cont. ) • Supply and demand work together to establish prices. • Surplus indicates price is too high for demand. • Shortage indicates price is too low for demand. The Price Adjustment Process

Markets and Prices (cont. ) • The balance between supply and demand is equilibrium price. – Stays until supply or demand changes

Markets and Prices (cont. ) • Government control over prices: – Caused by unfair balance between supply and demand – Price ceiling—maximum price for goods and services – Price floor—minimum price that can be charged for goods and services – Minimum wage is example of price floor

Do you think the government should control prices? A. Yes B. No A. A B. B

Prices as Signals In our economy, prices are signals that help businesses and consumers make decisions.

Prices as Signals (cont. ) • Prices help businesses and consumers make decisions. • Advantages of prices: – They are neutral. – They are flexible. – They allow freedom of choice. – Opposite in command economy – They are familiar.

Are there any advantages to the lack of choice offered in command economies? A. Yes B. No A. A B. B

As the supply increases, the price decreases.

demand  the desire, willingness, and ability to buy a good or service

demand schedule  a table showing quantities demanded at different possible prices

demand curve  downward-sloping line that graphically shows the quantities demanded at each possible price

law of demand  the concept that people are normally willing to buy less of a product if the price is high and more of it if the price is low

market demand  the total demand of all consumers for a product or service

utility  the amount of satisfaction one gets from a good or service

marginal utility additional use that is derived from each unit acquired

identify  to find or show the identity of

illustrate  to show or make clear by example

likewise  similarly or in addition

substitute  a competing product that consumers can use in place of another

complement  product often used with another product

demand elasticity  measure of responsiveness relating change in quantity demanded to a change in price

immigration the arrival of people from another region

phenomenon  a rare or important fact or event

supply  the amount of goods and services that producers are able and willing to sell at various prices during a specified time period

law of supply  the principle that suppliers will normally offer more for sale at higher prices and less at lower prices

supply schedule  table showing quantities supplied at different possible prices

supply curve  upward-sloping line that graphically shows the quantities supplied at each possible price

profit  the money a business receives for its products or services over and above its costs

market supply  the total of all the supply schedules of all the businesses that provide the same good or service

productivity  the degree to which resources are being used efficiently to produce goods and services

technology  the methods or processes used to make goods and services

subsidy  a government payment to an individual, business, or group in exchange for certain actions

supply elasticity  responsiveness of quantity supplied to a change in price

motive  something that causes a person to act

restrict  to place limits on or keep within bounds

surplus  situation in which quantity supplied is greater than quantity demanded; situation in which government spends less than it collects in revenues

shortage  situation in which quantity demanded is greater than quantity supplied

equilibrium price  the price at which the amount producers are willing to supply is equal to the amount consumers are willing to buy

price ceiling maximum price that can be charged for goods and services, set by the government

price floor minimum price that can be charged for goods and services, set by the government

minimum wage lowest legal wage that can be paid to most U. S. workers

mechanism  the steps that compose a process or activity

purchase  to buy or pay for

focus  a central point of attention or activity

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