Economics Chapter 7 Supply and Demand Section

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 prices in terms of how much they can purchase. § Demand in economics, the different amounts we will purchase at various prices.

Factors in purchasing § Diminishing Marginal Utility § Utility, the power that a good or service has to satisfy a want. § Law of diminishing marginal utility, You get more satisfaction from each additional purchase of an item, but the utility will diminish for each additional unit. § One candy bar is great, two are better, three is good, four is too much for that price.

Factors continued § Real Income Effect § No one will be able to buy everything they want. § Real Income Effect, people can not keep buying the same amount of a product if the price rises. § This can work in reverse also, the price declines, your real income increases.

Factors continued § Substitution Effect § Substitute, two items that are not exactly the same but satisfy the same need. § If the price of one drops people will purchase, substitute, that item. § Example, butter and margarine

Section 2: The Demand Curve and the Elasticity of Demand § As the price goes down, the demand goes up. § Quantity demanded is usually measured by the year. § Assume a constant-quality unit. § If demand increases, the curve shifts to the right.

Price elasticity of demand § Elasticity is how responsive consumers are to price changes on given items. § Elastic Demand, price changes greatly affect the amount bought. A brand of coffee, rise in price makes consumers go to a substitute. § Inelastic demand, price change does not affect substantially. Electricity, salt

3 factors in elacticity § 1. The existence of substitutes. § 2. The percentage of a person’s total budget devoted to the purchase of that good. § 3. How much time we allow for the consumer to adjust to the change in price.

Determinants of Demand § § Changes in population and income. Changes in taste. Substitutes available. The use of complimentary goods. § More bread bought = more butter sold.

Section 3: the Law of Supply and the Supply curve § The willingness and ability of producers to provide goods and services at different prices. § As price rises, the quantity supplied rises. § Profit drives this concept.

The Law of diminishing returns § After some point, when adding additional units to the factors of production, there will be a decrease in the amount of units per factor. § Example, hiring workers to the point of more workers versus machines. Less output.

The Supply Curve § The supply curve works exactly opposite of the demand curve. § On a graph, the curve rises as you go left to right. § Higher cost = more supply.

The determinants of Supply. § 1. The price of inputs, if the price of inputs drops, more can be produced at the same price, ( shift to the left on the curve). § 2. Technology § 3. Taxes § 4. Number of firms in the industry.

Section 4: Putting Supply and demand together § Equilibrium price- The price of any good or service will find the level at which the quantity demanded and the quantity supplied are balanced. § Shortage, The quantity demanded is higher than the quantity supplied. The price is below the equilibrium price (EP). § Surpluses occur when more is produced than demanded, above the EP.

Section 4 § Market forces take care of shortages and surpluses when no government is involved § Price controls- Government § Price ceilings § Rationing § Black Market § Price Floors