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Supply and Demand

Demand Is the desire to own something and the ability to pay for it. l Law of demand: Consumers buy more of a good when its price decreases and less when its price increases. Would you buy a slice of pizza for lunch if it cost \$1? (Would you buy more than one? ) Would you buy a slice of pizza for lunch if it cost \$5? As the price of pizza gets higher fewer of us are willing to buy it. l

The substitution effect l When the price of pizza rises, pizza becomes more expensive compared to other foods such as tacos. l So as the price of a slice of pizza rises, consumers become more and more likely to buy one of the alternatives as a substitute for pizza. l This causes a drop in the amount of pizza demanded.

The Income Effect l l When the price of pizza (movie tickets, shoes, DVDs) increases your limited budget just wonted buy as much as we used to. Economists measure consumption in the amount of a good bought, not the amount of money spent to buy it. Although people spend more of their money on pizza when the price goes up, the quantity demanded goes down. Also, if the price of the pizza falls you all of a sudden feel wealthier, as a result you buy more pizza.

Demand Schedule l The law of demand explains how the price of any item affects the quantity demanded of that item. l A demand schedule is a table that lists the quantity of a good that a person will purchase at each price in the market.

Price Elasticity l l Elastic: Change in price of an article causes the change in number of people who wish to buy the product (Wii, dvd) Inelastic: Change in price doesn’t result in the change in the number of buyers (gasoline and milk). Two reasons for elastic or inelastic: percentage of income spent on an item when money spent on an item is small in relation to total expenditures the demand is usually inelastic. Whether or not there is a substitute available. Lack of substitute means inelastic demand.

Demand Curve Shifts l Because of changes in factors other than price: Income, increase in demand, decrease in demand, consumer expectations, population, consumer tastes and advertising. l Movement on the demand curve means there is change in the quantity demanded in an item (think back to pizza example).

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Diminishing Marginal Utility l Selecting from alternative ways of spending their income. Consumers try to get the most satisfactory combination of goods and services. l Marginal Utility: extra usefulness or satisfaction a person gets from acquiring one more unite of a product. l Example: how much satisfaction would you get from a single glass of ice-cold lemonade when it was 110 degrees.

What is supply? Supply: may be defined as a schedule of quantities that would be offered for sale at all possible prices that could prevail in the market. l Supply schedule: tells the quantities offered at each and every possible market price. l Supply Curve: Slopes upward and to the right to reflect the tendency of supplies to offered greater quantities for sale at higher prices. It is the opposite of the demand curve. l

Law of Supply The law states that the quantity supplied varies directly with its price. l If the price is high, suppliers will offer greater quantities for sale. l Change in quantity supplied: Is the change in the amount offered for sale response to a change in price. l l Ex: 350 t-shirts are supplied when the price is \$30 each, if the price decreases to \$24, then 300 t-shirts are supplied. If the price changes to 21, 240 t-shirts are supplied.

Reasons for Change in Supply l Cost of inputs l Productivity l Technology l Number of sellers l Taxes and Subsidies l Expectations l Governmental Regulations

Comparing Demand Supply Activity l If quantities are being purchases the concept is demand elasticity. If quantities are being brought to market for sale, the concept is supply elasticity.

Three Stages of Production l Increasing Returns: first five workers, each worker producing more than the previous. l Diminishing Returns: Total production keeps groups growing but in smaller amounts. l Negative Returns: Too many workers have been hired and they get in each other’s way.

Diminishing Marginal Utility l Whatever amount you get is the marginal utility of that particular glass of lemonade. l The lemonade example illustrates the principle of diminishing of marginal utility. The principle states that the more units of a certain economic product a person acquires the less eager that person is to buy more.