!!Private Ownership!! Market Allocation!

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1 Capitalism Private Ownership Market Allocation Laws of Supply and DEMAND Demand- amount of a good or service a consumer is willing and able to pay at various prices during a given period of time. Two important aspects Willing and Able to pay Assume all other things equal (Ceteris Paribus)

2 Ex. Shopping for a new Car

3 Demand Schedule -table showing the amount of a good or service that people will buy at various prices.

4 Demand Curve -A graph that shows how demand for a good or service increases or decreases at various prices. (a graph of the demand schedule)

5 The law of Demand (the inverse relationship of price and quantity demanded) -any increase in price will cause the amount demanded to decrease or if price decreases the amount demanded increases. -negative slope=inverse relationship -X is the dependent variable and Y is the independent variable

6 Three concepts used to explain law of Demand 1. Income Effect -The increase or decrease in purchasing power brought on by changes in price is called income effect. Ex. gas

7 2. Substitute Effect -The tendency to purchase substitutes (generics) as the price of other expensive products rises. Ex. Breakfast Cereal

8 3. Diminishing Marginal Utility -as utility declines, demand declines and consumer will only buy when price is reduced (Utility - satisfaction received from consumption) -as more units of a good or service are consumed, the utility received from consuming each additional unit declines. (amount of satisfaction received from consuming a product affects the quantity demanded) ex. water slide

9 Individual Demand vs. Market Demand the market demand curve is derived by adding together the quantities demanded by all consumers at each and every possible price.

10 Elasticity Price Changes Affect Quantity Demanded Differently for Different Products - the degree to which price affects quantity demanded is known as elasticity Elastic -exists when a small increase in price leads to major decreases in quantity demanded.

11 Inelastic -exists when a change in price has little impact on quantity demanded.

12 Factors to consider when assessing good s or service s elasticity. 1. Number of Substitutes available

13 2. Price relative to income - any change in income or price may affect ones ability to demand a product ex. An increase in your cable bill by $40.00

14 3. Necessity vs. Luxury

15 4. Urgency of Purchase

16 Price Elasticities of Demand Good or Service Elasticity Elastic Demand Metals 1.52 Electrical engineering products 1.39 Mechanical engineering products 1.30 Furniture 1.26 Motor vehicles 1.14 Instrument engineering products 1.10 Professional services 1.09 Transportation services 1.03 Inelastic Demand Gas, electricity, and water 0.92 Oil 0.91 Chemicals 0.89 Beverages (all types) 0.78 Clothing 0.64 Tobacco 0.61 Banking and Insurance services 0.56 Housing services 0.55 Agricultural and fish products 0.42 Books, magazines and newspapers 0.34 Food 0.12

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18 What product or service might exemplify this situation?

19 What product or service might exemplify this situation?

20 NON PRICE Determinants of Demand (things that cause the demand curve to shift) 1. Taste and Preference -development of better technology or changes in personal taste affect demand. Ex. Ipods Ex. Iphone

21 2. Market Size -Number of buyers in the market Ex. opening of Trade with China Ex. compliance with Gov t TV standards (HDTV) Ex. bird flu Ex. prohibition

22 3. Income -any increase in income causes demand to shift Normal vs. Inferior good? Ex. Charcoal vs. Gas Grill, Hamburger vs. Steak

23 4. Price of Related Goods Ex. Butter vs. Margarine (an increase in the price of butter) Complimentary vs. Substitute goods Compliments Substitutes Price Cookies Price gold n plump Chicken Demand Milk Demand Turkey

24 5. Consumer Expectations Ex. New contract settlement (demand for new pool) Ex. Rise in Mortgage Rates Ex. Income tax return