WHAT IS DEMAND? CHAPTER 4.1

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1 Economics Unit 2 TEACHER WHAT IS DEMAND? CHAPTER 4.1 What is demand? THE DESIRE, ABILITY, AND WILLINGNESS TO BUY A PRODUCT. What is microeconomics? THE AREA OF ECONOMICS THAT DEALS WITH BEHAVIOR AND DECISION MAKING BY SMALL UNITS SUCH AS INDIVIDUALS AND FIRMS. The Individual Demand Curve What is a demand curve? A GRAPH SHOWING THE QUANTITY DEMANDED AT EACH AND EVERY PRICE THAT MIGHT PREVAIL IN THE MARKET. THE LAW OF DEMAND Explain the Law of Demand. When the price goes up, the quantity demanded for a product goes DOWN. When the price goes down, the quantity demanded for a product goes UP. DIMINISHING MARGINAL UTILITY Marginal utility is the EXTRA USEFULNESS or SATISFACTION a person gets from acquiring one more unit of a product. Marginal utility is the amount of UTILITY (OR SATISFACTION) added at the margin. Diminishing marginal utility states that the MORE units of a certain economic product a person acquires, the LESS eager that person is to buy more. FACTORS AFFECTING DEMAND CHAPTER 4.2 CHANGE IN QUANTITY DEMANDED Movement along the demand curve shows a change in quantity demanded. In other words, the MORE a product costs, the LESS people are willing to buy. The Income Effect What is the income effect? The change in QUANTITY DEMANDED because of a change in the consumer s REAL INCOME when the price of a commodity changes. In other words, consumers will spend LESS money on the same quantity, making them feel RICHER. 1

2 CHANGE IN DEMAND A change in demand means people are now willing to buy DIFFERENT amounts of the product at the SAME prices. As a result, the entire demand curve shifts to the RIGHT to show an INCREASE in demand or to the LEFT to show a decrease in demand for the product. This results in an entirely new demand curve. Consumer Income Income goes UP = buy MORE = Demand curve shifts to the RIGHT. Income goes DOWN = buy LESS = Demand curve shifts to the LEFT. Consumer Tastes (ADVERTISING, NEWS REPORTS, TRENDS, SEASONS) Want MORE = buy MORE = Demand curve shifts to the RIGHT. Want LESS = buy LESS.= Demand curve shifts to the LEFT. Substitutes PRODUCTS THAT CAN BE USED IN PLACE OF OTHER PRODUCTS. BUTTER AND MARGARINE An increase in the price of BUTTER could cause the demand for MARGARINE to increase. Complements GOODS WHERE USE OF ONE INCREASES USE OF OTHER. FLASHLIGHTS AND BATTERIES Decrease in price of FLASHLIGHTS = more BATTERIES sold. Demand curve shifts to the RIGHT. Change in Expectations You EXPECT THE PRICE of a product to go UP in the future = buy more now. Shift to the right. You EXPECT THE PRICE of a product to go DOWN in the future = buy less now. Shift to the left. Number of Consumers If the number of consumers increases, that is good. Demand curve shifts to the right. If the number of consumers decreases, that is bad. Demand curve shifts to the left. ELASTICITY OF DEMAND CHAPTER 4.3 DEMAND ELASTICITY Demand elasticity is a term used to indicate the extent to which changes in PRICE cause changes in the QUANTITY DEMANDED. Elastic Demand Demand is elastic when a relatively SMALL CHANGE in price causes a relatively LARGE CHANGE in the quantity demanded. Inelastic Demand Demand is inelastic when a given change in PRICE causes a relatively SMALLER change in the quantity demanded. Specific vs. General Market Specific Market a PARTICULAR gasoline station. It is considered to have ELASTIC demand. General Market GASOLINE in general. It is considered to have INELASTIC demand. 2

3 WHAT IS SUPPLY? CHAPTER 5.1 AN INTRODUCTION TO SUPPLY Supply is the schedule of QUANTITIES that would be OFFERED FOR SALE at all POSSIBLE PRICES that could prevail in the market. Each supplier must decide how much to offer for sale at VARIOUS prices. This decision must be best for the INDIVIDUAL seller. The HIGHER the price, the GREATER the quantity the seller will offer for sale. SUPPLY Supply Curve What is the supply curve? (SLOPES UPWARD AND TO THE RIGHT) REFLECTS THE TENDENCY OF SUPPLIERS TO OFFER GREATER QUANTITIES FOR SALE AT HIGHER PRICES. The supply curve is the OPPOSITE of the demand curve. Law of Supply The Law of Supply states that the QUANTITY SUPPLIED varies directly with its price. CHANGE IN QUANTITY SUPPLIED A change in quantity supplied is the change in the amount OFFERED for sale in response to a change in PRICE. CHANGE IN SUPPLY A change in supply is the AMOUNT OF PRODUCTS offered for sale at each and every possible price in the market. Changes in supply occur for the following reasons. Cost of Inputs If the price of inputs goes DOWN, producers can produce more items at EACH and every price (and vice-versa). Productivity If productivity increases, the supply curve shifts to the RIGHT because more items are produced at every possible price in the market. Technology New technology tends to shift the supply curve to the RIGHT. Number of Sellers When more suppliers enter the market, the supply curve shifts to the RIGHT. 3

4 Taxes and Subsidies Taxes have the same impact as an INCREASE in the cost of inputs. This causes the supply curve to shift to the LEFT. Subsidies have the OPPOSITE effect of taxes. Expectations If producers think the price of their product is likely to go UP, they may withhold some of the supply, causing the supply curve to shift to the LEFT. Government Regulations Increased government regulations restrict supply, which shifts the supply curve to the LEFT. THE THEORY OF PRODUCTION CHAPTER 5.2 The THEORY OF PRODUCTION deals with the relationship between the factors of production and the output of goods and services. It looks at how OUTPUT changes when INPUTS change. What is the short run? A PERIOD OF PRODUCTION THAT ALLOWS PRODUCERS TO CHANGE ONLY THE AMOUNT OF VARIABLE INPUTS. What is the long run? A PERIOD OF PRODUCTION LONG ENOUGH FOR ALL INPUTS, INCLUDING CAPITAL, TO VARY. THE PRODUCTION FUNCTION The production function is a concept that relates changes in OUTPUT to different amounts of a single INPUT while other inputs are held CONSTANT. Total Product The total OUTPUT produced by a firm. Marginal Product Marginal product is the EXTRA output generated by adding one more unit of variable input. 4

5 THREE STAGES OF PRODUCTION The three stages of production are based on the way MARGINAL product changes as variable inputs are added. Stage I: Increasing Returns The first stage is defined as the stage where marginal product is INCREASING. Stage II: Diminishing Returns This stage illustrates the principle of diminishing returns as MORE units of a certain variable input are added to a constant amount of other resources, total output keeps RISING, but only at a DIMINISHING rate. Stage III: Negative Returns In the third stage, MARGINAL product is NEGATIVE and total output DECREASES. SUPPLY AND THE ROLE OF COST CHAPTER 5.3 MEASURES OF COST Fixed Cost Fixed costs are the costs that a business incurs even if the plant is IDLE and output is ZERO. Total fixed cost, also known as OVERHEAD, remains the same. Fixed costs include SALARIES, RENT, and TAXES. Fixed costs also include depreciation, which is the gradual WEAR and TEAR on capital goods over time through use. Fixed costs DO NOT change when output changes. Variable Cost Variable cost is the cost that DOES change when the rate of operation or output changes. Variable costs are associated with LABOR and RAW MATERIALS. Other variable costs include ELECTRICITY and FREIGHT CHARGES on shipments. Total Cost Total cost is the sum of the FIXED and VARIABLE costs. 5