4 Demand Combination of desire, ability, and willingness to buy a product Question: Demand Schedule Price Quantity How many movie DVDs Demanded would people be willing to purchase at 30 0 point a on the graph? At point b? How 15 is the change in demand 3 for movie 10 DVDs illustrated 5 on this graph? 5 8
5 LAW OF DEMAND When the price goes up, quantity demanded goes down. When the price goes down, quantity demanded goes up.
6 Demand and Marginal Utility Marginal utility: additional satisfaction or usefulness a consumer gets from having one more unit of a product Diminishing marginal utility: decrease in satisfaction or usefulness from having one more unit of the same product
8 Q: How does the principle of diminishing marginal utility explain the price we pay for another unit of a good or service? A: If we get less satisfaction from more of a product, we won t be willing to pay as much for another unit of the product.
10 Change in Demand vs. Change in Quantity Demanded Change in quantity demanded: movement along the demand curve Change in demand: shift of the demand curve when people buy different amounts at every price P 0.6 A B Increase in quantity demanded P 0.6 A B A B Increase in demand C C C Qd Qd
11 Consumer tastes Consumer Income Price of Substitutes Several Factors can Cause the demand curve to shift Number of Consumers Price of Complements Expectations
12 Substitutes vs. Compliments Substitutes: competing products that can be used in place of one another Compliments: products that increase the use of other products
13 ELASTICITY OF DEMAND
14 Elasticity of Demand Elasticity: a measure of responsiveness that shows how one variable responds to a change in another variable Demand elasticity: the extent to which a change in price causes a change in the quantity demanded
15 Elastic vs. Inelastic Elastic: type of elasticity where a change in price causes a relatively larger change in quantity demanded Seasonal fresh vegetables Salt Inelastic: type of elasticity where a change in price causes a relatively smaller change in quantity demanded
16 Elastic vs. Inelastic P Qd P Qd
17 Unit Elastic Demand Type of elasticity where a change in prices causes a proportional change in quantity demanded Determining Elasticity 0.8 P Qd Type of Demand Change in Price Change in Expenditure Elastic Inelastic Unit Elastic No Change
18 Determinants of Demand Elasticity Can purchase be delayed? Are adequate substitutes available? Does purchase use a large portion of income? If you answered Yes to at least two of the questions, then the product has an elastic demand.
19 Supply : Amount of a product offered for sale at all possible prices
20 LAW OF SUPPLY When the price of a product goes up, quantity supplied goes up. When the price goes down, quantity supplied goes down.
21 Change in Supply vs. Change in Quantity Supplied Change in Quantity Supplied: movement along the supply curve Change in supply: shift of the supply curve when people buy different amounts at every price P Increase in quantity Supplied A B C P A A B C B C Increase in Supply Q Q
22 Productivity Cost of Resources Technology Government Regulations Change in Supply Taxes and Subsidies Expectations Number of Sellers
23 Determinants of Supply Elasticity Only production considerations determine supply elasticity How well a firm can react quickly to a change in price, determines how elastic the supply curve is.
24 Main Idea: The production function shows how output changes when a variable input changes THE THEORY OF PRODUCTION
25 The Production Function Production function: a graph or schedule showing how a change in the amount of a single variable input changes total output Short-run: production period so short that only the variable inputs can be changed Long-run: production period long enough to change the amounts of all inputs
26 Short-Run Production Total Product: total output or production by a firm Marginal Product: extra output due to the addition of one more unit of product
27 Stages of Production Increasing Returns Diminishing Returns Negative Returns
28 COST, REVENUE, AND PROFIT MAXIMIZATION
29 Measures of Costs Businesses analyze fixed, variable, total, and marginal costs to make production decisions. Fixed costs: costs that an organization have even if there is little or no activity. Total fixed costs are sometimes called overhead. Variable costs: costs that change when the business s rate of operation or output changes. Marginal Costs: extra cost of producing one additional unit of production Fixed Costs + Variable Costs = Total Costs
31 Questions related to Supply and Demand How much is a superstar in the NBA paid compared to an average player? Do you think you d pay more for a 1962 Corvette or a 2004 Corvette? Which costs more, diamonds or gravel? Because they are scarce / short supply
32 PRICES AND DECISION MAKING
33 Prices as Signals? Price: the monetary value of a product as established by supply and demand is a signal that helps us make economic decisions.
34 Prices vs. Rationing Prices help producers and consumers decide the 3 basic questions of WHAT, HOW, and FOR WHOM to produce. Prices help the economy run smoothly by providing a good way to allocate resources.
35 Prices vs. Rationing Prices are Neutral, because they favor neither the producer nor the consumer (compromise) Flexible Familiar and easy to understand No cost of outside help to establish prices
36 Prices vs. Rationing Question: What happens in countries with command economies? Rationing: a system under which a government agency decides everyone s fair share Rationing coupon: a ticket or a receipt that entitles the holder to obtain a certain amount of a product.
37 Prices vs. Rationing Problems with Rationing: Almost everyone feels their share is too small High administrative cost of rationing Declining incentive to produce
38 Assume that there is a gasoline shortage and your state has imposed rationing. Write a paragraph about how this might affect you, your family, and your community.
39 MARKET EQUILIBRIUM Equilibrium Price: Price where quantity supplied equals quantity demanded; at this price there is neither a surplus or a shortage
40 Surplus and Shortages Surplus: a situation in which the quantity supplied is greater than the quantity demanded at a given price. A surplus shows up as unsold products on suppliers shelves and begins to take up space. Surplus causes prices to go down
41 Surplus and Shortages Shortage: situation where quantity supplied is less than quantity demanded at a given price. A shortage shows up as running out of product to sell. Shortage causes prices and quantity supplied to go up
43 How do surpluses and shortages help establish the equilibrium price? Surpluses causes sellers to lower prices while shortages cause sellers to raise prices. This process continues until there are no surpluses or shortages and an equilibrium price is reached.
44 Main idea: The government sometimes uses policies that interfere with the market in order to achieve social goals. SOCIAL GOALS AND MARKET EFFICIENCY
45 Price ceiling: highest legal price that can be charged for a product The gov t sets prices at socially desirable levels. Prices are not allowed to adjust to their equilibrium price.
46 Price floor: lowest legal wage that can be paid to most workers
47 What are the negative and positive aspects of price ceilings and price floors? Price ceilings keep certain products affordable but limit their supply. Price floors increase income but lower demand for services.