Demand: 7.1 Understanding Demand: • Demand: The desire to own something, and the ability to pay for it. • The Law of Demand: The law of demand states that when a good’s price is lower, consumers will buy more of it. $ QD Substitution Effect: • The law of demand is the result of 2 separate behavior patterns. 1. Substitution effect: If the price for a good increases, people may purchase less of that good or find an adequate substitute good Real Income Effect: 2. Real income effect: If price for a good goes up, your limited budget won’t buy as much as it used to. If price goes down you can feel richer, and will purchase more goods. Utility: • Utility: The power that a good or service has to satisfy a want. • Marginal utility: additional amount of satisfaction each time you purchase a good. • Law of diminishing marginal Utility: Rule that states each additional unit of a good you purchase, the less satisfaction you’ll receive. The Demand Curve and Elasticity of Demand: 7.2 Demand Schedule: • Demand Schedule: A table that lists the quantity of a good that people will purchase at each price in the market. Price Per Slice of Pizza: Quantity Demanded: $5.00 10 $4.00 20 $3.00 30 $2.00 40 $1.00 50 Demand Curve: • Demand Curve: is a graphic representation of a demand schedule • Shows the relationship between the price of a certain good, and the quantity a person will purchase. • Demand curve slopes downward, showing that as price decreases, quantity consumed increases. 5432- Quantity Demanded 50- 40- 30- 20- 1- 10- $ Per Slice of Pizza Demand Curve: Population Income Preference Change 5- Prices of Complement Goods 4- Available Substitutes 32- Quantity Demanded 50- 40- 30- 20- 1- 10- $ per slice of pizza Shifts in the Demand Curve: Elasticity of Demand: • There are always some goods that you will always find money to buy, even if the price were to rise drastically. • There are also some goods that you would cut back on or stop buying altogether if the price were to rise just slightly. • Economists describe the way that consumers respond to prices changes as elasticity of demand. Elastic vs. Inelastic Demand: • elastic: when you buy less of a good even after a small price increase. (ex: sporting event tickets) • inelastic: demand for a good that you will keep buying despite price changes. (ex: gasoline) The Law of Supply and the Supply Curve: 7.3 The Law of Supply: • Law of Supply: As the price for a good increases, the quantity supplied also increases. $ QS Profit Incentive: • The reason a company will produce more when prices are high, is hopes of greater profits. Supply Schedule: • Supply Schedule: • Shows the relationship between price and the quantity supplied for a specific good. (similar to demand schedule) Price Per Slice of Pizza: Quantity Supplied: $1.00 10 $2.00 20 $3.00 30 $4.00 40 $5.00 50 5432- Quantity Demanded 50- 40- 30- 20- 1- 10- $ Per Slice of Pizza Supply Curve: Shift of the Supply Curve: 4 things that cause the supply curve to shift: - Cost of inputs - Number of firms - Taxes -Technology * Remember: shifts to the right show an increase in supply, to left shows a decrease in supply. Law of Diminishing Returns: Law of diminishing returns: level of production decreases as more workers are hired. • -Why does this happen?? – *Workers are working with limited capital. • (Ex: there are only so many machines in a factory.) Combining Supply and Demand: 7.4 S 543- -- Equilibrium price 21- Quantity Demand 50- 40- 30- 20- D 10- $ Per Slice of Pizza Graphing Supply and Demand: Equilibrium Price: • Equilibrium price: the point at which demand and supply come together. • It is at this point, where there is balance between price and quantity Demanded. • This is where businesses want to be. Disequilibrium: • Disequilibrium: If the market price or quantity demanded is anywhere except the equilibrium, the market is in a state of disequilibrium. • Disequilibrium can produce 1 of 2 outcomes. • -Excess demand- quantity demanded is greater than quantity supplied. (when price is below equilibrium) • -Excess supply- quantity supplied is greater than quantity demanded. (when price is above the equilibrium point) 5- S 4- - New Equilibrium 3- -E 21- Quantity Demanded 50- 40- 30- 20- D 10- $ Per Slice of Pizza Increase in Demand Shifts in Equilibrium Price: S 543- -E 2- -New Equilibrium 1- Quantity Demanded 50- 40- 30- 20- D 10- $ Per Slice of Pizza Increase in Supply Government Intervention: -Sometimes, the government must step in to control prices. 1. Price Ceiling- maximum price that can be legally charged for a good. (ex: rent Control) 2. Price Floor-Minimum price for a good or service. (ex: minimum wage) 3. Rationing- Limiting items that are in short supply. (can lead to a black market)