Unit #3
Demand and Supply
Homework:
1 st option: explain a thorough and complete example for the vocabulary word or
2 nd option: draw a graph, image, or representation for the vocabulary word

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Def: consumers buy more of a good when its price decreases and less when its price increases
A good’s price has an important effect on the amount of that good people will buy.
The lower the price, the more consumers will buy
The higher the price, the less consumers will buy

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More people will buy a slice of pizza priced at $1 than at $10.
Less people will buy a slice of pizza priced at $10 than at $1.
Your example:

The law of demand results from 2 patterns of human behavior. The first is known as the…
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2.) substitution effect:
Def: when consumers react to an increase in a good’s price by consuming less of that good and more of substitute goods.
1. increase in price of beef will decrease the quantity demanded for beef and increase the quantity demanded for chicken
2. some goods/services can’t be substituted (milk, gas, salt)

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My example:
When the price of pizza becomes more expensive then other foods, like tacos or salads, people are more likely to buy those other foods.
The result: demand for pizza drops
The change in spending is known as the substitute effect
O However, if the price of pizza drops
Consumers are more likely to substitute pizza for other choices.
This causes the demand for pizza to rise
Your example:

The law of demand results from 2 patterns of human behavior. The second is known as the…
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3.) income effect:
Def: the change in consumption resulting from a change in real income.
any increase or decrease in the consumer’s purchasing power caused by a change in the price.
O Usually occurs by someone on fixed income
Remember – economists measure consumption in the amount of a good that is bought, not the amount of money spend to buy it

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My example:
Price of slice of pizza increase – a slice of pizza went from $1 to $2
I feel poorer 
Can’t buy as much as I used to because of my limited budget
I buy fewer slices of pizza without increasing my purchases of other foods – income effect!
I have to spend $2 for my pizza – I don’t buy more than one piece
The quantity demanded goes down, even though I’m spending more.
What happens if the price of pizza falls?
I feel wealthier 
If, I start to buy more pizza – that is income effect too!
Your example:

O A demand schedule is a table that lists the quantity of a good a person will buy at each different price.
O A market demand schedule is a table that lists the quantity of a good all consumers in a market will buy at each different price.
Demand Schedules
Individual Demand Schedule
Price of a slice of pizza
Quantity demanded per day
$.50
$1.00
$1.50
$2.00
$2.50
$3.00
3
2
5
4
1
0
Market Demand Schedule
Price of a slice of pizza
Quantity demanded per day
$.50
$1.00
$1.50
$2.00
$2.50
$3.00
300
250
200
150
100
50

O A demand curve is a graphical representation of a demand schedule.
O When reading a demand curve , assume all outside factors, such as income, are held constant.
Market Demand Curve
3.00
2.50
2.00
1.50
1.00
.50
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Demand
0 50 100 150 200 250 300 350
Slices of pizza per day

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Def : illustrates the quantities demanded at each price by consumers in the market
Vertical axis shows price, and the horizontal axis shows the quantity demanded
Because demand rises as prices fall, the demand curve slopes down and to the right

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Three characteristics of every demand curve:
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Downward sloping
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Must assume ceteris paribus (all other things held constant)
Relationship between price and quantity
What is the one factor that causes a shift in the quantity demanded?
Price
Your example:
Market Demand Curve
3.00
2.50
2.00
1.50
1.00
.50
0
Demand
0 50 100 150 200 250 300 350
Slices of pizza per day
2
3
Chapter 4, Section 1

Demand Schedule & Demand Curve

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O Def: a good that consumers demand more of when their income increases
What I want!
Ex.: Amber’s income increases form $50 to $75 per week.
This increase will cause her to buy more of a normal good at ever price level
Plotting the new schedule on a graph would produce a curve to the right of her original curve
This shift to the right of the curve is called an increase in demand

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If Amber’s income falls from $50 to $25 per week, the demand curve would shift to the left.
This is called a decrease in demand.
Your example:

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Def: a good that consumers demand less of when their incomes increase
What I can afford
Goods that you would buy in smaller quantities, or none at all, if your income were to rise and you could afford something better.
Possible examples: macaroni and cheese, generic products, used cars
Your example:

.) complements (complementary goods):
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Def: two goods that are commonly bought and used together
If I buy a pair of skies, I’m likely to buy ski boots as well.
• An increase of the price of ski boots will cause people to buy fewer boots.
• Because skis are useless without boots, the demand for skis will fall at all prices
• Your example:

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Def: goods that can be used to replace the purchase of similar goods when prices rise
Ex. Snowboards are a substitute for skis
A rise in the price of snowboards will cause people to buy fewer snowboards, and therefore people will buy more pairs of new skis
Or, a fall in the price of snowboards will lead consumers to buy fewer skis ex. Butter for margarine; turkey for ham increase in price leads to an increase in demand for substitute goods
Your example:

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O a measure of how consumers react to a change in price
Describes the way people respond to price changes
Can be elastic or inelastic

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Def: describes demand that is very sensitive to a change in price
If you buy less after a small price increase your demand is elastic
O Product has elastic demand if:
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The product is not a necessity
Readily available substitutes
Products cost represents a large portion of a person’s income
Your example:

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Def: describes demand that is not very sensitive to a change in price
If you keep buying despite a price increase, your demand is inelastic
Demand tends to be inelastic for goods that have few substitutes, like medicines
Or, for goods that are considered essential like milk
Your example:

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Def: total amount of money a firm receives by selling its goods or services
Determined by two factors:
1.) The price of the goods
2.) And the quantity sold
T.R.: = (Q) Quantity sold X (P) price charged
If Ms. Morse’s Pizzeria sells 125 slices of pizza per day at $2.00 per slice: total revenue would be
$250.00 a day
Your example:

Def: According to the law of supply ,
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O as price increases, supply increases. By contrast as price decreases, supply decreases.
Producers will offer more of a good if prices rise, and less of a good if prices fall
You should draw this:
Price
As price increases…
Supply
Quantity supplied increases
Price
As price falls…
Supply
Quantity supplied falls

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If price of pizza rises, my cost of making the pizza stays the same, then Ms. Morse’s Pizzeria will earn a higher profit on each slice of pizza
I will try to produce and sell more pizza to take advantage of the higher prides.
As price of pizza increases…
Quantity of pizza supplied will increase

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The price of pizza starts to fall
Ms. Morse’s Pizzeria will earn less profit per slice or even lose money
Ms. Morse will choose to sell less pizza and produce something else, like calzones, flatbreads, or sandwiches, that would yield more profit.
Your ex.
As the price of pizza falls…
The quantity or amount of pizza supplied and produced falls.

A market supply schedule is a chart that lists how much of a good all suppliers will offer at different prices.
Market Supply Schedule
Price per slice of pizza Slices supplied per day
$.50
$1.00
$1.50
$2.00
$2.50
$3.00
1,000
1,500
2,000
2,500
3,000
3,500

Characteristics of a
Supply Curve
1. Relationship between price and quantity supplied
2. Always upward sloping
3. Must have ceteris paribus (“all things held constant”) to exist
Market Supply Curve
Supply
1.00
.50
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3.00
2.50
2.00
1.50
0 500 1000 1500 2000 2500 3000 3500
Output (slices per day)
Def: A market supply curve is a graph of the quantity
supplied of a good by all suppliers at different prices

• A change in price causes a change in the quantity supplied
• Your example:

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Elastic
Why can’t I respond to a
change in price for trees,
but I can for haircuts?

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Def: If supply is very sensitive to changes in price it is considered elastic.
The supply is easily expanded or reduced
My example: A service industry like a barbershop has elastic supply.
If the price of a haircut rises, barber shops and salons can hire new workers quickly.
New barber shops will start, and existing businesses will stay open later
A small increase in Quantity supplied will fall quickly
Haircut suppliers can quickly change their operations, the supply of haircuts is elastic price will cause a large increase in quantity supplied, even in the short term
If the price of haircut drops, shops will close earlier & others will leave the market
Your example:

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Def: If supply is not very responsive to changes in price, it is considered inelastic.
Industries that cannot easily alter production
My example: Orange tree growers
They cannot respond quickly when prices rise
They cannot increase production fast
Orange trees take years to grow and mature
New suppliers/growers would be prevented from entering the market quickly
Price on crates of oranges fall – the grove will produce oranges no matter what the prices are! Growers will still pick and sell nearly as many oranges as before
Because of the investment in land, trees, and time, most competitors won’t drop out of the market if they can survive.
Your example:

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Def: a cost that does not change, no matter how much of a good is produced.
Usually involves the production facility, the cost of building and equipping a factory, office, store, or restaurant.
Ex. Rent, machinery repairs, and the salaries of workers who keep the business running even when production temporarily stops.
Your ex.:

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Def: a cost that rises or falls depending on how much is produced
They include the costs of raw materials and some labor
Ex. To produce more lemonade, the company
(lemonade stand) must purchase more lemons and hire more workers to make the lemonade.
If the company wants to produce less or cut costs, it can stop buying lemons or have some workers work fewer hours.
Your ex.:

O Variable – companies can cut off heat and electricity for the factory and its machines when they are not in use.

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Def: fixed costs plus variable costs (fixed and variable added together)
Ex. Fixed costs (stand, equipment), $6 per min.
(2 nd column)
Variable costs (costs of lemons, sugar, water, and some labor) rise with the number of cups of lemonade that are being produced.
Fixed costs and variable costs are added together to find total cost.
Total cost is shown in the fourth column: TC=TFC +
TVC
Your example:

What is a subsidy? What does it mean to be subsidized?

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Def: a government payment that supports a business or market
The government often pays a producer a set subsidy for each unit of a good produced.
Since the subsidy lower producers’ cost, its effect is usually to increase supply.
Ex. Governments in developing countries often subsidize manufactures to protect young, growing industries from strong foreign competition.
Indonesia and Malaysia have subsidized a national car company as a source of pride, even though imported cars were less expensive to build
Your example:

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Def: a tax on the production or sale of a good
Governments reduce the supply of some goods by placing an excise tax on them
Increases production costs by adding an extra cost for each unit sold
Causes the supply of a good to decrease
Ex. Goods that are harmful to the public good: cigarettes, alcohol, and high-pollutant gasoline
Your example: