Lesson 7-1
The “Marketplace”
Consumers influence the price of goods in a
market economy.
-A market represents actions between buyers and
sellers.
Voluntary Exchange
– The seller sets the price.
– The buyer agrees to the product and price through
the act of purchasing product.
• Supply and demand analysis is a model of how
buyers and sellers behave in the marketplace
Graphing the Demand Curve
– A demand schedule is a table of prices and the
quantity demanded at each price.
– Lists quantity demanded are different prices.
– A demand curve graphs the quantity demanded of
a good or service at each possible price.
Demand
• Demand: the amount of a good or service
that buyers are willing and able to buy at
different prices at a given time
•
• *Demand does not mean desire or want
Law of Demand
• Law of demand: also called the price effect- people will buy less of a good
at a higher price and more of a good at a lower price (price goes up,
quantity demanded goes down)
• 1. real income effect- as price goes up people can’t afford to buy as much
(Buying power- you can get more at a lower price)
•
• 2. Diminishing personal value- as price goes up, it might seem less
important to have
•
• 3. Diminishing marginal utility- (marginal= additional, utility= usefulness)
• -point when next additional item consumed is less satisfying than the
previous
•
• 4. substitution effect- as price goes up people find other alternatives to
the good
•
Change in quantity demanded (the
price effect)
• price- if price goes up the quantity demanded
goes down (demand does not change)
Changes in Demand
• 1.Population (number of buyers)- if the number of
buyers increases, demand will increase
• 2.buyers’ incomes- increase/decrease in income
will change demand
– In general, if income goes up, demand for all things
goes up
•
– Ex. If I earn more I might trade in my Mitsubishi and
buy a BMW. (My demand for expensive things goes
up or I might by two cars; I’ll also buy more tater tots)
•
• 3. tastes- changes in taste affects demand
– Ex. A music group becomes popular- demand for their merchandise
increases. If they lose their popularity, demand decreases.
•
• 4. related goods
– Complements- two goods that are used together. ( camera and film,
tires and cars)
– Price of product goes down the demand for its complement will
increase. Ex. If hot dogs go on sale, people will probably buy more hot
dog buns. ( Because they are buying more hotdogs)
•
– substitutes- good that can be used in place of another good
• ex. Pepsi and Coke, butter and Margarine
•
If the price of a good increases the demand of a substitute
increases.
• 5. expectations- if people expect the price of a
good to increase, demand for that good will
probably go up (people rush in to buy it at the
current price expecting prices to go up)
•
•
6. Changes in weather or season- some products
are seasonal
•
Ex. Demand for snow blowers goes up after
snow storms
The Price Elasticity of Demand
• Elastic demand: change in price of product will bring
about a big change in the amount demanded
• bigger % of budget= more elastic
• when more substitutes are available= more elastic
• - something has elastic demand when the change in
quantity demanded is larger than the change in price (
ex. The price rises by 2% but the quantity demanded
drops by 10%)
• Ex. Luxury items people can do with out. Most people
have a set limit on what they’ll pay for let’s say a
snowmobile. If the price goes over that people won’t
buy them)
• Inelastic demand: change in price will bring
about little or no change in demand (ex.
Toothpaste. Even if the price of toothpaste
doubles, people will still buy the same
amount. If the price of motorcycles doubled
would people still buy them?)
Lesson 7-3
The Law of Supply
– Supply is the willingness and ability of producers
to provide goods to the consumer.
– As prices rise, the quantity supplied generally
rises.
– As prices fall, the quantity supplied falls.
– A direct relationship exists between price and
quantity supplied.
• The incentive of Greater Profits
– Increase in price and increase in production leads
to an increase in profits
– Higher prices encourage more competitors to join
the market.
– Higher prices turn potential suppliers into actual
suppliers, adding to total output.
• The Supply Curve
– Graphs and table can explain the law of supply.
– A supply schedule shows the quantity supplied at
each given price.
– A supply curve graphs the quantities supplied at
each possible price.
• The relationship between quantity and price is
direct and always moving in the same
direction
• Quantity Supplied Vs. Supply
– A change in quantity supplied is caused by a
change in price.
– Something other than price can cause a change in
supply as a whole to increase or decrease.
• The Determinants of Supply
– The price of inputs, or the cost of production-raw
materials, wages, insurance, utilities, etc- can cause
increase in supply.
– Competition, or the number of companies in an
industry, can cause an increase in supply.
– An increase in taxes can cause a decrease in supply.
– An improvement in technology, or the science used to
develop new products or methods of production and
distribution, can cause an increase in supply.
• The Law of Diminishing Returns
– Adding units to increase production increases
total output for a limited time period.
– The extra output for each additional until will
eventually decrease.
• Businesses will continue to add units of factor
of production until doing so no longer
increase revenue
Lesson 7-4
• Equilibrium Price
– In the real world, demand and supply work
together.
• The price at which the supply meets the
demand- where the two curves intersect- is
the equilibrium price
• Shifts in Equilibrium Price
– If the demand curve shifts due to something other
than price, the equilibrium price will change.
– If the supply curve shifts due to something other
than price, the equilibrium price will change.
• Prices Serve as Signals
– Rising prices signal producers to make more and
consumers to purchase less.
– Falling prices signal producers to make less and
consumers to purchase more.
– Shortages occur when the quantity demanded (at
equilibrium price) is greater than quantity supplied.
– Surpluses occur when the quantity supplied (at
equilibrium price) is greater than quantity demanded.
• Market forces can cause the prices to rise or fall to
correct shortages and surpluses.
• Price Controls
– Price ceilings are a maximum price set by the
government to prevent goods from going above
certain levels.
– Items in short supply might be rationed.
– Shortages can lead to a black market, or illegal places
to purchase such products at exorbitant prices.
– Price floors are minimum prices also set by the
government to prevent prices from going below a
certain level.
– Price floors set minimum wage levels and support
agricultural prices.