Unit 4 Economics Supply and Demand income effect • Any increase or decrease in consumers’ purchasing power caused by a change in price opportunity cost What you give up in time and resources when you chose to do one thing over another. law of demand • The inverse relationship in which consumers will buy more of a product at a lower price and less of a product at a higher price. demand schedule • A list which shows the relationship between the price of a good or service and the quantity that consumers demand. demand curve • A graph reflecting the relationship between the price of a good or service and the quantity that consumers demand scarcity • fundamental condition of economics that results from the combination of unlimited wants and limited resources. elastic demand • Exists when a small change in a good’s price has a large impact on the quantity demanded inelastic demand • When a change in price has little impact on quantity demanded human capital • Investing in education, training, health and values Law of supply • The idea that producers will supply more product at higher prices and less product at lower prices. supply • All of the product a company makes at various prices in a given period of time market equilibrium • The price at which both producers and consumers are satisfied. The term that refers to the tendency of consumers to buy products of similar quality at a lower price? substitution effect The concept which states that as more units of a product are consumed, the satisfaction from consuming each additional unit decrease is called? Diminishing marginal utility A demand curve only displays a “snapshot” of a market because… It represents a specific time period. The two conditions which make up demand • Willing and able to purchase • Specific time period Three things that can affect the demand for a product are: 1. Income effect 2. Substitution effect 3. Diminishing marginal utility What are the three qualities of elastic demand? 1. whether or not it has available substitutes. 2. whether or not it is a necessity. 3. the portion of the consumers’ income the product’s cost represents. Two things that can affect the supply for a product are: 1. Profit motive 2. Market trends What are the qualities of elastic supply? • Time • Money • Availability of resources Examples: Elastic: sports memorabilia, paper clips, toys, Inelastic: gold, oil, nuclear weapons Why do Governments set prices? • Minimize supply and demand swings • To balance inequalities in the market place. • To address unaccounted for costs like pollution. price ceiling • Rent control is an example • Can cause shortages • A maximum price for a product price floor • Minimum wage is an example • It can cause a surplus • It is a minimum price for a product.