Chapter 4,5,6,7
Supply and Demand
Demand
willingness and ability to purchase
Law of Demand
• principle stating that when prices are high less will be
demanded and when prices are low; more will be
demanded
• ex. Ice cream – when it is expensive, we don’t buy it.
When it is cheap; we stock up.
• This is from the viewpoint of the consumer!
• Price  - Demand 
• Price - Demand 
• The arrows are moving in different directions.
• Law of demand = different directions = both start
with D!!!)
Demand Schedule
• Table that shows the quantity demanded at
every price
Quantity
Price
300
4
200
5
90
10
45
15
30
20
20
25
Demand Curve
• Downward sloping graph showing the
quantity demanded at every possible price in
the market
Demand Curve
30
25
20
15
10
5
0
0
50
100
150
200
250
300
350
Changes in Demand Curve
• Income effect – Change in quantity demanded
because of a change in the consumer’s real
income when the price of a commodity
changes
• Substitution effect – a change in price = a
relative change in price compared to other
products consumers will buy it instead of
something else
Changes in Demand
Caused by:
•Consumer income
•Consumer tastes
•Price on relate products
Increase in Demand – Shifts Right
Substitutes
• Goods or services that can be used in place of
one another
• ex. Tape/glue
Complements
• Goods or services when used together
increase in usefulness or value
• ex. Mashed potatoes and gravy. Peanut
butter and fluff…
Marginal utility
• Marginal always means extra.
• Utility is usefulness or satisfaction.
• So, marginal utility = extra usefulness
• Marginal product - extra output (THIS DOES
NOT MEAN SURPLUS)
Principle of Diminishing Marginal
Utility
• Observation that people receive less and less
satisfaction for every additional unit of a
product consumed.
• A classmate ate chocolate chip cookies until
he didn’t want anymore. This student paid
for every cookie he ate. The amount he paid
decreased as he continued to eat the cookies.
• This illustrated the point of decreasing
SATISFACTION!
Paradoxical Demand
• Where there is a high demand for a product or
where the demand for a product increases
even though the price for that product
increases
• Contradiction to the law of demand because
it says they would buy less.
• Usually occurs with substituting
Paradoxical Demand Curve
• This acts “contrary” to the demand.
• It does so because it is concerned with
“inferior goods.” Inferior goods are items that
low income families purchase.
Elastic
• A change in price causes a change in demand.
• Ex. Chewing Gum becomes cheaper or more
expensive and our demand is affected
Inelastic
• A change in price has little or no affect on
demand.
• Ex. Eye glasses become cheaper or more
expensive. We still purchase them.
• Milk, gas, water, heating oil…
Supply
• Stuff (quantity)
Law of Supply
• Principle that states that more will be brought
to market when the price is high and less
when the price is low.
• This is from the viewpoint of the producer or
supplier.
• Price  - Supply 
• Price  - Supply 
• Law of Supply = same direction = both start
with S!!!)
Supply Curve
• Up-ward sloping graph showing the quantity
Supplied at every possible price in the market
• Opposite the Demand curve
Supply Curve
30
25
20
15
10
5
0
0
50
100
150
200
250
300
350
Changes on Supply
• Effected by:
– Cost of Inputs
– Productivity
– Technology
– Number of sellers
– Taxes and Subsidies
Increase in Supply – Shifts Right
• Surplus - supply exceeds demand
• Shortage - demand exceeds supply
• Market equilibrium - intersection point of the
demand and supply curve
Break- Even point
• Amount of output needed for a firm to
recover its production cost.
• Ex. Monster Mitts cost me $80 to produce.
At $8 a glove, I have to sell 10 in order to
“break even!”
• Point that must be sold before a firm begins
to see a profit
– Cost of producing a prototype and then mass
producing/marketing/distributing it.
3 Stages of Production
• Increasing –Each additional workers
contributes more than the previous worker
and increases output
• Diminishing – Production keeps growing but
by smaller and smaller amounts as workers
are added
• Negative – total output begins to decrease
because the cost of labor is greater than
output produced.
Law of Variable Proportions
• Principle that dictates that if one factor or
ingredient is changed; the entire output is
affected.
• Ex. Mrs. Paul accidentally put a cup of salt in
her batter rather than a cup of sugar.
– She changed one ingredient/factor and it changed
the taste of the whole batter
Principle of Diminishing Returns
• economic law stating that additional units of
input add less and less to the total product.
• Ex. hot chocolate mix
– Add the packet of powdered cocoa mix to 3 cups
of water instead of ¾ cup as was stated in the
instructions.
– What do you get? - less and less hot chocolate
flavor…less total product.