How does supply and demand impact prices?

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1. What are the different types of costs a business must cope with?
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2. What are is marginal and total revenue?
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3. How does a cost benefit analysis help a business make production decisions (law of diminishing returns?
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4. What is meant by supply and demand?
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5. How to create a supply and demand schedule?
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6. How to create a “demand”/ “supply (the curve)?
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7. What is the equilibrium price and quantity?
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8. How to find the “market clearing price” or “equilibrium price and quantity?”
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9. What is meant by supply/ demand elasticity?
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10. What occurrences will move supply curves and demand curves (e.g. An improvement in technology will cause an industry’s supply curve to slide to the right. Advertisement for a product will cause the demand curve to slide to the right, supplements, compliments)?

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Costs are the price of inputs that go into production.
o Fixed Cost o Variable Cost o Total Cost o Marginal Cost
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Competition forces producers to offer the lowest prices while still making a profit.
o To accomplish this they most lower costs in order to lower price without sacrificing profit
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Possible Revenues are used to estimate profits and different prices o Marginal Revenue o Total Revenue
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Cost Benefit Analysis is used to determine when to stop production o Law of Diminishing returns states that eventually amount of revenue decreases after certain production numbers

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Costs are the price of inputs that go into production.
o Fixed Cost o Variable Cost o Total Cost o Marginal Cost
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Competition forces producers to offer the lowest prices while still making a profit.
o To accomplish this they most lower costs in order to lower price without sacrificing profit
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Possible Revenues are used to estimate profits and different prices

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The fundamental ideas behind economics are: o
The law of demand o
The law of supply •
Before a producer can determine a possible price and supply quantity they must
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• determine:
Costs
Possible Revenue
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Cost Benefit Analysis
The law of demand: o
States that when the price of a product goes up consumer demand for the product falls •
• The law of supply:
States that when the price of the product goes up, the quantity of the product goes up

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The two are combined in the law of supply & demand o States that the price for a product will keep changing until supply & demand are equal •
Equilibrium Price o The price where supply & demand are equal o Also called the market price because it is the price determined by the market

Fixed costs: business costs that do not
• depend on the level of production o
Example: Rent
Variable costs: depend on a firm’s level
• of production o
Example: Overtime pay
Total costs: combination of fixed & variable costs into the overall cost of operating at a particular rate of production

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Marginal Costs o
Measure the balance of costs & benefits from the decision to produce an additional unit of good or
• service
Marginal Cost of the Additional Unit o
Cost of the additional factors of production needed to produce the unit o
Example: Auto Manufacturer wants to make an additional truck

Marginal cost refers to: materials, labor, building costs that went in to making it

Company stops increasing production when marginal costs lower profits

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Price: the producer must determine the willingness of consumers, or the demand, the total and
• marginal costs of the product, and the desired profit in determining the price.
Once a projected price is determine the producer
• can estimate revenue in order to determine the profit.
Total Revenue is the amount of money a business
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• takes in from selling a good or service; price*amount sold=total revenue
Marginal revenue is the additional revenue from selling one more unit
Profit is then determine by subtracting total revenue from total costs

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Before creating a cost benefit analysis, you must find all of your costs.
• Lets suppose we are making shirts
• We are making them in units of 10
• Our fixed costs are 5 dollars
• Variable cost increases by five for every 10 units produced.
• Total cost is variable times fixed
• Marginal is TC2-TC1
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We need to find average marginal cost in order to plot it.
• To do that we use the following formula
• MC2-MC1/U2-U1=AMC
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Plug it in
• 600-500/50-40=100/10=10
• 500-400/40-30=100/10=10
• So the average marginal cost is 10
• Your AMC should appear as a straight line
Units
10
20
30
40
50
Fixed
Cost
5
5
5
5
5
Variable
Cost
Total
Cost
20
25
30
35
40
205
505
905
Marginal Cost
300
400
500
1405 600
2005 -----

Creating a Cost Benefit Analysis: Marginal Revenue
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To create a cost benefit analysis, you must now find marginal revenue
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Again you need to make a table
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Lets suppose we price are shirts at 35 dollars (yea they’re designer shirts)
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Due to law of demand the higher the price the lower the demand, so as demand goes up price goes down
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We need to find the Marginal Revenue: o TR=Total Revenue o U=Units demanded o
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Plug it in
Formula
 TR2-TR1/U2-U1=MR
750-800/50-40=-50/10=-5
800-750/40-30=50/10=5
750-600/30-20=150/10=15
600-350/20-10=250/10
When you plot it, it will start high and go down
Units
Deman ded
10
20
30
40
50
Price
35
30
25
20
15
Total
Revenue
Change in
Renenue
350 250
Margina l
Revenu e
25
600 150
750 50
800 -50
750 ____
15
5
-5

o Bring line graph into class

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A chart that shows the quantity of a product at a particular price is a supply schedule •
When each of these points is graphed and then connected by a curve, the diagram show the supply curve for the product o
The curve is just a picture of the information in the schedule (the prices of different quantities of supply)

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Many changes in the economy can change the equilibrium price & influence supply
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Any product can have a compliment: o
A product that goes with another product o
Example: sugar in iced tea, jelly & peanut butter
When the price of a complimentary good goes up demand for the compliment goes down o
Example: if sugar is more expensive people will buy less tea

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By demanding less iced tea, people may demand more of some other drink such as lemonade •
The other drink is a substitute product for iced tea •
If the price of the substitute product goes down and the price of ice tea does not change, then demand for the substitute will go up and demand for iced tea will go down

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Supply-side economics is a recent, controversial economic school of thought •
It says that government should cut taxes on business to increase productivity •
Critics: o
Claim that needed government services
• would be cut under this approach
Defenders: o
Claim that increased productivity increases jobs

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According to its defenders, supply-side economics has a trickle-down effect
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Big business would get tax cuts
& government programs might be cut, but the increased money for business investment will get to the people through jobs

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A chart that shows the quantity of a product demanded at a particular price is a demand schedule •
When each of these points is graphed at then connected by a curve the diagram shows the demand curve for the product o The curve is just a picture of the information in the schedule o
The quantity demanded at different prices of a product

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Many changes in households have influences on demand
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The household’s demand is limited by its personal income
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Before buying other goods & services, personal income must first pay for necessities of life

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The amount of income left after paying for necessities •
Disposable income is the amount of money available for savings, entertainment, and more expensive
• products
Example: bread is a necessity but cinnamon raisin bread is more expensive bread that requires disposable income because it is more than just bread and costs more

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Market activities can change prices •
The market activities that change prices are changes in
• consumer demand
Consumer demand changes because the things
• consumers want change
This change is a change in consumer tastes o
Example: low-carb foods were expensive when they first came to market. Now, many low-carb products are sold at low prices because consumer tastes for low-carb products have decreased

The decrease in demand for l0w-carb foods has created a surplus
(excess supply) because consumers did not want to buy all of the products available at the price the producers wanted for them
When gasoline prices went up, people wanted cars that got higher gas mileage o The demand for high-mileage cars was greater than the supply o The resulting shortage of high-mileage cars caused the prices of high-mileage cars to go up o These changes all affect the demand or supply schedule

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Government actions can change prices and wages with wage and price controls
Example: government sets minimum wages that firms pay to workers for labor & interest rates that firms pay to households for capital o
The minimum wage is the lowest wage that can be paid according to law o
Wages can be and often are higher o
When the minimum wage goes up households have more money to spend on products however firms must charge higher prices for their goods so that they can pay their workers higher wages.

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Inflation: Occurs when prices go up
(become inflated) but no real change in supply or demand has happened o
Is bad because wages do not rise with
• prices
Deflation: Occurs when prices fall without a change in supply or demand o
Is bad because profits to businesses go down so much they may lay off workers o
They also lack capital to invest for economic growth