Today is your lucky day! You just won $1000!!! Write down at least 5 things that you will buy with your money. ~WARM UP~ WARM UP.

Today is your lucky day! You just won $1000!!! Write down at least 5

things that you will buy with your money.

~WARM UP~

WARM UP

What does DEMAND mean?!?!!?

To have demand for a product you must be

WILLING and ABLE to purchase the productWILLING + ABLE =

DEMAND\

LAW OF DEMAND•Price •Dema

nd As the price of a product

increases, consumers buy less of a product

~~~~~~~~~~~~~~~~~

As the price of a product decreases, consumers buy more of

a product increases

Quantity Demanded vs. Demand

Quantity Demanded is the amount of a good or service people are willing and able to buy at a particular PRICE other things being equal. (Graph)

Demand is the entire schedule. It represents the amount people are willing and able to buy at all price levels. (Graph)

To illustrate the difference….

The Demand Schedule

An individual demand schedule is a table that lists the quantity of a good a person will buy at each different price.

• 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

Market Demand Schedule

Price of a slice of pizza

Quantity demanded per day

$.50

$1.00

$1.50

$2.00

$2.50

$3.00

5

4

3

2

1

0

$.50

$1.00

$1.50

$2.00

$2.50

$3.00

300

250

200

150

100

50

The Demand Curve

A demand curve is a graphical representation of a demand schedule.

Three characteristics of every demand curve:

1. Downward sloping2. Must assume ceteris

paribus3. Relationship between

price and quantity What is the one factor that

causes a shift in the quantity demanded?

Market Demand Curve

3.00

2.50

2.00

1.50

1.00

.50

0

0 50 100 150 200 250 300 350Slices of pizza per day

Pri

ce p

er s

lic

e (i

n d

oll

ars)

Demand

PRICE

Movement along the demand curve is a result in a consumer changing their behavior based on a change in price.

Increase in quantity demanded is demonstrated by moving down the demand curve

Decrease in quantity demanded is demonstrated by moving up the demand curve

Shifting the Whole Demand Curve

1. Income Change in income affects demand.

Normal vs. Inferior Goods

2. Consumer Expectations of Future Price

Anticipation of increase/decrease in future price will impact current

demand.

3. Population

Change in population impacts the demand for most products.

4. Consumer Tastes and Advertising

Consumer perception of products will impact demand.

5. Price of Related Goods The demand curve for one good can be affected by a change in

the demand for another good. Compliments vs. Substitutes

Shifting the Curve (cont.)An increase in demand

is shown by moving the demand curve to the right

What would cause an increase in demand?

A decrease in demand is shown by moving the demand curve to the left?

What would cause a decrease in demand?

What is Elasticity of Demand?

Demand for a good that consumers will continue to buy despite a price increase is inelastic. (Graph)

Demand for a good that is very sensitive to changes in price is elastic.

(Graph)

Elasticity of demand is a measure of how consumers react to a change in price.

Factors Affecting Elasticity

1. Availability of Substitutes

If there are few substitutes for a good, then demand will not likely decrease as price increases. The

opposite is also usually true.

2. Relative Importance

Another factor determining elasticity of demand is how much of your budget you spend on the good.

3. Necessities versus Luxuries

Whether a person considers a good to be a necessity or a luxury has a

great impact on the good’s elasticity of demand for that person.

4. Change over Time

Demand sometimes becomes more elastic over time because people can eventually find substitutes.

Price

As price increases…

Supply

Quantity supplied increases

Price

As price falls…

Supply

Quantity supplied

falls

The Law of SupplyAccording to the law of supply, as price increases, supply increases. By contrast as price decreases, supply

decreases.

How Does the Law of Supply Work?

Economists use the term quantity supplied to describe how much of a good is offered for sale at a specific price. Just like demand, quantity supplied indicates movement along the supply curve, because ONLY price is being considered (ceteris paribus).

Why do suppliers produce more as the price increases?

1.The promise of increased revenues when prices are high encourages firms to produce more. The more you can make, the more you will produce!

2.Rising prices draw new firms into a market and add to the quantity supplied of a good. Higher Production + Market Entry = Law of Supply

More $$$$-- More Supply!

$.50 1,000

Price per slice of pizza Slices supplied per day

Market Supply Schedule

$1.00 1,500

$1.50 2,000

$2.00 2,500

$2.50 3,000

$3.00 3,500

Supply Schedules

A market supply schedule is a chart that lists how much of a good all suppliers will offer at different

prices.

Market Supply Curve

Pri

ce

(in

do

lla

rs)

Output (slices per day)

3.00

2.50

2.00

1.50

1.00

.50

0

0 500 1000 1500 2000 2500 3000 3500

Supply

Supply Curves

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

A market supply curve is a graph of the quantity supplied of a good by all suppliers at different

prices.

Shifting the Whole Supply Curve

1. Input Costs2. Government Influences on Supply

3. Number of Producers4. Global Economy

Input Costs and Supply

Any change will affect supply (i.e. cost of raw materials, machinery, or labor)

As input costs increase the firms profitability and supply will decrease.

As input costs decrease the firms profitability and supply will increase.New technology

Government Influences on Supply

By raising or lowering the cost of producing goods, the government can encourage or discourage an entrepreneur or

industry.

Subsidies~Government payment that supports a business or market. (Increase in supply)

Taxes~Government can reduce the supply of some goods by placing an excise tax (tax on the production or sale of a good) on them.

Other Factors Influencing Supply

Number of Suppliers If more firms enter a market, the market supply of

the good will rise. If firms leave the market, supply will decrease.

The Global Economy Supply of imported goods impacts the supply of

domestic products. Government import restrictions will decrease the

supply of imported goods.

Elasticity of supply is a measure of the way quantity supplied reacts to

a change in price.

Elasticity of Supply

If supply is not very responsive to changes in price, it is inelastic.

If supply is very sensitive to changes in price it is elastic.

What Affects Elasticity of Supply?

Time

ESSENTIAL QUESTIONS: CHAPTER 6

Chapter 6: Prices

Pri

ce

pe

r s

lic

e

Equilibrium Point

Finding Equilibrium

Price of a slice

of pizza

Quantity demanded

Quantity supplied

Result

Combined Supply and Demand Schedule

$ .50 300 100

$3.50

$3.00

$2.50

$2.00

$1.50

$1.00

$.50

Slices of pizza per day

050 100 150 200 250 300 350

Supply Demand

Balancing the MarketThe point at which quantity demanded and

quantity supplied come together is known as equilibrium.

$2.00

$2.50

$3.00

150

100

50

250

300

350

Surplus from excess supply

$1.50 200 200 Equilibrium

Equilibrium Price

a

Eq

uili

briu

m

Qu

an

tity

$1.00 250 150

Shortage from excess demand

Supply + Demand = Equilibrium

If the market price or quantity supplied is anywhere but at the equilibrium price, the market is in a state called

disequilibrium. There are two causes for disequilibrium:

Market Disequilibrium

Excess Demand Excess demand occurs when

quantity demanded is more than quantity supplied.

Shortage

Excess Supply Excess supply occurs when

quantity supplied exceeds quantity demanded.

Surplus

Interactions between buyers and sellers will always push the market back towards equilibrium.

Price Ceilings

A price ceiling is a maximum price that can be legally charged for a good.

An example of a price ceiling is rent control, a situation where a government sets a maximum amount that can be charged for rent in an area.

Price Floors

A price floor is a minimum price, set by the government, that must be paid for a good or service.

One well-known price floor is the minimum wage, which sets a minimum price that an employer can pay a worker for an hour of labor.

Prices provide a language for buyers and sellers.

Advantages of Prices

1. Prices as an IncentivePrices communicate to both buyers and sellers whether goods or services are scarce or easily available. Prices can encourage or discourage production.

2. SignalsThink of prices as a traffic light. A relatively high price is a green light telling producers to make more. A relatively low price is a red light telling producers to make less.

3. FlexibilityIn many markets, prices are much more flexible than production levels. They can be easily increased or decreased to solve problems of excess supply or excess demand.

4. Price System is "Free"Unlike central planning, a distribution system based on prices costs nothing to administer.

Increasing, Diminishing, and Negative Marginal Returns

Labor(number of workers)

Ma

rgin

al

Pro

du

ct

of

lab

or

(be

an

ba

gs

pe

r h

ou

r)

8

7

6

5

4

3

2

1

0

–1

–2

–3

Diminishing marginal returns occur when marginal production levels decrease with new investment.

4 5 6 7

Diminishing marginal returns

Negative marginal returns occur when the marginal product of labor becomes negative.

8 9

Negative marginal returns

Marginal Returns

1 2 3

Increasing marginal returns

Increasing marginal returns occur when marginal production levels increase with new investment.

Production Costs

A fixed cost is a cost that does not change, regardless of how much of a good is produced. Examples: rent and salaries

Variable costs are costs that rise or fall depending on how much is produced. Examples: costs of raw materials, some labor costs.

The total cost equals fixed costs plus variable costs. The marginal cost is the cost of producing one

more unit of a good.