1. Chapter 7 Demand & Supply Demand & Supply

2. Demand the amount of a good or service that consumers are able and willing to buy at various possible prices.

3. Law of Demand As price goes up quantity demanded goes down. As price goes down, quantity demanded goes up. The quantity demanded and price move in opposite directions. (Inverse)

4. Demand Schedule

5. Demand Curve

6. Law of Demand The factors that explain this inverse relation between price and quantity demanded are: Real Income Effect Substitute Goods Marginal Utility Diminishing Marginal Utility

7. Real Income Effect- individuals cannot keep buying the same quantity of a product if its price rises while their income stays the same Substitute Goods- A product that satisfies the same basic want as another product. Substitute goods may be used in place of one another. Marginal Utility -the extra satisfaction or pleasure achieved from the increase of one additional unit of a good or service. Diminishing Marginal Utility-the additional satisfaction a consumer gets from purchasing one more unit of a product will lessen with each additional unit purchased

8. What Can Cause Demand to Change? Demand Shifters/Determinants Factors other than price can shift demand. Changes in income. Changes in the number of consumers. Changes in consumer tastes and preferences. Changes in consumer expectations. Changes in the price of substitute goods. Changes in the price of complementary goods.

9. Demand Curve with Shifters Decrease

10. Demand Curve with Shifters-Increase

11. Elasticity of Demand- A measure of consumer’s sensitivity to a change in price. Inelastic- a product’s price change has little impact on the quantity demanded by consumers. (Salt, Sugar, medicine, milk).

12. Factors that influence Elasticity of Demand 1.Availability of Substitutes. 2.Price Relative to Income. 3.Necessities versus luxuries. 4.Time needed to adjust to a price change.- Elasticity can change over time. Gasoline has become more elastic.

13. Supply The amount of good or service that producers are able and willing to supply at various prices.

14. Law of Supply As the price rises for a good, the quantity supplied generally rises. As the price falls, the quantity supplied also falls. Price and quantity supplied move in the same direction

15. Supply Schedule

16. Supply Curve

17. What Can Cause Supply to Change? Supply Shifters/Determinants Changes in the cost of inputs Changes in the number of producers. Changes in conditions due to natural disasters or international events. Changes in technology. Changes in producer expectations. Changes in government policy.

18. Supply Curve with Shifters-Increase

19. Supply Curve with Shifters-Decrease

20. Law of Diminishing Returns As more units of a factor of production (such as labor) are added to other factors of production (such as equipment), after some point total output continues to increase but at a diminishing rate.

21. What Happens When Demand Meets Supply? Equilibrium Price This is the price at which the amount producers are willing to supply is equal to the amount consumers are willing to buy.

22. Equilibrium Price

23. Prices Serve as Signals What happens when the Price isn’t “Right?” When the price is too low: Shortages- quantity demanded is greater than the quantity supplied. When the price is too high: Surpluses- quantity supplied is greater than quantity demanded.

24. Price Controls Price Ceiling- a legal (gov’t set) maximum price that may be charged for a particular good or service. example: what landlords can charge for rent, the price of gasoline. Effective price ceilings–and resulting shortages– often lead to nonmarket ways of distributing goods and services. The government may resort to: Rationing- or limiting, items that are in short supply. Black Market- illegally high prices are charged for items in short supply.

25. Price Controls-Continued Price Floor- government set minimum price that can be charged for goods and services. Price floors prevent prices from dropping too low. Example- minimum wage, supporting agricultural prices.