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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.

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Presentation on theme: "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."— Presentation transcript:

1 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

2 What does DEMAND mean?!?!!? To have demand for a product you must be WILLING and ABLE to purchase the product WILLING + ABLE = DEMAND \

3 LAW OF DEMAND Price Demand 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

4 Quantity Demanded vs. Demand PRICE 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)

5 To illustrate the difference….

6

7 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 $ $.50 $1.00 $1.50 $2.00 $2.50 $

8 The Demand Curve A demand curve is a graphical representation of a demand schedule. Three characteristics of every demand curve: 1. Downward sloping 2. Must assume ceteris paribus 3. Relationship between price and quantity What is the one factor that causes a shift in the quantity demanded? Market Demand Curve Slices of pizza per day Price per slice (in dollars) Demand PRICE

9 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

10 Shifting the Whole Demand Curve

11 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?

12 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.

13 Factors Affecting Elasticity

14 Price As price increases… Supply Quantity supplied increases Price As price falls… Supply Quantity supplied falls The Law of Supply According to the law of supply, as price increases, supply increases. By contrast as price decreases, supply decreases.

15 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? produce more 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! new firms 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!

16 $.501,000 Price per slice of pizzaSlices supplied per day Market Supply Schedule $1.001,500 $1.502,000 $2.002,500 $2.503,000 $3.003,500 Supply Schedules A market supply schedule is a chart that lists how much of a good all suppliers will offer at different prices.

17 Market Supply Curve Price (in dollars) Output (slices per day) 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.

18 Shifting the Whole Supply Curve 1. Input Costs 2. Government Influences on Supply 3. Number of Producers 4. Global Economy

19 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

20 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.

21 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.

22 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.

23 What Affects Elasticity of Supply? Time

24 ESSENTIAL QUESTIONS: CHAPTER 6 Chapter 6: Prices

25 Price per slice Equilibrium Point Finding Equilibrium Price of a slice of pizza Quantity demanded Quantity supplied Result Combined Supply and Demand Schedule $ $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $.50 Slices of pizza per day Supply Demand Balancing the Market The point at which quantity demanded and quantity supplied come together is known as equilibrium. $2.00 $2.50 $ Surplus from excess supply $ Equilibrium Equilibrium Price a Equilibrium Quantity $ Shortage from excess demand Supply + Demand = Equilibrium

26 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.

27 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.

28 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.

29 Prices provide a language for buyers and sellers. Advantages of Prices 1. Prices as an Incentive Prices communicate to both buyers and sellers whether goods or services are scarce or easily available. Prices can encourage or discourage production. 2. Signals Think 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. Flexibility In 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.

30 Increasing, Diminishing, and Negative Marginal Returns Labor (number of workers) Marginal Product of labor (beanbags per hour) –1 –2 –3 Diminishing marginal returns occur when marginal production levels decrease with new investment Diminishing marginal returns Negative marginal returns occur when the marginal product of labor becomes negative. 89 Negative marginal returns Marginal Returns 123 Increasing marginal returns Increasing marginal returns occur when marginal production levels increase with new investment.

31 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.


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