Chapter 2 Demand and Supply GR. 12 ECONOMICS (CIA4U1) M. NICHOLSON

Markets and Circular Flows Households / Consumers Businesses Factor / Resource Market Product Market

The Role of Demand What is Demand? Demand: the relationship between the various possible prices of a product and the quantities of that product consumers are willing to purchase Quantity demanded: the amount of a product consumers are willing to purchase at each price

The Role of Demand Law of Demand: Law of demand: states that there is an inverse relationship between a product’s quantity demanded and it price Demand schedule: a table that shows possible combinations of prices and quantities demanded of a product Demand curve: a graph that expresses possible combinations of prices and quantities demanded of a product Change in quantity demanded: the effect of a price change on quantity demanded

The Role of Demand Change in Demand: Market Demand: the sum of all consumers’ quantity demanded for product at each price Demand determinants: factors that can cause an increase or decrease in a product’s demand Increase in demand: an increase in the quantity demanded of a product at all prices Decrease in demand: a decrease in the quantity demanded of a product at all prices

Demand Determinants: Consumer’s taste Personal income Normal goods: products whose demand changes directly with income Inferior goods: products whose demand changes inversely with income Change in price of other products Substitute goods: products that can be consumed in place of one another Complementary goods: products that are consumed together Consumers expectation concerning price Population increase/decrease

Price Elasticity of Demand: Price elasticity of demand: the responsiveness of a product’s quantity demanded to a change in its price Elastic demand: demand for which a % of change in a product’s price causes a larger % change in Qd Inelastic demand: demand for which % of change in a product’s price causes a smaller % change in Qd Perfectly elastic demand: demand for which a product’s price remains constant regardless of Qd Perfectly inelastic demand: demand for which a product’s Qd remains constant regardless of price

Factors that affect price elasticity of demand: Portion of consumer incomes Access to substitutes Necessities vs luxuries

Price Elasticity of Demand + Supply: Supply: the relationship between the various possible prices of a product and the quantities of the product that businesses are willing to supply Quantity supplied: the amount of a product businesses are willing to supply at each price Market supply: the sum of the producers’ quantities supplied at each price

The Law of Supply: Law of supply: states that there is a direct relationship between a product’s quantity supplies and its price Supply schedule: a table that shows possible combinations of prices and quantities supplied of a product Supply curve: a graph that expresses possible combinations of prices and Qs Change in quantity supplied: the effect of a price change on Qs Supply determinants: factors that can cause an increase or decrease a product’s supply Increase in supply: an increase in the Qs of a product at all prices Decrease in supply: a decrease in the Qs of a product at all prices

Supply Determinants: Change in cost of production Increased productivity Government subsides Taxes Change in # of producers in market Climatic conditions

Price Elasticity of Supply: Price elasticity of supply: the responsiveness of a product’s quantity supplied to a change in price Elastic supply: supply for which a % change in a product’s price causes a larger % change in Qs Inelastic supply: supply for which a % change in a product’s price causes a smaller % change in Qs

Factors that Affect Supply Elasticity: Immediate run: the production period during which none of the resources required to make a product can be varied Perfectly inelastic supply: supply for which a product’s Qs remains constant regardless of price Short run: the production period during which at least one of the resources required to make a product cannot be varied Long run: the production period during which all resource required to make a product can be varied, and businesses may either enter or leave the industry Constant-cost industry: an industry that is not a major user of any single resource Increasing-cost industry: an industry that is a major user of at least one resource Perfectly elastic supply: supply for which a product’s price remains constant regardless of Qs

Marginal Utility William Stanley Jevons: developed the law of diminishing marginal utility As a consumer purchases more units of a particular product in a give time period, that consumer’s extra satisfaction from each additional unit falls MU/P1 = MU/P2

Elasticity Elastic Inelastic Unitary Demand / Supply 1< >1 1