Objectives: 1.Describe how demand differs from the quantity demanded 2.Explain what the law of demand states 3.Explain what demand schedules and demand curves illustrate

12.1: Students understand common economic terms and concepts and economic terms and concepts and economic reasoning economic reasoning Adam Smith

What does this scenario tell you about the concepts of Demand vs. Quantity Demanded?

Demand vs. Quantity Demanded Demand: amount of a good or service that a consumer is willing and able to buy at various possible prices during a given time period Quantity demanded is the amount of a good or service that a consumer is willing and able to buy at each particular price during a given time period

Two important conditions of demand First, the consumer must be willing and able to buy the good or service Second, the time period under study must be specific because various factors that change over time can affect the demand for the product

The law of demand An increase in a good’s price causes a decrease in the quantity demanded; a decrease in price causes an increase in the quantity demanded

Income Effect Any increase or decrease in consumers’ purchasing power caused by a change in price 1973—gas prices from $.19 to $.55 per gallon

Substitution Effect Substitution effect: the tendency of consumers to substitute a similar, lower-priced product for another product that is relatively more expensive Yep! Salaries are down and gas prices are up so I’ll be driving less and riding my bicycle more. Even though water rates are higher, however, we are still using the same amount of water for showers, laundry, cooking and the yard. In that case, the substitution effect does not apply.

Diminishing Marginal Utility As more units of a product are consumed, the satisfaction received from consuming each additional unit declines. The marginal, or additional, utility of each unit consumed diminishes, or lessens, with each additional unit.

Price per Backpack Quantity Demanded$70100 $50170 $40250 $35400 $25500 Demand Schedule Demand Curve Backpacks in Oakdale $90 $70 $50 $40 $35 $ Price per backpack Price per backpack Quantity demanded (in hundreds) Quantity demanded (in hundreds)

Price perQuantity Demanded Demand Schedule Demand Curve Price per Price per Quantity demanded (in ) Quantity demanded (in )

We have had a significant change in enrollment in the Oakdale Joint Unified School District. Enrollment has increased/decreased by 300 students!

Decrease in Demand Backpacks in Oakdale $90 $70 $50 $40 $35 $ Price per backpack Price per backpack Quantity demanded (in hundreds) Quantity demanded (in hundreds) $90 $70 $50 $40 $35 $ Quantity demanded (in hundreds) Quantity demanded (in hundreds) Increase in Demand

Decrease in Demand Quantity demanded (in ) Quantity demanded (in ) Increase in Demand

Shifts in Demand (Determinants of Demand) Consumer tastes and preferences

Shifts in Demand (Determinants of Demand) Market size: a larger number of consumers means greater potential demand. Three forces: decisions by private businesses, governmental policy decisions and technology.

Shifts in Demand (Determinants of Demand) Income—when it increases, people have more money to spend, creating a greater demand for goods and services Income effect—change in purchasing power caused by a change in prices Personal income brings a different amount of money into that household—the change in income, rather than a change in price, causes the shift in demand as more product is bought at the same price

Teacher’s income, hence purchasing power, has decreased this year because our salaries were cut. Oh well. We’ll be demanding less in the market place.

Shifts in Demand (Determinants of Demand) Prices of related goods A.Substitute goods: substitution effect is the tendency of consumers to switch to lower-price substitutes (oleo for butter or ground beef for steak) B.Complementary goods—an increase in housing sales causes an increase in the demand for refrigerators and ranges

Shifts in Demand (Determinants of Demand) Consumer expectations How expecting good or bad times ahead affects demand With this pay cut, Becky and I will be traveling less and will have to defer improvements to the house into the future.

Shifts in Demand vs. Change in Quantity Demanded A shift in demand refers to a change in the demand of a product at each and every price; a change in the quantity demanded refers to a change in the demand of a product at a specific price

News flash! More fun and games today learning about demand and supply! I’m so happy I could just spit!!!

Objectives: 1.Define demand elasticity 2.Describe the difference between elastic and inelastic demand 3.Explain how demand elasticity is measured

12.1: Students understand common economic terms and concepts and economic terms and concepts and economic reasoning economic reasoning Adam Smith

Elasticity of Demand The degree to which changes in a good’s price affect the quantity demanded by consumers Elastic Demand Exists when a small change in a good’s price causes a major, opposite change in the quantity demanded. A good’s elasticity can change if  The product is not a necessity  There are readily available substitutes  The product’s cost represents a large portion of consumers’ income consumers’ income

Number Purchased per Week Number Purchased per Week Price per Boat Price per Boat $60,000$50,000$40,000$30,000$20,000$10,000 0 Recreational Boats Sold in Modesto

Inelastic Demand Exists when a change in a good’s price has little impact on the quantity demanded. A good usually has inelastic demand if  The product is a necessity  There are few or no readily available substitutes  The product’s cost represents a small portion of consumers’ income consumers’ income

Number Demanded per Winter Month Number Demanded per Winter Month Price per Shovel Price per Shovel $50 $50 $40 $40 $30 $30 $20 $20 $10 $10 0 Snow shovels in Springfield, Illinois

How can a Product have both an Elastic and an Inelastic Demand? Demand for a product may be inelastic in general, but elastic in a specific market. Also the degree of a product’s demand elasticity can vary across price ranges. Inelastic in the Midwest and East but elastic in Sonora, CA

The Total-Revenue Test (Total Receipts) A drop in total revenue after a price increase indicates elastic demand; an increase indicates inelastic demand. To calculate a product’s elasticity of demand in response to a price change, economists divide the percentage that the product’s quantity demanded changed by the percentage that the product’s price changed

Quantity Demanded (In thousands) Quantity Demanded (In thousands) Price per Ticket Price per Ticket $6.00 $6.00 $5.00 $5.00 $4.00 $4.00 $3.00 $3.00 $2.00 $2.00 $1.00 $ Movie Tickets in City X Elastic Inelastic

Product’s Elasticity of Demand 10,000/30,000 = 34%--% change in qty $1/$4 = 25%--% change in price 34%/25% = 1.36 = elastic Change > 1 = elastic Change < 1 = inelastic

Objectives: 1.Explain the difference between supply and quantity supplied 2.Explain the law of supply 3.Explain what supply schedules and supply curves illustrate 4.Describe supply elasticity

12.1: Students understand common economic terms and concepts and economic terms and concepts and economic reasoning economic reasoning Adam Smith

Supply vs. Quantity Supplied Supply is the quantity of goods and services that producers are willing and able to offer at VARIOUS possible prices while the quantity supplied is the amount of a good or service that a producer is willing to sell at EACH particular price

The Law of Supply Producers supply more goods and services when they can sell them at higher prices and fewer goods and services when they must sell them at lower prices. When prices were high, General Washington sold 10,000 sacks of corn meal a year. When prices were low he sold 7,500 sacks a year.

The Profit Motive Profit motive: the desire to make money Profit—when revenues are greater than costs of production To make a profit, producers must provide the goods and services that consumers want at prices that consumers are willing and able to pay I’m a contractor who makes family homes for under $250,000. I can make a profit while satisfying customers.

Price perQuantity Demanded Supply Schedule Supply Curve Price per Backpack Price per Backpack Quantity Supplied (in hundreds) Quantity Supplied (in hundreds) Price per Backpack Quantity Supplied$70500 $50450 $40350 $35200 $250 Backpacks in Oakdale $90 $70 $50 $40 $35 $

Price perQuantity Demanded Supply Schedule Supply Curve Price per Price per Quantity Supplied (in ) Quantity Supplied (in )

Elasticity of Supply The degree to which price changes affect the quantity supplied When whiskey prices rose, General Washington distilled and sold (supplied) more; but he limited production when prices dropped.

Elastic Supply Elastic supply exists when a small change in price causes a major change in the quantity supplied; products with elastic supply usually can be made quickly, inexpensively and using a few, readily available resources

Price per T-Shirt Price per T-Shirt Quantity Supplied (in thousands) Quantity Supplied (in thousands) New Orleans Saints T-Shirts $30 $25 $20 $15 $10 $ Elastic Supply

Inelastic Supply Inelastic supply exists when a change in a good’s price has little impact on the quantity supplied. A product usually has an inelastic supply if production requires a great deal of time, money, and resources that are not readily available. Beachfront homes

Price per House (in ten thousands) Price per House (in ten thousands) Quantity Supplied Quantity Supplied Beachfront Houses $100 $ 90 $ 80 $ 70 $ 60 $ Inelastic Supply

Objectives: 1.Explain what it means for a product’s supply to shift 2.Identify determinants that might cause a product’s supply curve to shift 3.Describe the difference between a tax and a subsidy 4.Explain why producers look at productivity when making supply decisions 5.Describe how varying the levels of input affects the levels of output

12.1: Students understand common economic terms and concepts and economic terms and concepts and economic reasoning economic reasoning Adam Smith

Decrease in Supply Price per Backpack Price per Backpack Quantity Supplied (in hundreds) Quantity Supplied (in hundreds) Backpacks in Oakdale $90 $70 $50 $40 $35 $ Increase in Supply Quantity Supplied (in hundreds) Quantity Supplied (in hundreds) $90 $70 $50 $40 $35 $

Decrease in Supply Quantity Supplied (in hundreds) Quantity Supplied (in hundreds) Increase in Supply Quantity Supplied (in hundreds) Quantity Supplied (in hundreds)

Factors (Determinants of) Supply Prices of resources—a resource is anything that is used in the production of a good or service (raw materials, electricity, wages). Any price change for a resource increases or decreases a business’s production costs. A decrease in the price of a resource often causes producers to supply more product to the market at each and every price. The opposite is also true. Hmph! The darned union threatened to strike, so I had to raise wages by 2.5%. Now I’ll have to cut supply.

Factors (Determinants of) Supply Government tools: taxes, subsidies and regulation.

Factors (Determinants of) Supply Government tools: taxes, subsidies and regulation.

Factors (Determinants of) Supply Government tools: taxes, subsidies and regulation.

Factors (Determinants of) Supply Technology: new technology makes production more efficient and less expensive, causing the costs of production to decrease allowing producers to supply more goods and services at each and every price; can be costly at first and can cause job loss for labor

Factors (Determinants of) Supply Competition tends to increase supply while lack of competition tends to decrease supply.

Factors (Determinants of) Supply Prices of related goods

Factors (Determinants of) Supply Producer expectations

Shifts in Supply Curve vs. Change in Quantity Supplied A change in quantity supplied is indicated by movement along the supply curve; a shift in supply is indicated by the movement of the entire supply curve to the right or left.

Productivity and the two “Products” Businesses Examine Productivity is the amount of goods and services produced per unit of input—it tells business owners how efficiently their resources are being used in production. Total product (also called total output)—all of the product a company makes in a given period of time with a given amount of input Marginal product is the change in output generated by adding one more unit of input.

The Law of Diminishing Returns Describes the effect that varying the level of an input has on total and marginal product; it states that as more of one input is added to a fixed supply of other resources, productivity increases up to a point. At some point the marginal product will diminish. Eventually it will result in negative marginal product.

Three Stages of Production Predicted by the Law of Diminishing Returns—Figure 4-6, p. 90 Increasing Marginal Returns: As each of the first 11 workers are added, output rises at a faster rate.

Labor Input Total Prod Marg. Prod Fixed Costs Var. Costs Total Costs Marg Costs 000$3,400$0$3, , ,615$ , , , , , , ,4001,0754, ,4001,2904, ,4001,5054, ,4001,7205, ,4001,9355, ,4002,1505, ,4002,3655, ,4002,5805, ,000153,4002,7956, ,4003,0106, ,4003,2256,625-

Three Stages of Production Predicted by the Law of Diminishing Returns—Figure 4-6, p. 90 Diminishing Marginal Returns—at some point, output begins to increase at a diminished rate

Labor Input Total Prod Marg. Prod Fixed Costs Var. Costs Total Costs Marg Costs 000$3,400$0$3, , ,615$ , , , , , , ,4001,0754, ,4001,2904, ,4001,5054, ,4001,7205, ,4001,9355, ,4002,1505, ,4002,3655, ,4002,5805, ,000153,4002,7956, ,4003,0106, ,4003,2256,625-

Three Stages of Production Predicted by the Law of Diminishing Returns—Figure 4-6, p. 90 Negative Marginal Returns—at some point, output begins to decrease

Labor Input Total Prod Marg. Prod Fixed Costs Var. Costs Total Costs Marg Costs 000$3,400$0$3, , ,615$ , , , , , , ,4001,0754, ,4001,2904, ,4001,5054, ,4001,7205, ,4001,9355, ,4002,1505, ,4002,3655, ,4002,5805, ,000153,4002,7956, ,4003,0106, ,4003,2256,625-

Depreciation: cost of the good (distillery building) divided by the life of the good (building’s age); generally based on local tax laws Fixed costs (overhead) Some production costs do not change regardless of how many goods are produced Includes costs such as rent, interest on loans, property insurance premiums, local and state property taxes, and salaries George Washington’s distillery

Labor Input Total Prod Marg. Prod Fixed Costs Var. Costs Total Costs Marg Costs 000$3,400$0$3, , ,615$ , , , , , , ,4001,0754, ,4001,2904, ,4001,5054, ,4001,7205, ,4001,9355, ,4002,1505, ,4002,3655, ,4002,5805, ,000153,4002,7956, ,4003,0106, ,4003,2256,625-

Variable costs Change as the level of output changes Raw materials and wages

Labor Input Total Prod Marg. Prod Fixed Costs Var. Costs Total Costs Marg Costs 000$3,400$0$3, , ,615$ , , , , , , ,4001,0754, ,4001,2904, ,4001,5054, ,4001,7205, ,4001,9355, ,4002,1505, ,4002,3655, ,4002,5805, ,000153,4002,7956, ,4003,0106, ,4003,2256,625-

Total costs: fixed + variable Marginal costs—the additional costs of producing one more unit of output Only variable costs considered Marginal cost is the variable cost increase divided by the number of additional items produced

Labor Input Total Prod Marg. Prod Fixed Costs Var. Costs Total Costs Marg Costs 000$3,400$0$3, , ,615$ , , , , , , ,4001,0754, ,4001,2904, ,4001,5054, ,4001,7205, ,4001,9355, ,4002,1505, ,4002,3655, ,4002,5805, ,000153,4002,7956, ,4003,0106, ,4003,2256,625- +$ $430/125=$3.44 marginal cost of going from 11 workers to 13 workers 11 workers to 13 workers