Recap So far we have discussed some of the fundamental concepts of Economics. –Sec 1 Definition of economics –Sec 2 & 3 Addressed limited resources 7 scarcity –Sec 4 & 5 Institutional forces that affect economic behaviors

Objectives The major factors that explain the operation of our market economy. The concepts of supply & demand. Elastic & inelastic demand.

Wordsmithing Law of Diminishing Demand –states that as the demand price goes up or down, so will the supply of the good/service. Demand Curve –shows the amount of goods/services that will be purchased at various prices. Substitutes –alternative goods/services. The greater the number of substitutes the greater degree of elasticity.

Wordsmithing cont. Elastic Demand –As prices fluctuates, so does demand. Price goes up=demand goes down or vise-versus Inelastic Demand –Price fluctuates up/down within a relevant range while demand stays consistent Supply Curve –Amount of goods/services available at various prices Market Equilibrium Point –The point at which the quality & price sellers are willing to offer is equal to quality/price buyers are willing to accept

“Forecasting is like trying to drive a car blindfolded and following directions given by a person who is looking out the back window”. -Anonymous

Law of Diminishing Demand Most families budget a certain amount of money to be spent on groceries each week/month. If the price of hamburger drops, it is reasonable to expect that he/she will switch some of their food money to hamburger and away from some other foods. On the other hand, if hamburger prices rises, you would expect them consumers to buy less hamburger and more of other foods.

Demand Curve If we plot on a graph how much hamburger consumers would purchase at different prices, we would have a demand curve similar to the one on the next slide.

Demand Curve for Hamburger A 2.50.B 2.00.C 1.50.D 1.00.E

Demand Curve With all these prices & quantities to choose from, how does one know what the best price is? If you are the buyer, the lower the price, the better the deal. If you are the seller, the price needs to be set where you will get the greatest total revenue. The easiest way of comparing different price levels is to make a demand schedule.

Demand Schedule PointPrice per lbQuantity/lbsTotal revenue A$3.002$6.00 B$2.504$10.00 C$2.006$12.00 D$1.508$12.00 E$1.0010$10.00

Demand Schedule So based on the demand schedule, the price that will yield the greatest total revenue for the seller would be between $1.50 and $2.00; they both yielded $ At the price of $1.75, the seller should sell 7 pounds, which would be the optimum price ($1.75 X 7 = $12.25).

Elastic Demand All products do not have the same demand curve. Because of the great number of substitutes for hamburger, demand will fluctuate (up or down) depending on its selling price. This fluctuating demand is called elastic demand.

Inelastic Demand If a certain product, such as gasoline, does not have many good substitutes, the demand will remain the same as long as there is not a quick, radical change in price. Let’s take a look at what a demand curve for gasoline looks like…………..

Demand Curve for Gasoline P R I C E ($) A 1.30B 1.20C 1.10D 1.00E Demand (Quantity in Gallons)

Demand Curve As we can see from the demand curve, relatively small changes in price will not change people’s driving habits, so demand will stay the same. When demand stays relatively constant with small percentage changes in price, this is referred to as inelastic demand.

Demand Schedule for Gasoline PointPrice per Gallon Quantity in Gallons Total Revenue A$1.4020$28 B$1.3020$26 C$1.2020$24 D$1.1020$22 E$1.0020$20

Demand Schedule AS you might have noticed, as price goes down, so does total revenue. On the other hand, as price goes up, so does total revenue. When the price and total revenue move in the same direction, this indicates inelastic demand. The optimum price for the seller would be at the highest level where price does not affect demand.

Supply Curve So far things should be making sense. This is because of the simple example in which we have had only one seller and one buyer. However, we still need to factor in suppliers. In remembering the law of diminishing demand, as the demand prices rises, so does the supply quantity and as supply increases, prices tend to decrease.

Supply Curve With all this in mind, the market price for gasoline will be driven downward by increased supply if the price was set at the top of the demand curve. This is because at very high prices more firms are willing to supply the market. How much suppliers are willing to release into the market depends on the price they can receive. Typically, the higher the price, the more suppliers will release to the market.

Supply Curve for Gasoline PRICEPRICE Supply ( Quantity in Gallons

Market Equilibrium Point Suppliers want to maximize their total revenue, just as sellers do. So when the quantity & price that sellers are willing to offer are equal to the quantity & price that the buyers are willing to accept, then they have reached the market equilibrium point.

Class Participation Required

Supply and Demand

Review As prices fluctuates, so does demand. Price goes up=demand goes down or vise-versus Price fluctuates up/down within a relevant range while demand stays consistent Amount of goods/services available at various prices The point at which the quality & price sellers are willing to offer is equal to quality/price buyers are willing to accept

Review –states that as the demand price goes up or down, so will the supply of the good/service. –shows the amount of goods/services that will be purchased at various prices. –alternative goods/services. The greater the number of substitutes the greater degree of elasticity.