1. Chapter 7 Supply & Demand

2. Demand
All consumers have a great influence on the price of all goods and services
Demand – the amount of a good or service that consumers are able and willing to buy at various possible prices during a specified period of time
Supply – the amount of a good or service that producers are able and willing to sell at various prices during a specified period of time

3. Demand
Market – the process of freely exchanging goods and services between buyers and sellers
Voluntary Exchange – a transaction in which a buyer and a seller exercise their economic freedom by working out their own terms of exchange (automobiles)

4. Demand Demand exists when a person is willing & able to buy something.
There is an inverse relationship between the quantity demanded and the price.
Law of Demand – economic rule stating that the quantity demanded & price move in opposite directions
As price goes up, quantity demanded goes down.
As price goes down, quantity demanded goes up.

5. Demand
Quantity Demanded – the amount of a good or service that a consumer is willing and able to purchase at a specific price
QD influenced by:
Real Income Effect – economic rule stating that individuals cannot keep buying the same quantity of a product if its price rises while their income stays the same (gasoline
Substitution Effect – economic rule stating that if two items satisfy the same need and the price of one rises, people will buy the other
Diminishing Marginal Utility

6. Demand
Utility – the ability of any good or service to satisfy consumer wants
Marginal Utility – an additional amount of satisfaction
Law of Diminishing Marginal Utility – rule stating that the additional satisfaction a consumer gets from purchasing one or more unit of a product will lessen with each additional unit purchased (soda)

7. Demand Supply and demand are illustrated with graphs.
Demand Schedule – table showing quantities demanded at different possible prices
Demand Curve – downward sloping line that shows in graph form the quantities demanded at each possible price
Refer to graphs on pages 178 & 179
Quantity demanded is a specific point on a graph while demand is represented by the entire graph.

8. Demand Determinants of Demand Change in population Changes in income
Changes in tastes and preferences
Substitutes
Complementary goods – a product often used with another product
Refer to graphs on pages 182 & 183

9. Demand
Elasticity – economic concept dealing with consumers’ responsiveness to an increase or decrease in the price of a product
Price Elasticity of Demand – economic concept that deals with how much demand varies according to changes in price
Elastic Demand – situation in which the rise or fall in a product’s price greatly affects the amount that people are willing to buy
Inelastic Demand – situation in which a product’s price change has little impact on the quantity demanded by consumers
Factors affecting elasticity
Existence of substitutes (insulin & soda)
% of budget devoted to that good (pepper & cars)
Time consumers are given to adjust to price (electricity)

10. Supply
Law of Supply – economic rule stating that price and quantity supplied move in the same direction
As the price rises for a good, the quantity supplied generally rises.
As the price falls, the quantity supplied also falls.
Quantity Supplied – the amount of a good or service that a producer is willing and able to supply at a specific price
The higher the price the greater the profit incentive.

11. Supply
Supply Schedule – table showing quantities supplied at different prices
Supply Curve – upward-sloping line that shows in graph form the quantities supplied at each possible price
Be familiar with graphs on pages 188 & 189.

12. Supply
Law of Diminishing Returns – after a certain point adding additional factors of production output increases at a diminishing rate
Determinants of Supply
Price of inputs
Number of firms in the industry
Taxes
Technology
Graphs on page 191

13. Supply & Demand
As price goes down, quantity demanded goes up and supply goes down
As price goes up, quantity demanded goes down and supply goes up.
Equilibrium Price – the price at which the amount producers are willing to supply is equal to the amount consumers are willing to buy
Graph on page 195

14. Supply & Demand
Shortage – situation in which the quantity demanded is greater than the quantity supplied at the current price
Surplus – situation in which quantity supplied is greater than quantity demanded at the current price

15. Supply & Demand
Price Ceiling – a legal maximum price that may be charged for a particular good or service
Rationing – the distribution of goods and services based on something other than price
Black Market – underground or illegal market in which goods are traded above their legal price or in which illegal goods are sold
Price Floor – a legal minimum price below which a good or service may not be sold