1. The art of Supply and Demand
Microeconomics
The art of Supply and Demand

2. Microeconomics
Economics dealing with decision making by small units. (individuals and firms)
How prices are eventually determined
What is wanted and at what price can it be sold?

3. Why do you think some goods are more expensive than others?
What causes people to want one good more than another, even if they are nearly identical?
Why do people’s tastes change?
What can cause prices to change for the same good?

4. Supply and Demand
Law of supply: Suppliers will offer more of a product at high prices, and less at lower prices
Law of Demand: The amount of good up for sale, varies inversely with it’s price (As the price goes down, more are willing to buy it)

5. Demand
The desire, willingness, and ability to buy a product at a given price
Important for sound planning by businesses

6. Demand Schedule Shows what people are willing to buy at what prices.
Info used to create a demand curve

7. Demand Schedule

10. What affects demand? Substitution Effect: Income Effect:
If the price of an item rises and there are substitutes for that item, the demand will go down.
Income Effect:
As prices go up, you feel like you have less money, therefore you are able to buy less, or not buy it at all.
Consumption goes down.

11. Marginal Utility
The extra satisfaction one gets from acquiring one more unit of a product
Law of Diminishing Marginal Utility:
Satisfaction diminishes with each extra unit of a product .

12. Shifts in Demand Change in the amount of income one has
Change in the tastes of the consumer
The availability of substitutes
Change in the price of a complementary good
Expectations of the future change
Change in the number of consumers
All of these can cause a shift to the right or left!

13. Elasticity of Demand
How much change is there in demand when the price of a product changes?

14. Calculate elasticity by…
Change in demand divided by change in price.
If the elasticity is less than one, it is inelastic
People will buy the same amount no matter the price
If the elasticity is greater than 1, it is elastic.
People will buy more/less depending on the price
If demand is equal to 1, it is unitary.
Percent change in price and demand is the same

16. Determinants of elasticity
Importance of good to consumer
Necessity or luxury
What substitutes are available?

17. If you were a producer, what would determine how much of your product you would produce?
Would you produce a good or service that is very similar to another good? Why or why not?
How would you gauge the price you could sell your product at?

18. The Law of Supply
The higher the price, the more of a good will be produced. (quantity supplied)
Price Supply Price Supply
If ceteris peribus

19. Elasticity of Supply Depends on time (short run or long run)
Elastic supply = small change in price, big change in supply (short term)
Elasticity can change over time

21. Supply Questions How much to produce? How many laborers needed?
Specialization can increase output. (increasing marginal return)
How many laborers needed?
If you hire too many, you may produce more product, but be losing profit (diminishing marginal returns)

23. Surplus here
Shortage here

24. Shift in demand cause EQ price to change.

26. Production Costs Fixed Variable Total cost Marginal
Cost that does not change, same no matter how much is produced
Variable
Rise or fall depending on output
Total cost
Fixed + variable
Marginal
The additional cost of producing one more unit

27. Excess When demand is greater than supply
Price is below the equilibrium level
When supply is greater than the demand
Price is too high above equilibrium level

28. Government intervention
Subsidies
Gov’t pays producers to producer for each unit produced
Excise Tax
A tax on each unit of a product made
Price Ceilings
The highest price that can be charged for a good or service, set by law
Price Floors
The minimum price that can be charged for a good or service, set by law