2 DemandAll consumers have a great influence on the price of all goods and servicesDemand – the amount of a good or service that consumers are able and willing to buy at various possible prices during a specified period of timeSupply – 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 DemandMarket – the process of freely exchanging goods and services between buyers and sellersVoluntary 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 directionsAs price goes up, quantity demanded goes down.As price goes down, quantity demanded goes up.
5 DemandQuantity Demanded – the amount of a good or service that a consumer is willing and able to purchase at a specific priceQD 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 (gasolineSubstitution Effect – economic rule stating that if two items satisfy the same need and the price of one rises, people will buy the otherDiminishing Marginal Utility
6 DemandUtility – the ability of any good or service to satisfy consumer wantsMarginal Utility – an additional amount of satisfactionLaw 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 pricesDemand Curve – downward sloping line that shows in graph form the quantities demanded at each possible priceRefer to graphs on pages 178 & 179Quantity 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 preferencesSubstitutesComplementary goods – a product often used with another productRefer to graphs on pages 182 & 183
9 DemandElasticity – economic concept dealing with consumers’ responsiveness to an increase or decrease in the price of a productPrice Elasticity of Demand – economic concept that deals with how much demand varies according to changes in priceElastic Demand – situation in which the rise or fall in a product’s price greatly affects the amount that people are willing to buyInelastic Demand – situation in which a product’s price change has little impact on the quantity demanded by consumersFactors affecting elasticityExistence of substitutes (insulin & soda)% of budget devoted to that good (pepper & cars)Time consumers are given to adjust to price (electricity)
10 SupplyLaw of Supply – economic rule stating that price and quantity supplied move in the same directionAs 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 priceThe higher the price the greater the profit incentive.
11 SupplySupply Schedule – table showing quantities supplied at different pricesSupply Curve – upward-sloping line that shows in graph form the quantities supplied at each possible priceBe familiar with graphs on pages 188 & 189.
12 SupplyLaw of Diminishing Returns – after a certain point adding additional factors of production output increases at a diminishing rateDeterminants of SupplyPrice of inputsNumber of firms in the industryTaxesTechnologyGraphs on page 191
13 Supply & DemandAs price goes down, quantity demanded goes up and supply goes downAs 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 buyGraph on page 195
14 Supply & DemandShortage – situation in which the quantity demanded is greater than the quantity supplied at the current priceSurplus – situation in which quantity supplied is greater than quantity demanded at the current price
15 Supply & DemandPrice Ceiling – a legal maximum price that may be charged for a particular good or serviceRationing – the distribution of goods and services based on something other than priceBlack Market – underground or illegal market in which goods are traded above their legal price or in which illegal goods are soldPrice Floor – a legal minimum price below which a good or service may not be sold