1. Demand and Supply Chapter 3

2. Demand demand is a schedule that shows the various amounts of a product consumers are WILLING and ABLE to BUY at each specific price at a specific time. demand is a schedule that shows the various amounts of a product consumers are WILLING and ABLE to BUY at each specific price at a specific time.

3. Demand Schedule: listing that shows the # demanded at different prices Demand Schedule: listing that shows the # demanded at different prices Demand Schedule for Donuts Price Quantity $20 $1.501 $1.003 $.756 $.5015 $.2525

4. Demand Curve: the schedule on a graph Demand Curve: the schedule on a graph See graph on document camera See graph on document camera

5. Law of Demand There is an inverse relationship between price & quantity demanded There is an inverse relationship between price & quantity demanded –If price , demand  –If price , demand 

6. Marginal Utility: Marginal Utility: Extra satisfaction from getting one more unit of a product Diminishing marginal utility: the extra satisfaction we get from one more unit begins to diminish Diminishing marginal utility: the extra satisfaction we get from one more unit begins to diminish –i.e., the third donut, yields less extra satisfaction than the first.

7. Demand Curve Always Downward sloping—indicating lower quantity demanded at higher prices, higher quantities at lower prices Always Downward sloping—indicating lower quantity demanded at higher prices, higher quantities at lower prices Change in PRICE reflects movement along the curve = change in quantity demanded Change in PRICE reflects movement along the curve = change in quantity demanded

8. If a change in demand is NOT caused by a change in PRICE, the entire curve will shift = change in demand If a change in demand is NOT caused by a change in PRICE, the entire curve will shift = change in demand

9. Determinants that affect demand (other than price) Consumer tastes Consumer tastes # of buyers # of buyers Income Income Prices of related goods Prices of related goods –Substitute goods –Complementary goods Expectations Expectations

10. Demand Schedule for Donuts Price Quantity1Quantity2 $201 $1.5013 $1.0036 $.75615 $.501525 $.252535 Demand has increased so the curve has shifted to the right.

11. Income Effect: Lower prices increase the purchasing power of money income enabling the consumer to buy more at lower prices Income Effect: Lower prices increase the purchasing power of money income enabling the consumer to buy more at lower prices

12. Substitution Effect: a lower price gives an incentive to substitute the lower-priced good for the higher priced good Substitution Effect: a lower price gives an incentive to substitute the lower-priced good for the higher priced good

13. Supply Supply is a schedule that shows the amount of a product a producer is WILLING and ABLE to produce and SELL at each specific price at a specific time. Supply is a schedule that shows the amount of a product a producer is WILLING and ABLE to produce and SELL at each specific price at a specific time.

14. Law of supply Producers will produce and sell more of their product at a high P than at a low P. Producers will produce and sell more of their product at a high P than at a low P. There is a direct relationship in P and Q supplied There is a direct relationship in P and Q supplied –If price , supply will  –If price , supply will 

15. Explanation of the Law of Supply Given product costs, a higher P means greater profits and thus an incentive to increase the Q supplied. Given product costs, a higher P means greater profits and thus an incentive to increase the Q supplied.

16. Supply Curve Upward sloping— indicating higher Qs supplied at higher P, lower Qs at lower P Upward sloping— indicating higher Qs supplied at higher P, lower Qs at lower P Supply Schedule for cakes P (Price) Q (Quantity) $2015 $1510 $108 $53

17. Supply Curve for cakes See board or document camera See board or document camera

18. Change in PRICE reflects movement along the curve = change in quantity supplied Change in PRICE reflects movement along the curve = change in quantity supplied If a change in supply is NOT caused by a change in PRICE, the entire curve will shift = change in supply If a change in supply is NOT caused by a change in PRICE, the entire curve will shift = change in supply

19. Determinants that affect supply (other than price) Resource prices Resource prices Technology Technology Taxes and subsidies Taxes and subsidies Price of related goods Price of related goods Expectations Expectations Number of sellers Number of sellers

20. Supply Schedule for cakes $Q1Q2 201510 15108 1085 531

21. Market Equilibrium Quantity supplied = quantity demanded Quantity supplied = quantity demanded –Where the two curves intersect Prices above equilibrium = surplus of supply Prices above equilibrium = surplus of supply Prices below equilibrium = shortage of supply Prices below equilibrium = shortage of supply Market Clearing or Market Price is another name for equilibrium Market Clearing or Market Price is another name for equilibrium

22. Price Floors: a legally determined price at or above the equilibrium price (can’t go below) Price Floors: a legally determined price at or above the equilibrium price (can’t go below) Price Ceiling: a legally established maximum price for a good or service (can’t go above) Price Ceiling: a legally established maximum price for a good or service (can’t go above)