2. Supply and Demand Goal 8 Notes

3. Economic Interdependence  Everything is linked together in economics. One economic decision will affect other parts of the economy. Some factors that affect economic interdependence are:  New products  Consumer income—fixed incomes, layoffs, and pay raises  Inflation—when the price of goods rise faster than your income  Cost of resources—gas, electricity, and water  Natural disasters—floods, hurricanes, and earthquakes  Everything is linked together in economics. One economic decision will affect other parts of the economy. Some factors that affect economic interdependence are:  New products  Consumer income—fixed incomes, layoffs, and pay raises  Inflation—when the price of goods rise faster than your income  Cost of resources—gas, electricity, and water  Natural disasters—floods, hurricanes, and earthquakes

4. Law of Diminishing Returns  This happens when you want to increase productivity, so you keep adding one or more of the factors of production to increase your output.  Your output will increase to a point, but there will be a point when if you add another factor, that output will start to decrease.  At this point it is not a benefit to you to keep spending money on more factors of production.  This happens when you want to increase productivity, so you keep adding one or more of the factors of production to increase your output.  Your output will increase to a point, but there will be a point when if you add another factor, that output will start to decrease.  At this point it is not a benefit to you to keep spending money on more factors of production.

5. Diminished Returns

6. Law of Diminishing Marginal Utility  This happens when the product that you purchase, even at a bargain price, will give you less satisfaction.  This is because you may become bored, and tired or overstocked with that product.  Example: 39-cent cheeseburgers, buy one get two free pizzas, or a low price on toilet tissue.  This happens when the product that you purchase, even at a bargain price, will give you less satisfaction.  This is because you may become bored, and tired or overstocked with that product.  Example: 39-cent cheeseburgers, buy one get two free pizzas, or a low price on toilet tissue.

7. Basic Observations about Consumers  You can not have it all! Decisions must be made that involve an opportunity cost (economic decision).  You are responsible for your decisions. You must pay your bills (credit Cards).  You should have some information about what you are buying. The more expensive the product, the more research you should do. Methods of research include: the internet, consumer reports, and advice from friends  You can not have it all! Decisions must be made that involve an opportunity cost (economic decision).  You are responsible for your decisions. You must pay your bills (credit Cards).  You should have some information about what you are buying. The more expensive the product, the more research you should do. Methods of research include: the internet, consumer reports, and advice from friends

8.  Supply and Demand

9. Demand  Is the amount that the consumer will buy.  It is called consumer sovereignty.  Is the amount that the consumer will buy.  It is called consumer sovereignty.

10. Demand Curve

11. The Law of Demand  The Law of Demand states that people are willing to buy more of a product if the price is lower. Price and demand move in opposite directions  This is also known as the price effect.  Down with Demand!!!!!!!!!  The Law of Demand states that people are willing to buy more of a product if the price is lower. Price and demand move in opposite directions  This is also known as the price effect.  Down with Demand!!!!!!!!!

12. Factors That Shape Demand  The price effect is the most important factor.  The quality and durability of a product.  Consumer taste or desire. What's in style.  Types of substitutes  Availability of the product  Season  The price effect is the most important factor.  The quality and durability of a product.  Consumer taste or desire. What's in style.  Types of substitutes  Availability of the product  Season

13. Normal v Inferior Good  A normal good- is a product whose demand increases with rising incomes. Example: Lexus, BMW, or a cruise trip.  An inferior good- is a product whose demand decreases with a rising income, (Generic or Wal-Mart goods).  A normal good- is a product whose demand increases with rising incomes. Example: Lexus, BMW, or a cruise trip.  An inferior good- is a product whose demand decreases with a rising income, (Generic or Wal-Mart goods).

14. Substitutions  Sometimes stores offer generic or off brands offer lower prices without compromising quality.  (Wal-Mart Soda). This is a substitution.  Another example is Fruit Rings  Sometimes stores offer generic or off brands offer lower prices without compromising quality.  (Wal-Mart Soda). This is a substitution.  Another example is Fruit Rings

15. Substitution effect  A price increase in one product (Dr. Pepper) will cause the demand of a substitute product to increase (Dr. Thunder).

16. Complementary good  When the demand for one product is linked to the demand of another product.  Examples: VCR and tapes, computers and disks, and shoes and socks.  When the demand for one product is linked to the demand of another product.  Examples: VCR and tapes, computers and disks, and shoes and socks.

17. Elasticity of Demand  How much a price change affects the amount demanded.

18. Elastic Demand  When the amount demanded varies greatly with a price change.  These are wants  When the amount demanded varies greatly with a price change.  These are wants

19. Inelastic Demand  When a price change does not affect the amount demanded.  These are needs  Example, medicine  When a price change does not affect the amount demanded.  These are needs  Example, medicine

20. Supply  The amount that producers will offer for sale

21. Supply Curve

22. The Law of Supply  The Law of Supply states that production or the supply will increase if prices are higher and the producers are making more profit (self-interest).  Supply to the Sky!!!!!!!!!!!!  The Law of Supply states that production or the supply will increase if prices are higher and the producers are making more profit (self-interest).  Supply to the Sky!!!!!!!!!!!!

23. Change in Supply (causes)  The major reason is the cost of production.  There is a fixed supply; a limited number of the product is available. Example: sporting events, concerts, and hospital beds.  There are substitutes or alternative choices available.  New businesses.  Government policy- Deregulation, allows more competition. (Phone companies, airlines, Microsoft)  The major reason is the cost of production.  There is a fixed supply; a limited number of the product is available. Example: sporting events, concerts, and hospital beds.  There are substitutes or alternative choices available.  New businesses.  Government policy- Deregulation, allows more competition. (Phone companies, airlines, Microsoft)

24. Supply and the Consumer  Surplus- is an oversupply. This will usually result in lower prices.  Shortage- is a lack in supply. This will usually result in higher prices. However, these high prices may not last long because new producers will enter the market seeking high profits. If a shortage is severe enough, then rationing could take place.  Rationing is selling a product in limited quantities.  Surplus- is an oversupply. This will usually result in lower prices.  Shortage- is a lack in supply. This will usually result in higher prices. However, these high prices may not last long because new producers will enter the market seeking high profits. If a shortage is severe enough, then rationing could take place.  Rationing is selling a product in limited quantities.

25. Market Clearing Price  The Market- is anyplace where producers and consumers make exchanges. In capitalism, the price is usually set in a free market.  Market Price- is the price that satisfies both producers and consumers. It is also called the equilibrium price.  The market price is affected by the balancing between supply and demand, shortage V. surplus. These cycles usually vary on a regular basis.  The Market- is anyplace where producers and consumers make exchanges. In capitalism, the price is usually set in a free market.  Market Price- is the price that satisfies both producers and consumers. It is also called the equilibrium price.  The market price is affected by the balancing between supply and demand, shortage V. surplus. These cycles usually vary on a regular basis.

26. Market Clearing Price

27. Profit and Competition  Profit- is income after all the expenses have been paid Normal Profit- is the amount of profit needed to break even. Economic Profit- is profit in excess of the break even point. Operating expenses Red- means that a business is operating at a loss. Black- means that a business is operating with a profit

28. Competition  Competition- is the rivalry between businesses to attract customers. Here are some benefits of businesses trying to attract customers.

29. Why Do We Need Competition?  The efficient use of resources.  Controls prices  Better quality and service  Encourage research and development  Competition is Adam Smith’s Invisible Hand.  The efficient use of resources.  Controls prices  Better quality and service  Encourage research and development  Competition is Adam Smith’s Invisible Hand.

30. Non-price Competition  Advertising.  Catchphrases  Endorsements  Exploiting fears  Sex appeal  Numerical claims  Bargain appeal  Bandwagon  Product improvement  Styles and Services  Location or availability  Advertising.  Catchphrases  Endorsements  Exploiting fears  Sex appeal  Numerical claims  Bargain appeal  Bandwagon  Product improvement  Styles and Services  Location or availability

31. The Circular Economic Flow of Money and Goods  This chart explains how money and goods are exchanged between consumers producers and the growers of crops in the factor market.

32. Circular Flow of Money

33. The Business Cycle  The business cycle is a measure of the strength of the economy.  There are 4 cycles of the business cycle.  Peak  Recession  Depression  Recovery  The business cycle is a measure of the strength of the economy.  There are 4 cycles of the business cycle.  Peak  Recession  Depression  Recovery

34. Peak  Is the highest phase of the business cycle.  It is the top of the roller coaster  A peak is also known as a boom time.  This period is marked by low interest rates, low unemployment rates, and low inflation.  There is a high consumer confidence and a high GDP.  Is the highest phase of the business cycle.  It is the top of the roller coaster  A peak is also known as a boom time.  This period is marked by low interest rates, low unemployment rates, and low inflation.  There is a high consumer confidence and a high GDP.

35. Recession  Is when there is a decline in the GDP for 6 months.  The economy is starting to shrink.  Unemployment is rising along with interest rates as well as inflation.  Consumer confidence is falling.  Is when there is a decline in the GDP for 6 months.  The economy is starting to shrink.  Unemployment is rising along with interest rates as well as inflation.  Consumer confidence is falling.

36. Depression  Is the lowest phase on the business cycle.  It is also known as a trough period.  There is high unemployment, inflation, and interest rates.  There is no consumer confidence, and the GDP is in a steady decline.  We had a “great depression” in 1929 in the US.  Is the lowest phase on the business cycle.  It is also known as a trough period.  There is high unemployment, inflation, and interest rates.  There is no consumer confidence, and the GDP is in a steady decline.  We had a “great depression” in 1929 in the US.

37. Recovery  Is a rebound after a recession or a depression.  Interest rates, unemployment rates, and inflation are falling.  Consumer confidence is beginning to climb.  The GDP is beginning to increase.  Is a rebound after a recession or a depression.  Interest rates, unemployment rates, and inflation are falling.  Consumer confidence is beginning to climb.  The GDP is beginning to increase.

38. Business Cycle

39. Economic Indicators  These are certain parts of the economy that we use to determine the health of the nation’s economy.  The Business Cycle shows this graphically.  The main indicators are: inflation, unemployment, interest rates, GDP, and Consumer confidence.  The most important id the GDP.  These are certain parts of the economy that we use to determine the health of the nation’s economy.  The Business Cycle shows this graphically.  The main indicators are: inflation, unemployment, interest rates, GDP, and Consumer confidence.  The most important id the GDP.

40. Gross Domestic Product  This is the measure of all new finished goods and services produced in the US every year.  Finished- Something you buy that is not an ingredient in another product.  Good- A product that you buy that yo ucan physically touch (A cheeseburger).  Service- Something that is provided for you (haircut).  This is the measure of all new finished goods and services produced in the US every year.  Finished- Something you buy that is not an ingredient in another product.  Good- A product that you buy that yo ucan physically touch (A cheeseburger).  Service- Something that is provided for you (haircut).