Chapter 7 Supply & Demand

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

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)

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.

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

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)

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.

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

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)

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.

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.

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

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

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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

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