Transcript Topic 3 Supply and demand

TOPIC 3 SUPPLY AND DEMAND
Mr. Kallusingh
LAW OF SUPPLY AND DEMAND
Law of Demand- the quantity demanded of a
good or service varies inversely with the price; if
price goes up demand goes down or if price
goes down demand goes up
 Law of Supply- the principle that suppliers will
offer more at higher prices and less for sale at
lower prices

DETERMINANTS OF DEMAND
Income Effect- change in quantity demanded
because of a change in price that alters
consumers real income
 Substitution Effect- change in quantity
demanded because of the change in relative
price of the product; concert vs. cd

DETERMINANTS OF DEMAND
Consumer Income- the more money a person
makes, the more likely they will become to
spend it
 Consumer Tastes- can change due to
advertising, news reports, fashion trends, new
products, weather seasons, etc
 Complements- if computer prices go down
more software is purchased
 Substitutes- if butter price goes up people buy
margarine

DETERMINANTS OF SUPPLY
Cost of Inputs- if cost of producing goes down
expect to see more products, cost goes up less
products
 Productivity- if workers work more efficient then
expect more product as well as the inverse
 Technology- new machine, chemical, or process
can increase the amount supplied

DETERMINANTS OF SUPPLY
Taxes and Subsidies- if taxes go up cost goes
up production goes down and the inverse; if the
government provides subsidies to a company
their production should increase because the
cost of producing has gone down and the
inverse
 Government Regulations- usually tighter
government regulations supply goes down and
the inverse

PRICE ELASTICITY
A measure of responsiveness that tells us how
a dependent variable such as quantity
responds to a change in an independent
variable such as price
 Elastic- is when there is a drastic change due to
a small change, supply or demand
 Inelastic- is when the change is small or equal,
supply or demand

MARKET EQUILIBRIUM

A situation in which prices are relatively stable
and the quantity of goods or services supplied
are equal to the quantity demanded
COST OF PRODUCTION
Fixed Cost- the cost a business incurs even if it
remains idle; rent, taxes, salaries, cost of
maintenance, etc
 Variable Cost- cost that changes when a
business rate or output changes; price of raw
materials or changes in labor prices
 Marginal Cost- the cost of producing one more
item; can be based on materials or labor
 Total Cost- the sum of fixed and variable cost

PRICE CONTROLS
Price Ceiling- the maximum legal price that can
be charged for a single product
 Price Floor- the lowest legal price that can be
paid for a good or service

MARGINAL COST ANALYSIS
Is when a company determines how much more
to produce in order to make the most profit
 The marginal cost the amount to produce one
more unit and the marginal benefit/ revenue is
the amount made by that one more unit
 Profit-maximizing quantity of output is when the
marginal cost and marginal revenue are equal
