Transcript Objectives: 1. Describe how demand differs from the quantity demanded 2. Explain what the law of demand states 3.

Objectives:
1. Describe how demand differs from the
quantity demanded
2. Explain what the law of demand states
3. Explain what demand schedules and
demand curves illustrate
Adam Smith
12.1: Students understand common
economic terms and concepts and
economic reasoning
What does this scenario tell you about the
concepts of Demand vs. Quantity Demanded?
Demand vs. Quantity Demanded
Demand: amount of a good or service that a
consumer is willing and able to buy at various
possible prices during a given time period
Quantity demanded is the amount of a good or
service that a consumer is willing and able to buy
at each particular price during a given time period
Two important conditions of demand
First, the consumer must be willing and able to
buy the good or service
Second, the time period under study must be
specific because various factors that change over
time can affect the demand for the product
The law of demand
An increase in a good’s price causes a decrease
in the quantity demanded; a decrease in price
causes an increase in the quantity demanded
Income Effect
Any increase or decrease in consumers’
purchasing power caused by a change in price
1973—gas prices
from $ .19 to $ .55
per gallon
Substitution Effect
Substitution effect: the tendency of consumers to
substitute a similar, lower-priced product for
another product that is relatively more expensive
Yep! Salaries are down and gas prices
are up so I’ll be driving less and riding
my bicycle more. Even though water
rates are higher, however, we are still
using the same amount of water for
showers, laundry, cooking and the
yard. In that case, the substitution
effect does not apply.
Diminishing Marginal Utility
As more units of a product are consumed, the
satisfaction received from consuming each
additional unit declines. The marginal, or
additional, utility of each unit consumed
diminishes, or lessens, with each additional unit.
Backpacks in Oakdale
Demand Schedule
Quantity
Demanded
100
$50
170
$40
250
$35
400
$90
$70
Price per backpack
Price per
Backpack
$70
$50
$40
$35
$25
0
$25
500
Demand Curve
1
2
3
4
5
6
Quantity demanded (in hundreds)
Demand Schedule
Quantity
Demanded
Price per
Price per
Demand Curve
Quantity demanded (in
)
We have had a
significant change in
enrollment in the
Oakdale Joint Unified
School District.
Enrollment has
increased/decreased by
300 students!
Backpacks in Oakdale
$90
Increase in Demand
$90
$70
Price per backpack
$70
Decrease in Demand
$50
$40
$35
$50
$40
$35
$25
$25
0
0
1
2
3
4
5
Quantity demanded (in hundreds)
6
1
2
3
4
5
6
Quantity demanded (in hundreds)
Increase in Demand
Quantity demanded (in
Decrease in Demand
)
Quantity demanded (in
)
Shifts in Demand (Determinants of Demand)
Consumer tastes and preferences
Shifts in Demand (Determinants of Demand)
Market size: a larger number of consumers
means greater potential demand.
Three forces: decisions by private
businesses, governmental policy
decisions and technology.
Shifts in Demand (Determinants of Demand)
Income—when it increases, people have more
money to spend, creating a greater demand for
goods and services
Income effect—change in purchasing power
caused by a change in prices
Personal income brings a different amount of
money into that household—the change in
income, rather than a change in price, causes the
shift in demand as more product is bought at the
same price
Teacher’s income,
hence purchasing
power, has
decreased this year
because our salaries
were cut. Oh well.
We’ll be demanding
less in the market
place.
Shifts in Demand (Determinants of Demand)
Prices of related goods
A. Substitute goods: substitution effect is the
tendency of consumers to switch to lower-price
substitutes (oleo for butter or ground beef for
steak)
B. Complementary goods—an increase in
housing sales causes an increase in the
demand for refrigerators and ranges
Shifts in Demand (Determinants of Demand)
Consumer expectations
How expecting good or bad times ahead affects
demand
With this pay cut,
Becky and I will
be traveling less
and will have to
defer
improvements to
the house into the
future.
Shifts in Demand vs. Change in Quantity
Demanded
A shift in demand refers to a change in the
demand of a product at each and every price; a
change in the quantity demanded refers to a
change in the demand of a product at a specific
price
News flash!
More fun
and games
today
learning
about
demand and
supply!
I’m so happy I
could just
spit!!!
Objectives:
1. Define demand elasticity
2. Describe the difference between elastic and
inelastic demand
3. Explain how demand elasticity is measured
Adam Smith
12.1: Students understand common
economic terms and concepts and
economic reasoning
Elasticity of Demand
The degree to which changes in a good’s price
affect the quantity demanded by consumers
Elastic Demand
Exists when a small change in a good’s price
causes a major, opposite change in the quantity
demanded. A good’s elasticity can change if
The product is not a necessity
There are readily available substitutes
The product’s cost represents a large portion of
consumers’ income
Recreational Boats Sold in Modesto
$60,000
Price per Boat
$50,000
$40,000
$30,000
$20,000
$10,000
0
10
15
20
25
Number Purchased per Week
30
35
Inelastic Demand
Exists when a change in a good’s price has little
impact on the quantity demanded. A good
usually has inelastic demand if
The product is a necessity
There are few or no readily available substitutes
The product’s cost represents a small portion of
consumers’ income
Snow shovels in Springfield, Illinois
Price per Shovel
$50
$40
$30
$20
$10
0
100
150
200
250
300
Number Demanded per Winter Month
350
How can a Product have both an Elastic and an
Inelastic Demand?
Demand for a product may be inelastic in general,
but elastic in a specific market. Also the degree
of a product’s demand elasticity can vary across
price ranges.
Inelastic in the
Midwest and East
but elastic in
Sonora, CA
The Total-Revenue Test (Total Receipts)
A drop in total revenue after a price increase
indicates elastic demand; an increase indicates
inelastic demand.
To calculate a product’s elasticity of demand in
response to a price change, economists divide
the percentage that the product’s quantity
demanded changed by the percentage that the
product’s price changed
Movie Tickets in City X
Price per Ticket
$6.00
$5.00
$4.00
Inelastic
$3.00
$2.00
Elastic
$1.00
0
5
10
15
20
25
Quantity Demanded (In thousands)
30
35
Product’s Elasticity of Demand
10,000/30,000 = 34%--% change in qty
$1/$4 = 25%--% change in price
34%/25% = 1.36 = elastic
Change > 1 = elastic
Change < 1 = inelastic
Objectives:
1. Explain the difference between supply and
quantity supplied
2. Explain the law of supply
3. Explain what supply schedules and supply
curves illustrate
4. Describe supply elasticity
Adam Smith
12.1: Students understand common
economic terms and concepts and
economic reasoning
Supply vs. Quantity Supplied
Supply is the quantity of goods and services that
producers are willing and able to offer at
VARIOUS possible prices while the quantity
supplied is the amount of a good or service that a
producer is willing to sell at EACH particular price
The Law of Supply
Producers supply more goods and services when
they can sell them at higher prices and fewer
goods and services when they must sell them at
lower prices.
When prices were
high, General
Washington sold
10,000 sacks of corn
meal a year. When
prices were low he
sold 7,500 sacks a
year.
The Profit Motive
Profit motive: the desire to make money
Profit—when revenues are greater than costs of
production
To make a profit, producers must provide the
goods and services that consumers want at
prices that consumers are willing and able to pay
I’m a contractor who
makes family homes
for under $250,000. I
can make a profit
while satisfying
Backpacks in Oakdale
Supply Schedule
Quantity
Demanded
Supplied
500
$50
450
$40
350
$35
200
$90
$70
Price per Backpack
Price per
Backpack
$70
$50
$40
$35
$25
0
$25
0
Supply Curve
1
2
3
4
5
Quantity Supplied (in hundreds)
6
Supply Schedule
Quantity
Demanded
Price per
Price per
Supply Curve
Quantity Supplied (in
)
Elasticity of Supply
The degree to which price changes affect the
quantity supplied
When whiskey
prices rose,
General
Washington
distilled and sold
(supplied) more;
but he limited
production when
prices dropped.
Elastic Supply
Elastic supply exists when a small change in
price causes a major change in the quantity
supplied; products with elastic supply usually can
be made quickly, inexpensively and using a few,
readily available resources
New Orleans Saints T-Shirts
$30
Price per T-Shirt
$25
$20
$15
$10
$5
0
100
200
300
400
500
Quantity Supplied (in thousands)
Elastic Supply
600
Inelastic Supply
Inelastic supply exists when a change in a good’s
price has little impact on the quantity supplied. A
product usually has an inelastic supply if
production requires a great deal of time, money,
and resources that are not readily available.
Beachfront homes
Price per House (in ten thousands)
$100
Beachfront Houses
$ 90
$ 80
$ 70
$ 60
$ 50
0
Inelastic Supply
5
10
15
Quantity Supplied
20
Objectives:
1. Explain what it means for a product’s supply
to shift
2. Identify determinants that might cause a
product’s supply curve to shift
3. Describe the difference between a tax and a
subsidy
4. Explain why producers look at productivity
when making supply decisions
5. Describe how varying the levels of input
affects the levels of output
Adam Smith
12.1: Students understand common
economic terms and concepts and
economic reasoning
Backpacks in Oakdale
$90
Increase in Supply
Decrease in Supply
$90
$70
Price per Backpack
$70
$50
$40
$35
$50
$40
$35
$25
$25
0
0
1
2
3
4
5
Quantity Supplied (in hundreds)
6
1
2
3
4
5
Quantity Supplied (in hundreds)
6
Increase in Supply
Quantity Supplied (in hundreds)
Decrease in Supply
Quantity Supplied (in hundreds)
Factors (Determinants of) Supply
Prices of resources—a resource is anything that
is used in the production of a good or service
(raw materials, electricity, wages). Any price
change for a resource increases or decreases a
business’s production costs. A decrease in the
price of a resource often causes producers to
supply more product to the market at each and
every price. The opposite is also true.
Hmph! The darned union threatened
to strike, so I had to raise wages by
2.5%. Now I’ll have to cut supply.
Factors (Determinants of) Supply
Government tools: taxes, subsidies and
regulation.
Factors (Determinants of) Supply
Government tools: taxes, subsidies and
regulation.
Factors (Determinants of) Supply
Government tools: taxes, subsidies and
regulation.
Factors (Determinants of) Supply
Technology: new technology makes production
more efficient and less expensive, causing the
costs of production to decrease allowing
producers to supply
more goods and
services at each
and every price;
can be costly at first
and can cause job
loss for labor
Factors (Determinants of) Supply
Competition tends to increase supply while lack
of competition tends to decrease supply.
Factors (Determinants of) Supply
Prices of related goods
Factors (Determinants of) Supply
Producer expectations
Shifts in Supply Curve vs. Change in Quantity
Supplied
A change in quantity supplied is indicated by
movement along the supply curve; a shift in
supply is indicated by the movement of the entire
supply curve to the right or left.
Productivity and the two “Products” Businesses
Examine
Productivity is the amount of goods and services
produced per unit of input—it tells business
owners how efficiently their resources are being
used in production.
Total product (also called total output)—all of the
product a company makes in a given period of
time with a given amount of input
Marginal product is the change in output
generated by adding one more unit of input.
The Law of Diminishing Returns
Describes the effect that varying the level of an
input has on total and marginal product; it states
that as more of one input is added to a fixed
supply of other resources, productivity increases
up to a point. At some point the marginal product
will diminish. Eventually it will result in negative
marginal product.
Three Stages of Production Predicted by the Law
of Diminishing Returns—Figure 4-6, p. 90
Increasing Marginal Returns: As each of the first
11 workers are added, output rises at a faster
rate.
Labor Input Total Prod
Marg. Prod
Fixed Costs
Var. Costs
Total Costs
Marg Costs
0
0
0
$3,400
$0
$3,400
-
1
10
10
3,400
215
3,615
$21.50
2
50
40
3,400
430
3,830
5.38
3
110
60
3,400
645
4,045
3.58
4
175
65
3,400
860
4,260
3.31
5
245
70
3,400
1,075
4,475
3.07
6
320
75
3,400
1,290
4,690
2.87
7
400
80
3,400
1,505
4,905
2.69
8
485
85
3,400
1,720
5,120
2.53
9
575
90
3,400
1,935
5,335
2.39
10
675
100
3,400
2,150
5,550
2.15
11
875
200
3,400
2,365
5,765
1.08
12
985
110
3,400
2,580
5,980
1.95
13
1,000
15
3,400
2,795
6,195
14.33
14
975
-25
3,400
3,010
6,410
-
15
925
-50
3,400
3,225
6,625
-
Three Stages of Production Predicted by the Law
of Diminishing Returns—Figure 4-6, p. 90
Diminishing Marginal Returns—at some point,
output begins to increase at a diminished rate
Labor Input Total Prod
Marg. Prod
Fixed Costs
Var. Costs
Total Costs
Marg Costs
0
0
0
$3,400
$0
$3,400
-
1
10
10
3,400
215
3,615
$21.50
2
50
40
3,400
430
3,830
5.38
3
110
60
3,400
645
4,045
3.58
4
175
65
3,400
860
4,260
3.31
5
245
70
3,400
1,075
4,475
3.07
6
320
75
3,400
1,290
4,690
2.87
7
400
80
3,400
1,505
4,905
2.69
8
485
85
3,400
1,720
5,120
2.53
9
575
90
3,400
1,935
5,335
2.39
10
675
100
3,400
2,150
5,550
2.15
11
875
200
3,400
2,365
5,765
1.08
12
985
110
3,400
2,580
5,980
1.95
13
1,000
15
3,400
2,795
6,195
14.33
14
975
-25
3,400
3,010
6,410
-
15
925
-50
3,400
3,225
6,625
-
Three Stages of Production Predicted by the Law
of Diminishing Returns—Figure 4-6, p. 90
Negative Marginal Returns—at some point,
output begins to decrease
Labor Input Total Prod
Marg. Prod
Fixed Costs
Var. Costs
Total Costs
Marg Costs
0
0
0
$3,400
$0
$3,400
-
1
10
10
3,400
215
3,615
$21.50
2
50
40
3,400
430
3,830
5.38
3
110
60
3,400
645
4,045
3.58
4
175
65
3,400
860
4,260
3.31
5
245
70
3,400
1,075
4,475
3.07
6
320
75
3,400
1,290
4,690
2.87
7
400
80
3,400
1,505
4,905
2.69
8
485
85
3,400
1,720
5,120
2.53
9
575
90
3,400
1,935
5,335
2.39
10
675
100
3,400
2,150
5,550
2.15
11
875
200
3,400
2,365
5,765
1.08
12
985
110
3,400
2,580
5,980
1.95
13
1,000
15
3,400
2,795
6,195
14.33
14
975
-25
3,400
3,010
6,410
-
15
925
-50
3,400
3,225
6,625
-
Fixed costs (overhead)
Some production costs do not change regardless
of how many goods are produced
Includes costs such as rent, interest on loans,
property insurance premiums, local and state
property taxes, and salaries
Depreciation: cost of the
good (distillery building)
divided by the life of the
good (building’s age);
generally based on local
tax laws
George Washington’s distillery
Labor Input Total Prod
Marg. Prod
Fixed Costs
Var. Costs
Total Costs
Marg Costs
0
0
0
$3,400
$0
$3,400
-
1
10
10
3,400
215
3,615
$21.50
2
50
40
3,400
430
3,830
5.38
3
110
60
3,400
645
4,045
3.58
4
175
65
3,400
860
4,260
3.31
5
245
70
3,400
1,075
4,475
3.07
6
320
75
3,400
1,290
4,690
2.87
7
400
80
3,400
1,505
4,905
2.69
8
485
85
3,400
1,720
5,120
2.53
9
575
90
3,400
1,935
5,335
2.39
10
675
100
3,400
2,150
5,550
2.15
11
875
200
3,400
2,365
5,765
1.08
12
985
110
3,400
2,580
5,980
1.95
13
1,000
15
3,400
2,795
6,195
14.33
14
975
-25
3,400
3,010
6,410
-
15
925
-50
3,400
3,225
6,625
-
Variable costs
Change as the level of output changes
Raw materials and wages
Labor Input Total Prod
Marg. Prod
Fixed Costs
Var. Costs
Total Costs
Marg Costs
0
0
0
$3,400
$0
$3,400
-
1
10
10
3,400
215
3,615
$21.50
2
50
40
3,400
430
3,830
5.38
3
110
60
3,400
645
4,045
3.58
4
175
65
3,400
860
4,260
3.31
5
245
70
3,400
1,075
4,475
3.07
6
320
75
3,400
1,290
4,690
2.87
7
400
80
3,400
1,505
4,905
2.69
8
485
85
3,400
1,720
5,120
2.53
9
575
90
3,400
1,935
5,335
2.39
10
675
100
3,400
2,150
5,550
2.15
11
875
200
3,400
2,365
5,765
1.08
12
985
110
3,400
2,580
5,980
1.95
13
1,000
15
3,400
2,795
6,195
14.33
14
975
-25
3,400
3,010
6,410
-
15
925
-50
3,400
3,225
6,625
-
Total costs: fixed + variable
Marginal costs—the additional costs of producing
one more unit of output
Only variable costs considered
Marginal cost is the variable cost increase
divided by the number of additional items
produced
Labor Input Total Prod
Marg. Prod
Fixed Costs
Var. Costs
Total Costs
Marg Costs
0
0
0
$3,400
$0
$3,400
-
1
10
10
3,400
215
3,615
$21.50
2
50
40
3,400
430
3,830
5.38
$430/125=$3.44 marginal cost of going from
4
175
65
3,400
860
4,260
3.31
to7013 workers
5 11 workers
245
3,400
1,075
4,475
3.07
3
110
60
3,400
645
4,045
3.58
6
320
75
3,400
1,290
4,690
2.87
7
400
80
3,400
1,505
4,905
2.69
8
485
85
3,400
1,720
5,120
2.53
9
575
90
3,400
1,935
5,335
2.39
10
675
100
3,400
2,150
5,550
2.15
11
875
200
3,400
2,365
5,765
985
110
3,400
2,580
5,980
+$430
1.08
13
1,000
15
3,400
2,795
6,195
14.33
14
975
-25
3,400
3,010
6,410
-
15
925
-50
3,400
3,225
6,625
-
12
+125
1.95