markets markets – exchanges between buyers and sellers. supply – questions faced by sellers in...
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Markets
• Markets – exchanges between buyers and sellers.
• Supply – questions faced by sellers in those exchanges are related to how much to sell and at what price.
• Demand – questions faced by buyers – the amount of goods and services consumers are willing to buy at various prices at a particular time and place.
The Law of Demand
• If all other things are equal, the higher the price of a product or service, the less of it people are willing to buy.
• The lower the price, the more people will buy.
• Based on the connection between the price of a good or service and the quantity demanded.
Graphing the Law of Demand
• Demand Schedule – list that shows the quantities demanded of a product a various prices during a particular time period.
• Demand Curve – Each point on the graph shows the quantity purchased at a particular price. The line formed by connecting the points is called a demand curve.
• Downward slope shows a negative relationship- as one variable increases, the other decreases.
Why Demand Rises and Falls
• Real Income Effect – what people can actually buy with their money; if prices rise and your income stays the same, you are no longer able to buy as much as you once did.
• Substitution Effect – when prices increase people tend to choose a similar product in their price range.
The Law of Diminishing Marginal Utility(Returns)
• of Diminish – to grow smaller.• Utility – usefulness of a product or the amount of
satisfaction it provides.• Marginal Utility – the extra usefulness or satisfaction
people get from buying or using more of a product or service.
• As people use more of a product or service, the satisfaction they get from their additional purchases declines.
• People not willing to pay as much for the second, third, or fourth.
• When it gets to the point where the marginal utlility is less than the price the item, he or she stops buying.
Vocabulary
• Market• Supply• Demand• Law of Demand• Law of Diminishing
Marginal Utility
• Demand Schedule• Demand Curve• Real Income Effect• Substitution Effect
Analyzing Market Demand
• A demand curve starts with preferences of individual buyers.
• Points along the curve show your willingness and abilityu to buy a good or service at a particular price.
• Market Demand – total of all of the individual demands with a market.
• When curve shifts to the left –decrease in demand
• Shifts to the right – increase in demand.
Causes of Shifts in Demand
• Price• Average Income• Changes in Population• Changes in Complementary products; complements are
products or services that are used together.• Substitutes
• Changes in personal preferences.• Special influences.• Fads • Expectations about the future.
Putting It All Together
• Work with a partner to list the brand names of ten goods you use.
• Next, try to identify a complementary product and a substitute for each. Then predict what would happen to the demand for your favorite item or brand and its complementary products if the item doubled in price.
Demand Elasticity
• Elasticity - Consumers are more responsive to changes in the prices of some goods and services than others.
• Measure elasticity of demand by how sensitive consumers are to a change in price.
• Elastic – when a specific change in price causes a relatively large change in the quantity demanded.
• Inelastic – if a change in price does not bring much of a change in the quantity demanded.
Effects of Elasticity
• Elastic - some products are more elastic because they have more substitutes than others.
• Inelastic – products that have few substitutes tend to be inelastic.
• If the cost of an item represents a large percentage of a consumer’s real income, a change in the price will have a large effect on demand.
• Time – some items are inelastic in the short run, but elastic in the long run.
• Elasticity closely related to competition. The more choices the more competitive.
Putting It All Together
• List some items that you purchase regularly. Which are elastic in demand? Which are inelastic in demand?
• Explain how you decided which was which?
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