chapter 7 supply & demand
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Chapter 7 Supply & Demand. The Marketplace. Demand is amount of g/s consumers are willing/able to buy at various prices during specific time frame Supply is amount of g/s producers are willing/able to sell at various prices during specific time frame. The Marketplace. - PowerPoint PPT PresentationTRANSCRIPT
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Chapter 7Chapter 7Supply & DemandSupply & Demand
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The MarketplaceThe MarketplaceDemand is amount of g/s
consumers are willing/able to buy at various prices during specific time frame
Supply is amount of g/s producers are willing/able to sell at various prices during specific time frame
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The MarketplaceThe MarketplaceMarket is process of freely
exchanging g/s between buyer & sellers◦Local◦National◦International
With your neighbor, come up w/ as many examples of markets as you can think of in a minute◦Classify as local, national or international
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The MarketplaceThe MarketplaceVoluntary exchange – transaction
that buyers & sellers work out on their own terms
What are some factors that buyers consider?
What are some factors that sellers consider?
In a market economy prices are set by voluntary exchange
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Which are markets?Which are markets?GapMcDonaldsOverstock.comHair SalonConcert
DentistMovie theatreEbayShopko
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Law of DemandLaw of DemandAs price goes up, quantity goes
down and vice versa
Example: Dark Knight DVD
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Law of DemandLaw of DemandCharacteristics of Demand
(Factors Affecting Quantity Demanded)
1.Real income effect2.Substitutes3.Diminishing marginal utility
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Law of DemandLaw of DemandReal Income Effect
◦States we cannot keep buying same quantity of products if price rises while our income stays the same Forces us to make tradeoffs
◦Real income is purchasing power
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Law of DemandLaw of DemandSubstitution Effect
◦States have if have 2 similar items and the price of one rises, people will buy more of the other item
Examples?????
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Law of DemandLaw of DemandUtility is power that a g/s has to
satisfy a wantMarginal utility is the additional
amount of satisfactionLaw of diminishing marginal utility
says that the additional satasfaction a consumer gets from buying one more unit will lessen w/ each additional one purchased
Example: Peanuts at bball game
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Read the BusinessWeek Read the BusinessWeek spotlightspotlight
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Graphing the Demand Graphing the Demand CurveCurveDemand curve shows
relationship between price & quantity demanded◦Downward sloping line (falls from left
to right)Demand schedule is table of
quantities at difference prices
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Graphing the Demand Graphing the Demand CurveCurve
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Determinants of DemandChange in demand for an items
shifts the demand curve to the left or right
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Determinants of DemandChange in populationChange in incomeChange in taste/preferenceSubstitutesComplementary goods
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Determinants of DemandChange in
population◦ Naturally if
increases so does demand b/c there are more opportunities to buy/sell Increases shifts
demand curve to right
Decreases shifts to left
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Determinants of DemandChange in
income◦ Demand for g/s
depends on your income Income increase,
demand curve shifts to right
If decreases, shifts to left
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Determinants of DemandChange in
taste/preference◦ When a fad is hot
or not affects demand If fad hot, shifts
curve to right When fad is over,
shifts back to left
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Determinants of DemandSubstitutes
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Determinants of DemandComplementary
goods◦ Produces used w/
another product
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Price Elasticity of DemandPrice Elasticity of DemandElasticity measures how much the
quantity demanded changes when price goes up/down◦If prices lower, we buy more◦But how much lower should they be
for us to buyPrice elasticity of demand is how
much demand varies according to changes in price
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Elastic DemandElastic DemandRise/fall in price affects the
amount we are willing to buy◦Flexible about buying or not◦Luxury items◦Item has many substitutes
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Inelastic DemandInelastic DemandPrice has little impact on quantity
demanded◦Consumers not flexible (purchase
not matter what)◦Staple items (milk, bread, salt, etc.)◦Necessities
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What affects demand What affects demand elasticityelasticityAvailability of substitutesHow much you have (budget)Amount of time you have to
adjust to change in price
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Law of SupplyLaw of SupplyAs price goes up, quantity
supplied goes up and vice versa
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Law of SupplyLaw of SupplyProfit incentive motivated people
in market economy◦At higher prices, greater incentive to
produce more
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Law of SupplyLaw of SupplySupply schedule is table showing
quantities supplied at different prices
Supply curve is graph showing relationship between price & quantity supplied
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Supply CurveSupply CurveSupply curve is an upward sloping line
showing quantities supplies at possible prices
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Supply curveSupply curveChange in supply causes entire
curve to shift to left/right
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Determinates of SupplyDeterminates of SupplyPrice of inputsNumber of firms in industryTaxesTechnology
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Price of InputsPrice of InputsItems needed to
make product◦If price of inputs
drops (raw materials, wages) producers can supply more at lower production costs – (shifts curve to right)
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Number of Firms in Number of Firms in IndustryIndustryAs more enter
industry, greater quantities of product/service, which would cause a shift to right
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TaxesTaxesIf gov’t imposes
taxes on production of certain items, businesses will NOT supply as much b/c production costs are higher◦ Causes shift to
left
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TechnologyTechnologyNew products &
new methods of producing increase supply◦ Allows to produce
more goods at lower cost
◦ Shift to right
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Law of Diminishing Law of Diminishing ReturnsReturnsAdding units of
one factor of production increases total output, however, after a certain point output continues to increase but at a diminishing rate
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Equilibrium PriceEquilibrium PricePrice where amount producers
are willing to supply is equal to the amount consumers are willing to buy
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Prices as signalsPrices as signalsPrice communicates information
and coordinates activities of producers and consumers
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Prices as SignalsPrices as SignalsShortage – quantity demanded is
greater than quantity supplied at current price
Surplus – quantity supplied is greater than demanded at current price
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Price ControlsPrice ControlsIn certain circumstances, gov’t
set price limits
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Price ControlsPrice ControlsPrice ceiling – legal maximum
price that can be charged for g/sPrice floors – legal minimum price
that can be charged for g/s