objectives: 1.describe how demand differs from the quantity demanded 2.explain what the law of...

Objectives:Objectives:1.1.Describe how demand differs from the Describe how demand differs from the quantity demandedquantity demanded2.2.Explain what the law of demand statesExplain what the law of demand states3.3.Explain what demand schedules and Explain what demand schedules and demand curves illustratedemand curves illustrate

12.112.1: Students understand common : Students understand common economic terms and concepts and economic terms and concepts and economic reasoning economic reasoning

Adam Smith Adam Smith

What does this scenario tell you about What does this scenario tell you about the concepts of Demand vs. Quantity the concepts of Demand vs. Quantity Demanded?Demanded?

Demand vs. Quantity DemandedDemand vs. Quantity Demanded

Demand: amount of a good or service that Demand: amount of a good or service that a consumer is willing and able to buy at a consumer is willing and able to buy at various possible prices during a given time various possible prices during a given time periodperiod

Quantity demanded is the amount of a Quantity demanded is the amount of a good or service that a consumer is willing good or service that a consumer is willing and able to buy at each particular price and able to buy at each particular price during a given time periodduring a given time period

Two important conditions of demandTwo important conditions of demand

First, the consumer must be willing and First, the consumer must be willing and able to buy the good or serviceable to buy the good or serviceSecond, the time period under study must Second, the time period under study must be specific because various factors that be specific because various factors that change over time can affect the demand change over time can affect the demand for the productfor the product

The law of demand The law of demand

An increase in a good’s price causes a An increase in a good’s price causes a decrease in the quantity demanded; a decrease in the quantity demanded; a decrease in price causes an increase in the decrease in price causes an increase in the quantity demandedquantity demanded

Income EffectIncome Effect

Any increase or decrease in consumers’ Any increase or decrease in consumers’ purchasing power caused by a change in purchasing power caused by a change in priceprice

1973—gas 1973—gas prices from prices from $ .19 to $ .55 $ .19 to $ .55 per gallonper gallon

Substitution EffectSubstitution Effect

Substitution effect: the tendency of Substitution effect: the tendency of consumers to substitute a similar, lower-consumers to substitute a similar, lower-priced product for another product that is priced product for another product that is relatively more expensiverelatively more expensiveYep! Salaries are down and gas Yep! Salaries are down and gas

prices are up so I’ll be driving prices are up so I’ll be driving less and riding my bicycle more. less and riding my bicycle more.

Even though water rates are Even though water rates are higher, however, we are still higher, however, we are still

using the same amount of water using the same amount of water for showers, laundry, cooking for showers, laundry, cooking

and the yard. In that case, the and the yard. In that case, the substitution effect does not substitution effect does not

apply.apply.

Diminishing Marginal Utility Diminishing Marginal Utility

As more units of a product are consumed, As more units of a product are consumed, the satisfaction received from consuming the satisfaction received from consuming each additional unit declines. The each additional unit declines. The marginal, or additional, utility of each unit marginal, or additional, utility of each unit consumed diminishes, or lessens, with each consumed diminishes, or lessens, with each additional unit.additional unit.

Price per Backpack

Quantity Demanded

$70$70 100100

$50$50 170170

$40$40 250250

$35$35 400400

$25$25 500500

Demand Schedule Demand Schedule Demand Curve Demand Curve Backpacks in Oakdale Backpacks in Oakdale

$90

$70

$50

$40

$35

$25

0 1 2 3 4 5 6 1 2 3 4 5 6

Pric

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kpac

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ackp

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Quantity demanded (in hundreds)Quantity demanded (in hundreds)

Price per Quantity Demanded

Demand Schedule Demand Schedule Demand Curve Demand Curve

Pric

e pe

r

Pric

e pe

r

Quantity demanded (in )Quantity demanded (in )

We have had a We have had a significant change in significant change in

enrollment in the enrollment in the Oakdale Joint Unified Oakdale Joint Unified

School District. School District. Enrollment has Enrollment has

increased/decreased increased/decreased by 300 students!by 300 students!

Decrease in DemandDecrease in DemandBackpacks in Oakdale Backpacks in Oakdale

$90

$70

$50

$40

$35

$25

0 1 2 3 4 5 6 1 2 3 4 5 6

Pric

e pe

r bac

kpac

k Pr

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per b

ackp

ack


$90

$70

$50

$40

$35

$25

0 1 2 3 4 5 6 1 2 3 4 5 6


Increase in DemandIncrease in Demand

Decrease in DemandDecrease in Demand

Quantity demanded (in )Quantity demanded (in ) Quantity demanded (in )Quantity demanded (in )

Increase in DemandIncrease in Demand

Shifts in Demand (Determinants of Shifts in Demand (Determinants of Demand) Demand) Consumer tastes and preferencesConsumer tastes and preferences

Shifts in Demand (Determinants of Shifts in Demand (Determinants of Demand) Demand) Market size: a larger number of consumers Market size: a larger number of consumers means greater potential demand.means greater potential demand.

Three forces: decisions by Three forces: decisions by privateprivatebusinesses, governmental businesses, governmental policy policy decisions and technology.decisions and technology.

Shifts in Demand (Determinants of Shifts in Demand (Determinants of Demand) Demand) Income—when it increases, people have Income—when it increases, people have more money to spend, creating a greater more money to spend, creating a greater demand for goods and servicesdemand for goods and servicesIncome effect—change in purchasing power Income effect—change in purchasing power caused by a change in pricescaused by a change in pricesPersonal income brings a different amount Personal income brings a different amount of money into that household—the change of money into that household—the change in income, rather than a change in price, in income, rather than a change in price, causes the shift in demand as more causes the shift in demand as more product is bought at the same price product is bought at the same price

Teacher’s income, Teacher’s income, hence purchasing hence purchasing

power, has power, has decreased this decreased this

year because our year because our salaries were cut. salaries were cut. Oh well. We’ll be Oh well. We’ll be demanding less in demanding less in the market place.the market place.

Shifts in Demand (Determinants of Shifts in Demand (Determinants of Demand) Demand) Prices of related goodsPrices of related goodsA.A.Substitute goods: substitution effect is Substitute goods: substitution effect is the tendency of consumers to switch to the tendency of consumers to switch to lower-price substitutes lower-price substitutes (oleo for butter or (oleo for butter or ground beef for steak)ground beef for steak) B.B.Complementary goods—an increase in Complementary goods—an increase in housing sales causes an increase in the housing sales causes an increase in the demand for refrigerators and rangesdemand for refrigerators and ranges

Shifts in Demand (Determinants of Shifts in Demand (Determinants of Demand) Demand) Consumer expectationsConsumer expectationsHow expecting good or bad times ahead How expecting good or bad times ahead affects demandaffects demand

With this pay With this pay cut, Becky and I cut, Becky and I will be traveling will be traveling

less and will less and will have to defer have to defer improvements improvements to the house to the house

into the future.into the future.

Shifts in Demand vs. Change in Quantity Shifts in Demand vs. Change in Quantity DemandedDemanded

A shift in demand refers to a change in the A shift in demand refers to a change in the demand of a product at each and every demand of a product at each and every price; a change in the quantity demanded price; a change in the quantity demanded refers to a change in the demand of a refers to a change in the demand of a product at a specific priceproduct at a specific price

News flash! News flash! More fun More fun

and games and games today today

learning learning about about

demand demand and supply!and supply!

I’m so happy I’m so happy I could just I could just

spit!!!spit!!!

Objectives:Objectives:1.1.Define demand elasticityDefine demand elasticity2.2.Describe the difference between elastic Describe the difference between elastic and inelastic demandand inelastic demand3.3.Explain how demand elasticity is Explain how demand elasticity is measuredmeasured

Elasticity of DemandElasticity of Demand

The degree to which changes in a good’s The degree to which changes in a good’s price affect the quantity demanded by price affect the quantity demanded by consumersconsumersElastic DemandElastic Demand

Exists when a small change in a good’s Exists when a small change in a good’s price causes a major, opposite change in price causes a major, opposite change in the quantity demanded. A good’s elasticity the quantity demanded. A good’s elasticity can change ifcan change ifThe product is not a necessity The product is not a necessity There are readily available substitutesThere are readily available substitutesThe product’s cost represents a large The product’s cost represents a large portion of portion of consumers’ incomeconsumers’ income

Number Purchased per WeekNumber Purchased per Week

Pric

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per B

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$60,000$60,000

$50,000$50,000

$40,000$40,000

$30,000$30,000

$20,000$20,000

$10,000$10,000

00

Recreational Boats Sold in Modesto Recreational Boats Sold in Modesto

10 15 20 25 30 35

Inelastic DemandInelastic Demand

Exists when a change in a good’s price has Exists when a change in a good’s price has little impact on the quantity demanded. A little impact on the quantity demanded. A good usually has inelastic demand ifgood usually has inelastic demand ifThe product is a necessity The product is a necessity There are few or no readily available There are few or no readily available substitutessubstitutesThe product’s cost represents a small The product’s cost represents a small portion of portion of consumers’ incomeconsumers’ income

Number Demanded per Winter Month Number Demanded per Winter Month

Pric

e pe

r Sho

vel

Pric

e pe

r Sho

vel

$50$50

$40$40

$30$30

$20$20

$10$10

00

Snow shovels in Springfield, IllinoisSnow shovels in Springfield, Illinois

100 150 200 250 300 350

How can a Product have both an Elastic How can a Product have both an Elastic and an and an Inelastic Demand?Inelastic Demand?Demand for a product may be inelastic in Demand for a product may be inelastic in general, but elastic in a specific market. general, but elastic in a specific market. Also the degree of a product’s demand Also the degree of a product’s demand elasticity can vary across price ranges.elasticity can vary across price ranges.

Inelastic in the Inelastic in the Midwest and EastMidwest and Eastbut elastic in but elastic in Sonora, CASonora, CA

The Total-Revenue Test The Total-Revenue Test (Total Receipts)(Total Receipts)

A drop in total revenue after a price A drop in total revenue after a price increase indicates elastic demand; an increase indicates elastic demand; an increase indicates inelastic demand.increase indicates inelastic demand.To calculate a product’s elasticity of To calculate a product’s elasticity of demand in response to a price change, demand in response to a price change, economists divide the percentage that the economists divide the percentage that the product’s quantity demanded changed by product’s quantity demanded changed by the percentage that the product’s price the percentage that the product’s price changedchanged

Quantity Demanded (In thousands)Quantity Demanded (In thousands)

Pric

e pe

r Tic

ket

Pric

e pe

r Tic

ket

$6.00$6.00

$5.00$5.00

$4.00$4.00

$3.00$3.00

$2.00$2.00

$1.00$1.00

00

Movie Tickets in City X Movie Tickets in City X

5 10 15 20 25 30 35

Elastic Elastic

Inelastic Inelastic

Product’s Elasticity of DemandProduct’s Elasticity of Demand10,000/30,000 = 34%--% change in qty10,000/30,000 = 34%--% change in qty

$1/$4 = 25%--% change in price$1/$4 = 25%--% change in price

34%/25% = 1.36 = elastic34%/25% = 1.36 = elastic

Change > 1 = elasticChange > 1 = elasticChange < 1 = inelasticChange < 1 = inelastic

Objectives:Objectives:1.1.Explain the difference between supply Explain the difference between supply and quantity suppliedand quantity supplied2.2.Explain the law of supplyExplain the law of supply3.3.Explain what supply schedules and Explain what supply schedules and supply curves illustratesupply curves illustrate4.4.Describe supply elasticity Describe supply elasticity

Supply vs. Quantity SuppliedSupply vs. Quantity Supplied

Supply is the quantity of goods and Supply is the quantity of goods and services that producers are willing and able services that producers are willing and able to offer at VARIOUS possible prices while to offer at VARIOUS possible prices while the quantity supplied is the amount of a the quantity supplied is the amount of a good or service that a producer is willing to good or service that a producer is willing to sell at EACH particular pricesell at EACH particular price

The Law of SupplyThe Law of Supply

Producers supply more goods and services Producers supply more goods and services when they can sell them at higher prices when they can sell them at higher prices and fewer goods and services when they and fewer goods and services when they must sell them at lower prices.must sell them at lower prices.

When prices were When prices were high, General high, General

Washington sold Washington sold 10,000 sacks of 10,000 sacks of

corn meal a year. corn meal a year. When prices were When prices were low he sold 7,500 low he sold 7,500

sacks a year.sacks a year.

The Profit MotiveThe Profit Motive

Profit motive: the desire to make moneyProfit motive: the desire to make moneyProfit—when revenues are greater than Profit—when revenues are greater than costs of productioncosts of productionTo make a profit, producers must provide To make a profit, producers must provide the goods and services that consumers the goods and services that consumers want at prices that consumers are willing want at prices that consumers are willing and able to payand able to pay

I’m a contractor I’m a contractor who makes family who makes family homes for under homes for under $250,000. I can $250,000. I can

make a profit make a profit while satisfying while satisfying

customers.customers.


Supply Schedule Supply Schedule Supply Curve Supply Curve

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Quantity Supplied (in hundreds)Quantity Supplied (in hundreds)

Price per Backpack

Quantity Supplied

$70$70 500500

$50$50 450450

$40$40 350350

$35$35 200200

$25$25 00

Backpacks in Oakdale Backpacks in Oakdale

$90

$70

$50

$40

$35

$25

0 1 2 3 4 5 6 1 2 3 4 5 6


Supply Schedule Supply Schedule Supply Curve Supply Curve

Pric

e pe

r

Pric

e pe

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Quantity Supplied (in )Quantity Supplied (in )

Elasticity of SupplyElasticity of Supply

The degree to which price changes affect The degree to which price changes affect the quantity suppliedthe quantity supplied

When whiskey When whiskey prices rose, prices rose,

General General Washington Washington

distilled and sold distilled and sold (supplied) more; (supplied) more;

but he limited but he limited production when production when prices dropped.prices dropped.

Elastic SupplyElastic Supply

Elastic supply exists when a small change Elastic supply exists when a small change in price causes a major change in the in price causes a major change in the quantity supplied; products with elastic quantity supplied; products with elastic supply usually can be made quickly, supply usually can be made quickly, inexpensively and using a few, readily inexpensively and using a few, readily available resourcesavailable resources

Pric

e pe

r T-S

hirt

Pr

ice

per T

-Shi

rt

Quantity Supplied (in thousands)Quantity Supplied (in thousands)

New Orleans Saints T-ShirtsNew Orleans Saints T-Shirts$30

$25

$20

$15

$10

$5

0 100 200 300 400 500 600 100 200 300 400 500 600

Elastic Elastic SupplySupply

Inelastic SupplyInelastic Supply

Inelastic supply exists when a change in a Inelastic supply exists when a change in a good’s price has little impact on the good’s price has little impact on the quantity supplied. A product usually has quantity supplied. A product usually has an inelastic supply if production requires a an inelastic supply if production requires a great deal of time, money, and resources great deal of time, money, and resources that are not readily available.that are not readily available.

Beachfront homes

Pric

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r Hou

se (i

n te

n th

ousa

nds)

Pr

ice

per H

ouse

(in

ten

thou

sand

s)

Quantity Supplied Quantity Supplied

Beachfront HousesBeachfront Houses$100

$ 90

$ 80

$ 70

$ 60

$ 50

0 5 10 15 205 10 15 20

Inelastic SupplyInelastic Supply

Objectives:Objectives:1.1.Explain what it means for a product’s Explain what it means for a product’s supply to shiftsupply to shift2.2.Identify determinants that might cause Identify determinants that might cause a product’s supply curve to shifta product’s supply curve to shift3.3.Describe the difference between a tax Describe the difference between a tax and a subsidyand a subsidy4.4.Explain why producers look at Explain why producers look at productivity when making supply productivity when making supply decisionsdecisions5.5.Describe how varying the levels of Describe how varying the levels of input affects the levels of output input affects the levels of output

Decrease in SupplyDecrease in Supply

Pric

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Backpacks in Oakdale Backpacks in Oakdale

$90

$70

$50

$40

$35

$25

0 1 2 3 4 5 6 1 2 3 4 5 6

Increase in SupplyIncrease in Supply


$90

$70

$50

$40

$35

$25

0 1 2 3 4 5 6 1 2 3 4 5 6

Decrease in SupplyDecrease in Supply


Increase in SupplyIncrease in Supply


Factors (Determinants of) SupplyFactors (Determinants of) Supply

Prices of resources—a resource is anything Prices of resources—a resource is anything that is used in the production of a good or that is used in the production of a good or service (service (raw materials, electricity, wagesraw materials, electricity, wages). ). Any price change for a resource increases Any price change for a resource increases or decreases a business’s production costs. or decreases a business’s production costs. A decrease in the price of a resource often A decrease in the price of a resource often causes producers to supply more product causes producers to supply more product to the market at each and every price. The to the market at each and every price. The opposite is also true.opposite is also true.Hmph! The darned union Hmph! The darned union

threatened to strike, so I had threatened to strike, so I had to raise wages by 2.5%. Now to raise wages by 2.5%. Now

I’ll have to cut supply.I’ll have to cut supply.


Government tools: taxes, Government tools: taxes, subsidies and subsidies and regulationregulation..


Government tools: Government tools: taxes,taxes, subsidies subsidies and and regulationregulation..


Government tools: Government tools: taxes,taxes, subsidies and subsidies and regulation.regulation.


Technology: Technology: new technology makes production new technology makes production more efficient and less expensive, causing the more efficient and less expensive, causing the costs of production to decrease allowing costs of production to decrease allowing producers to supplyproducers to supplymore goods and more goods and services at each services at each and every price; and every price; can be costly at firstcan be costly at firstand can cause job and can cause job loss for laborloss for labor


Competition tends to increase supply while Competition tends to increase supply while lack of competition tends to decrease lack of competition tends to decrease supply.supply.


Prices of related goodsPrices of related goods


Producer expectationsProducer expectations

Shifts in Supply Curve vs. Change in Shifts in Supply Curve vs. Change in Quantity SuppliedQuantity Supplied

A change in quantity supplied is indicated A change in quantity supplied is indicated by movement along the supply curve; a by movement along the supply curve; a shift in supply is indicated by the shift in supply is indicated by the movement of the entire supply curve to the movement of the entire supply curve to the right or left.right or left.

Productivity and the two “Products” Productivity and the two “Products” Businesses Examine Businesses Examine

Productivity is the amount of goods and services Productivity is the amount of goods and services produced per unit of input—it tells business produced per unit of input—it tells business owners how efficiently their resources are being owners how efficiently their resources are being used in production.used in production.Total product (Total product (also called total outputalso called total output)—all of the )—all of the product a company makes in a given period of product a company makes in a given period of time with a given amount of input time with a given amount of input Marginal product is the Marginal product is the changechange in output in output generated by adding one more unit of inputgenerated by adding one more unit of input..

The Law of Diminishing Returns The Law of Diminishing Returns

Describes the effect that varying the level Describes the effect that varying the level of an input has on total and marginal of an input has on total and marginal product; it states that as more of one input product; it states that as more of one input is added to a fixed supply of other is added to a fixed supply of other resources, productivity increases up to a resources, productivity increases up to a point. At some point the marginal product point. At some point the marginal product will diminish. Eventually it will result in will diminish. Eventually it will result in negative marginal product.negative marginal product.

Three Stages of Production Predicted by Three Stages of Production Predicted by the Law of Diminishing Returnsthe Law of Diminishing Returns—Figure 4-—Figure 4-6, p. 906, p. 90 Increasing Marginal Returns: As each of the Increasing Marginal Returns: As each of the first 11 workers are added, output rises at first 11 workers are added, output rises at a faster rate. a faster rate.

Labor InputLabor Input Total ProdTotal Prod Marg. ProdMarg. Prod Fixed CostsFixed Costs Var. CostsVar. Costs Total CostsTotal Costs Marg CostsMarg Costs

00 00 00 $3,400$3,400 $0$0 $3,400$3,400 --

11 1010 1010 3,4003,400 215215 3,6153,615 $21.50$21.50

22 5050 4040 3,4003,400 430430 3,8303,830 5.385.38

33 110110 6060 3,4003,400 645645 4,0454,045 3.583.58

44 175175 6565 3,4003,400 860860 4,2604,260 3.313.31

55 245245 7070 3,4003,400 1,0751,075 4,4754,475 3.073.07

66 320320 7575 3,4003,400 1,2901,290 4,6904,690 2.872.87

77 400400 8080 3,4003,400 1,5051,505 4,9054,905 2.692.69

88 485485 8585 3,4003,400 1,7201,720 5,1205,120 2.532.53

99 575575 9090 3,4003,400 1,9351,935 5,3355,335 2.392.39

1010 675675 100100 3,4003,400 2,1502,150 5,5505,550 2.152.15

1111 875875 200200 3,4003,400 2,3652,365 5,7655,765 1.081.08

1212 985985 110110 3,4003,400 2,5802,580 5,9805,980 1.951.95

1313 1,0001,000 1515 3,4003,400 2,7952,795 6,1956,195 14.3314.33

1414 975975 -25-25 3,4003,400 3,0103,010 6,4106,410 --

1515 925925 -50-50 3,4003,400 3,2253,225 6,6256,625 --

Three Stages of Production Predicted by Three Stages of Production Predicted by the Law of Diminishing Returns—Figure 4-the Law of Diminishing Returns—Figure 4-6, p. 90 6, p. 90 Diminishing Marginal Returns—at some Diminishing Marginal Returns—at some point, output begins to increase at a point, output begins to increase at a diminished rate diminished rate


00 00 00 $3,400$3,400 $0$0 $3,400$3,400 --

11 1010 1010 3,4003,400 215215 3,6153,615 $21.50$21.50

22 5050 4040 3,4003,400 430430 3,8303,830 5.385.38

33 110110 6060 3,4003,400 645645 4,0454,045 3.583.58

44 175175 6565 3,4003,400 860860 4,2604,260 3.313.31

55 245245 7070 3,4003,400 1,0751,075 4,4754,475 3.073.07

66 320320 7575 3,4003,400 1,2901,290 4,6904,690 2.872.87

77 400400 8080 3,4003,400 1,5051,505 4,9054,905 2.692.69

88 485485 8585 3,4003,400 1,7201,720 5,1205,120 2.532.53

99 575575 9090 3,4003,400 1,9351,935 5,3355,335 2.392.39

1010 675675 100100 3,4003,400 2,1502,150 5,5505,550 2.152.15

1111 875875 200200 3,4003,400 2,3652,365 5,7655,765 1.081.08

1212 985985 110110 3,4003,400 2,5802,580 5,9805,980 1.951.95

1313 1,0001,000 1515 3,4003,400 2,7952,795 6,1956,195 14.3314.33

1414 975975 -25-25 3,4003,400 3,0103,010 6,4106,410 --

1515 925925 -50-50 3,4003,400 3,2253,225 6,6256,625 --

Three Stages of Production Predicted by Three Stages of Production Predicted by the Law of Diminishing Returns—Figure 4-the Law of Diminishing Returns—Figure 4-6, p. 90 6, p. 90 Negative Marginal Returns—at some point, Negative Marginal Returns—at some point, output begins to decreaseoutput begins to decrease


00 00 00 $3,400$3,400 $0$0 $3,400$3,400 --

11 1010 1010 3,4003,400 215215 3,6153,615 $21.50$21.50

22 5050 4040 3,4003,400 430430 3,8303,830 5.385.38

33 110110 6060 3,4003,400 645645 4,0454,045 3.583.58

44 175175 6565 3,4003,400 860860 4,2604,260 3.313.31

55 245245 7070 3,4003,400 1,0751,075 4,4754,475 3.073.07

66 320320 7575 3,4003,400 1,2901,290 4,6904,690 2.872.87

77 400400 8080 3,4003,400 1,5051,505 4,9054,905 2.692.69

88 485485 8585 3,4003,400 1,7201,720 5,1205,120 2.532.53

99 575575 9090 3,4003,400 1,9351,935 5,3355,335 2.392.39

1010 675675 100100 3,4003,400 2,1502,150 5,5505,550 2.152.15

1111 875875 200200 3,4003,400 2,3652,365 5,7655,765 1.081.08

1212 985985 110110 3,4003,400 2,5802,580 5,9805,980 1.951.95

1313 1,0001,000 1515 3,4003,400 2,7952,795 6,1956,195 14.3314.33

1414 975975 -25-25 3,4003,400 3,0103,010 6,4106,410 --

1515 925925 -50-50 3,4003,400 3,2253,225 6,6256,625 --

Depreciation: cost of Depreciation: cost of the good (the good (distillery distillery buildingbuilding) divided by ) divided by the life of the good the life of the good ((building’s agebuilding’s age); ); generally based on generally based on local tax lawslocal tax laws

Fixed costs Fixed costs (overhead)(overhead)

Some production costs do not change Some production costs do not change regardless of how many goods are regardless of how many goods are producedproducedIncludes costs such as rent, interest on Includes costs such as rent, interest on loans, property insurance premiums, local loans, property insurance premiums, local and state property taxes, and salariesand state property taxes, and salaries

George Washington’s distillery George Washington’s distillery


00 00 00 $3,400$3,400 $0$0 $3,400$3,400 --

11 1010 1010 3,4003,400 215215 3,6153,615 $21.50$21.50

22 5050 4040 3,4003,400 430430 3,8303,830 5.385.38

33 110110 6060 3,4003,400 645645 4,0454,045 3.583.58

44 175175 6565 3,4003,400 860860 4,2604,260 3.313.31

55 245245 7070 3,4003,400 1,0751,075 4,4754,475 3.073.07

66 320320 7575 3,4003,400 1,2901,290 4,6904,690 2.872.87

77 400400 8080 3,4003,400 1,5051,505 4,9054,905 2.692.69

88 485485 8585 3,4003,400 1,7201,720 5,1205,120 2.532.53

99 575575 9090 3,4003,400 1,9351,935 5,3355,335 2.392.39

1010 675675 100100 3,4003,400 2,1502,150 5,5505,550 2.152.15

1111 875875 200200 3,4003,400 2,3652,365 5,7655,765 1.081.08

1212 985985 110110 3,4003,400 2,5802,580 5,9805,980 1.951.95

1313 1,0001,000 1515 3,4003,400 2,7952,795 6,1956,195 14.3314.33

1414 975975 -25-25 3,4003,400 3,0103,010 6,4106,410 --

1515 925925 -50-50 3,4003,400 3,2253,225 6,6256,625 --

Variable costsVariable costs

Change as the level of output changesChange as the level of output changesRaw materials and wages Raw materials and wages


00 00 00 $3,400$3,400 $0$0 $3,400$3,400 --

11 1010 1010 3,4003,400 215215 3,6153,615 $21.50$21.50

22 5050 4040 3,4003,400 430430 3,8303,830 5.385.38

33 110110 6060 3,4003,400 645645 4,0454,045 3.583.58

44 175175 6565 3,4003,400 860860 4,2604,260 3.313.31

55 245245 7070 3,4003,400 1,0751,075 4,4754,475 3.073.07

66 320320 7575 3,4003,400 1,2901,290 4,6904,690 2.872.87

77 400400 8080 3,4003,400 1,5051,505 4,9054,905 2.692.69

88 485485 8585 3,4003,400 1,7201,720 5,1205,120 2.532.53

99 575575 9090 3,4003,400 1,9351,935 5,3355,335 2.392.39

1010 675675 100100 3,4003,400 2,1502,150 5,5505,550 2.152.15

1111 875875 200200 3,4003,400 2,3652,365 5,7655,765 1.081.08

1212 985985 110110 3,4003,400 2,5802,580 5,9805,980 1.951.95

1313 1,0001,000 1515 3,4003,400 2,7952,795 6,1956,195 14.3314.33

1414 975975 -25-25 3,4003,400 3,0103,010 6,4106,410 --

1515 925925 -50-50 3,4003,400 3,2253,225 6,6256,625 --

Total costs: fixed + variableTotal costs: fixed + variable

Marginal costs—the additional costs of Marginal costs—the additional costs of producing producing one more unit of outputone more unit of output

Only variable costs consideredOnly variable costs consideredMarginal cost is the variable cost Marginal cost is the variable cost

increase divided by the number of increase divided by the number of additional items producedadditional items produced


00 00 00 $3,400$3,400 $0$0 $3,400$3,400 --

11 1010 1010 3,4003,400 215215 3,6153,615 $21.50$21.50

22 5050 4040 3,4003,400 430430 3,8303,830 5.385.38

33 110110 6060 3,4003,400 645645 4,0454,045 3.583.58

44 175175 6565 3,4003,400 860860 4,2604,260 3.313.31

55 245245 7070 3,4003,400 1,0751,075 4,4754,475 3.073.07

66 320320 7575 3,4003,400 1,2901,290 4,6904,690 2.872.87

77 400400 8080 3,4003,400 1,5051,505 4,9054,905 2.692.69

88 485485 8585 3,4003,400 1,7201,720 5,1205,120 2.532.53

99 575575 9090 3,4003,400 1,9351,935 5,3355,335 2.392.39

1010 675675 100100 3,4003,400 2,1502,150 5,5505,550 2.152.15

1111 875875 200200 3,4003,400 2,3652,365 5,7655,765 1.081.08

1212 985985 110110 3,4003,400 2,5802,580 5,9805,980 1.951.95

1313 1,0001,000 1515 3,4003,400 2,7952,795 6,1956,195 14.3314.33

1414 975975 -25-25 3,4003,400 3,0103,010 6,4106,410 --

1515 925925 -50-50 3,4003,400 3,2253,225 6,6256,625 --

+$430+$430+12+1255

$430/125=$3.44 marginal cost of going from$430/125=$3.44 marginal cost of going from 11 workers to 13 workers11 workers to 13 workers

objectives: 1.describe how demand differs from the quantity demanded 2.explain what the law of...

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