unit three economics demandandsupply. pa standards 6.2.12e; 6.2.12.g; 6.3.12.d; 6.3.12.e; 6.3.12.f
TRANSCRIPT
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Unit Three
ECONOMICS
Demand and
Supply
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PA Standards
6.2.12E; 6.2.12.G; 6.3.12.D; 6.3.12.E; 6.3.12.F
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DEMANDAmount of a good or
service that a consumer is willing and able to buy at
various possible prices during a given time
period.
willing and able
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QUANTITY DEMANDED Amount of a good or
service that a consumer is willing and able to buy at
each particular price during a given time
period.
each particular price
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The Law of DemandAn increase in a good’s
price causes a decrease in the
quantity demanded; a decrease causes an
increase.
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1. Income EffectPurchasing power
refers to the amount of money
people have to spend on goods
and services
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1. Income Effect
Income Effect refers to the increase or decrease in
purchasing power caused by a
change in price
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2. Substitution Effect
Tendency of consumers to
substitute a similar, lower-priced
product for another product that is
more expensive
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Substitute Goods replace a more expensive, or
brand-name good
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Complementary Goods are
commonly used with other goods
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Product Substitute Good Complementary Good
Butter Margarine Bread
Steak Hamburger A-1
Digital CameraDisposable
CamBatteries
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3. Diminishing Marginal Utility
Decrease in the utility (usefulness) of a good as more
units are consumed
(usefulness)
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Demand Schedule
A list of the quantity of goods that
consumers are willing and able to buy at a series of possible prices
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Demand CurveA graph which plots the information from a demand schedule;
it shows the relationship between
price & demand
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Determinantsof Demand
Non-price factors that influence the amount of demand for a good
or service
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Determinants of Demand
Consumer Tastes and Preferences
Consumer Expectations
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Determinants of Demand
Market Size
-- decisions by private businesses-- government
policy-- new technology
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Determinants of Demand
Income
-- generally, as income rises, so does demand-- income relates to purchasing power
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Determinants of Demand
Prices of Related Goods-- ?? Substitutes ??
-- ?? Complements ??
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Elasticityof Demand
The degree to which changes in a good’s
price affect the quantity demanded
by consumers
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Elastic Demand
A small change in a good’s price causes a
major, opposite change in the
quantity demanded.
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Elastic Demand
Elasticity of demand if…
…the product is not a necessity
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Elastic Demand
Elasticity of demand if…
…there are readily available substitutes
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Elastic Demand
Elasticity of demand if……the product’s cost
represents a large portion of consumers’
incomes
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Inelastic Demand
A change in a good’s price has little impact
on the quantity demanded.
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Inelastic Demand
Inelasticity of demand if…
…the product is a necessity
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Inelastic Demand
Inelasticity of demand if…
…there are few or no readily available
substitutes
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Inelastic Demand
Inelasticity of demand if……the product’s cost
represents a small portion of consumers’
incomes
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Elasticity for a product varies
depending on the specificity of the
market—you can look at the big picture
(general market) or the close-up picture
(specific market)
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The more time that passes following a price change, the
more elastic a product’s demand
becomes
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Measuring Elasticity
Total Revenue (total receipts) is the total
income that a business receives from selling its
products
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Total Revenue & Elastic Demand
A drop in a company’s total
revenue from a price increase indicates
elastic demand for a product.
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Total Revenue & Inelastic Demand
An increase in a company’s total revenue
because of a price increase indicates
inelastic demand for the product.
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To maximize revenue, the seller must
determine at what point pricing choice brings the highest
revenue
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SUPPLY
The quantity of goods and services that
producers are willing to offer at various possible
prices during a given time period.
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QUANTITY SUPPLIED
The amount of a good or service that a producer is willing to sell at each
particular price.
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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.
Law of Supply
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Profit
Amount of money remaining after
producers have paid costs
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Costs of Production
Business expenses involved in the
manufacture of a product
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Profit influences specific and general
markets--new manufacturers will enter a profitable market; current
manufacturers will increase production
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A list of each quantity of a product that producers are willing to supply at
various market prices
Supply Schedule
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Supply CurveIt plots on a graph
the relationship between a good or
service and the quantity supplied
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ElasticityOf Supply
The degree to which price changes affect the quantity supplied
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Elastic Supply
A small change in price causes a major change in
the quantity supplied
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Elastic Supply
Elastic supply if…
…the product can be produced quickly
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Elastic Supply
Elastic supply if…
…the product can be produced
inexpensively
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Elastic Supply
Elastic supply if…
…production uses few, readily available
resources
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Inelastic Supply
When a good’s price has little impact on
the quantity supplied
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Inelastic Supply
Inelastic supply if…
…the product is expensive to produce
…the product requires time to be
produced
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Inelastic Supply
Inelastic supply if…
…production uses resources not readily
available
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Determinantsof Supply
Non-price factors that move the entire
supply curve
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Determinants of Supply
Prices of Resources
Competition
Technology
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Determinants of Supply
Producer Expectations
Government Action--tax
--subsidy--
regulation
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Making Production DecisionsProductivity
The amount of a good or service produced
per unit of input
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Total Product
All of the product a company makes in a
given period of time—with a given amount of
input
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Marginal Product
Change in output generated by adding
one more unit of input
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Law of Diminishing ReturnsAs more of one input is
added to a fixed supply of other resources,
productivity increases up to a point, but at some point marginal product will diminish.
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Increasing Marginal Returns
Stage of production when addition of units raises
returns.
More workers, more product
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DiminishingMarginal Returns
Stage of production when addition of units
reduces returns.More workers, declining marginal product
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NegativeMarginal Returns
Stage of production when addition of units
lowers returns.More workers, negative marginal product
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Costs of Production
Costs that do not change as the level of
output changes
Fixed Costs
depreciation
overhead
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Costs of Production
Costs that change as the level of output changes
Variable Costs
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Costs of Production
Sum of fixed and variable costs
Total Costs
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Costs of Production
Additional costs of producing one
more unit of product
Marginal Costs
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End of Chapters 3 & 4