UNDERSTANDING DEMAND

• This section will be one of the easiest to understand. – You live out this section nearly every day.

• SUMMARY OF SECTION –– This section explains how when you have more

you want (Demand) more, and…– How you want (Demand) more when prices

drop, and– How your income affect your choices (i.e. I have

$5 I buy a value meal. I have $30 I go to Cheddars).

UNDERSTANDING DEMAND

• According to the LAW OF DEMAND people buy less of a good when the price rises.

• Demand schedules & demand curves illustrates how people & markets react to different prices.

• SUMMARY OF SECTION –this section explains how people increase or decrease their wants and it uses graphs, charts, & tables to illustrate how people increase or decrease their wants.

UNDERSTANDING DEMAND

• Demand – the desire to own something and have the ability to pay for it.

• Law of Demand – when a good’s price is lower consumers will buy more of it.

PRICE GOES DOWN

DEMAND GOES UP

Price Goes Up

Quantity Demand Goes Down

LAW OF DEMAND

INCOME EFFECT

PRICE OF “A” INCREASES

Consumption of “A” goes down

Consumption of other goods go

down or remain the same

The change in consumption resulting from a change in real income.

Understanding the income effect.

When the price of “A” increase real Income (purchasing power)

decreases

Resulting in the consumer’s ability to buy fewer of the other goods

INCOME EFFECT

PRICE OF “A” DECREASES

Consumption of “A” goes UP

Consumption of other goods go

UP

Understanding the income effect.

When the price of “A” Decrease real Income (purchasing power)

increases

Resulting in the consumer’s ability to

more of the other goods

SUBSTITUTION EFFECT

PRICE OF “A” INCREASES

Consumption of “A” goes down

Consumption of other goods go UP

When consumers react to an increase in a good’s price by consuming less of that good and more of other goods.

SUBSTITUTION EFFECT

PRICE OF “A” DECREASES

Consumption of “A” goes up

Consumption of other goods go

DOWN

When consumers react to an increase in a good’s price by consuming less of that good and more of other goods.

THE PRICE OF A CASE OF COCA COLA GOES UP TO $5.99 / CASE

PEOPLE WILL SUBSTITUTE FOR A CHEAPER COLA

• For example let’s view a demand schedule for a “Snicker’s candy bar.

Price of Snicker’s

Quantity demanded

.50 10

.75 7

1.00 5

1.25 4

1.50 2

2.00 0

Demand Schedule

Demand Curve for Snicker’s Bar

0 1 2 4 5 7 10

2.00

1.75

1.50

1.25

1.00

0.75

0.50

READING A DEMAND CURVE

Demand Curves slope down from left to right

0 1 2 4 5 7 10

2.00

1.75

1.50

1.25

1.00

0.75

0.50

READING A DEMAND CURVE

The higher the price the lower the demand

SHIFTS OF THE DEMAND CURVE

• In this section we will understand the difference between a change in quantity demanded and a SHIFT IN QUANTITY demanded.

• A Shift involves factors other than price.

• For example let’s view a demand schedule for a “Snicker’s candy bar.

Price of Snicker’s

Quantity demanded

.50 10

.75 7

1.00 5

1.25 4

1.50 2

2.00 0

Demand Schedule

Demand Curve for Snicker’s Bar

0 1 2 4 5 7 10

2.00

1.75

1.50

1.25

1.00

0.75

0.50

• “BREAKING NEWS REPORT!” A new medical discovery has found that eating one or two Snicker’s candy bar per week can prevent wrinkles in women or reverse the wrinkling process!

Price of Snicker’s

Quantity demanded

1.00 50

1.25 45

1.50 30

1.75 25

2.00 20

2.50 10

Demand Schedule

Demand Curve for Snicker’s Bar

0 10 20 25 30 45 50

2.50

2.00

1.75

1.50

1.25

1.00

Understanding Through Relating Terms & Sections

• Demand Shifts - A Shift involves factors other than price.– Ceteris paribus – “all other things held

constant.” – in the previous section the demand schedule only took into account prices.

• More factors than just price cause a shift in quantities demanded (key).

• A demand curve is accurate only as long as the “ceteris paribus” assumption is true.

Understanding Through Relating Terms & Sections

• Factors that Cause Shifts –– Income – a consumer’s income affect his or

her demand for most goods.• Normal goods – goods that consumers demand

more of when their income is up.– A reduction of income almost always lead to a

reduction in demand (income effect). – A reduction in income would cause a decrease in

demand and a demand shift to the left– A decrease in income would cause the demand of

normal goods to go down and inferior goods to go up.

• Factors that Cause Shifts –– Income – a consumer’s income affect his or

her demand for most goods.• Normal goods – goods that consumers demand

more of when their income is up.– A decrease in income would cause the demand of

normal goods to go down and inferior goods to go up.

• Inferior Goods – inferior goods are goods that you would buy in smaller quantities or not at all.

– Even though you may buy a small quantity the demand for Inferior goods go up because you are now purchasing more of a product that you would not normally purchase (substitution effect).

• Factors that Cause Shifts –– Consumer Expectation – Our expectations

about the future affect our demand for certain goods.

• Would tax free weekend in August cause a demand shift to the left or right in July?

– The shift would be to the left because people will wait until the tax free weekend to satisfy their demands.

• Skinny leg jeans will double in price starting in April. Will the demand for skinny leg jeans shift to the left or right in March?

– The shift will be to the right because the immediate demand goes up in order to beat the price increase.

– Self interest becomes the incentive to buy.

• Factors that Cause Shifts –– Population – The size of the population

affect the demand for products.• Example – a new factory opens up in Macon

employing 1000 local workers but relocating 2000 employees to Macon.

– Which way will the demand for goods in Macon shift?

– Name some of the things that will cause an increase in demand.

– Consumer tastes & Advertising –• Once advertising makes a product popular how

is the demand for that product affected?

• Factors that Cause Shifts –– Price of Related Goods – the demand curve

for one good can affect positively or negatively the demand curve for another.

• Complements are two goods bought and used together.

– Computer, monitor, & printer – if the demand for computers rise the demand shift for monitors & printers go up.

– How will a rise in demand for laptops cause a demand shift for monitors? Which way will the shift go?

• Substitutes are goods used in place of one another.

PRICE GOES DOWN

Quantity Of Supply Goes Up

Price Goes Up

Quantity OF SUPPLY Goes DOWN

LAW OF SUPPLY

UNDERSTANDING SUPPLY

• Supply is the amount of goods available.• Law of Supply – The higher the price the

larger the quantity produced.• When do parents buy kids the most?

– Example – • Bratz & WWF sell for $10.00 ea. from January to August

but the demand is low therefore producers make a small quantity.

• For Christmas lots of children want Bratz & WWF. Christmas is a hot buying season therefore both now sell for $17.00 ea. Producers make more because the profit motive is higher.

• Quantity Supplied describes how much of a good is offered for sale at a specific price. – When the price of goods rise firms produce

more in order to earn more profit.– The key to profit is that they utilize almost the

same labor & output cost.– The rise in the price of goods causes new

firms to enter into the market.– Firms changing their level of output and new

firms entering into the market combine to create the Law of Supply.

– Bottom Line – The more money to be made the higher the supply becomes.

• If a firm is making a profit an increase in price will automatically bring an increase in profit.

• A Supply Schedule shows the relationship between a price increase of a good and the quantity supplied.– Variables are the factors that can change.

See Figure 5.2– A supply schedule only deals with price. It

shows how the price affects the producer’s output.

• A Supply Curve – is a graph of the data in a supply schedule.

Price of Snickers

Snickers supplied per week

.50 50

.75 100

1.00 150

2.00 200

2.50 300

SUPPLY SCHEDULE

0 50 75 100 150 200 250 300 350

Quantity of Goods supplied

100

9

8

7

6

5

4

3

2

1

0

SUPPLY CURVE

PRICE

• Elasticity of Supply measures the way suppliers respond to a change in prices.– If elasticity is greater than one supply is

considered ________– If Elasticity is less than one supply is

considered ________– If Elasticity is equal to one supply is said to be

___________.

• Elasticity of Supply and Time– If a producer can change his production to

take advantage of a price increase the supply is elastic. A Baker (cakes double)

– If a producer cannot change in a short period of time the supply is inelastic. Hotel rooms

COSTS OF PRODUCTION

• Why do you suppose that some employers increase the work load on its employees instead of hiring help?

• Labor & Output – how does the number of workers affect production?– Marginal Product of Labor – the change in

output from hiring one more worker –• Why would an employer pay an employee

overtime instead of hiring another employee?

COSTS OF PRODUCTION

• Labor & Output – how does the number of workers affect production?– Marginal Product of Labor – the change in

output from hiring one more worker –– Recall THINKING AT THE MARGIN!!!

• Deciding whether to do or add one unit of resource.

• The marginal product of labor measures the change of output at the margin.

• Increasing Marginal Returns –a level of production in which the marginal product of labor (what is being made) increases as the number of workers increase.– More workers equal greater production– More workers can specialize thereby

creating EFFICIENCY.

• Diminishing Marginal Returns - a level of production in which the marginal product of labor decreases as the number of workers increase.– More workers equals less production.

Production Costs

• Fixed costs – a cost that does not change no matter how much goods are produced.

• Variable Costs – costs that rise or fall depending on the quantity produced.

• Total costs – the fixed costs and variables costs added together find the total cost.

• Marginal cost is the additional cost to produce one more unit.