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Demand

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  1. Section 4.1 Demand

  2. Demand • Two requirements for demand • the desire to own something, and • the ability to pay for it • An inverse relation of quantity demanded and price of a good

  3. The Law of Demand • Consumers buy more if price decreases and less if price increases • As price drops, demand rises

  4. Demand Curve • A graphic representation of a demand curve • Vertical axis • Price of the good • Horizontal axis • Number of units demandedof the good Price $ Demand units

  5. Demand Schedules • Demand Schedule • A table that lists the quantity of a good each person will buy at each different price • Market Demand Schedule • A table that lists the quantity of a good that all consumers in a market will buy at each different price

  6. Simple Demand Curves Demand Curve Market Demand Curve

  7. Demand for Cookies Demand Schedule Demand Curve

  8. Substitution Effect • A substitute is a nearly equivalent good • If the price of pizza goes up, you might substitute tacos. • When consumers react to an increase in a good’s price by consuming less of that good and more of other goods

  9. Income Effect • The change in consumption resulting from a change in real income • Consumption – the amount of a good that is bought • As income increases, demand increases

  10. Section 4.2 Shifts in the Demand Curve

  11. Ceteris paribus • “all other things held constant” • Economists simplify models by changing only one thing at a time

  12. Shift in the Demand Curve Left ShiftDecrease in Demand Right ShiftIncrease in Demand DemandDecrease DemandIncrease Change Along a Curve Price $ Price $ Price $ Demand units Demand units Demand units

  13. Changes in Demand • Income • People buy more if income increases • Expectations • People buy more if the economy is improving • Population • Demand increases if the number of customers increases • Tastes and advertising • Prices of related goods

  14. Related Goods • Complements – purchased along with other goods • skis • ski boots • • • • • Substitutes – purchased in place of other goods • skis • snowboards • • • •

  15. Effect of Related Goods on Demand • Increase in price for one good reduces demand for complementary goods • Price of skis ↑ • Demand for skis ↓ • Demand for ski boots ↓ • Increase on price of one good increases demand for substitute goods • Price of skis ↑ • Demand for skis ↓ • Demand for snowboards ↑

  16. Section 4.3 Elasticity of Demand

  17. Definitions • Elasticity of Demand • How consumers react to a change in price • Inelastic Demand • Demand is NOT SENSITIVE to a change in price • If price changes, demand does NOT change • Elastic Demand • Demand is VERY SENSITIVE to a change in price • If price changes, demand DOES change

  18. Factors Affecting Elasticity • Availability of substitutes • Relative importance • Necessities vs. luxuries • Changes over time

  19. Test for Elasticity of Demand ELASTIC INELASTIC There are no substitutes, or Buyer’s budget is not limited , or Good is perceived as a necessity • There are substitutes, or • Buyer’s budget is limited , or • Good is perceived as a luxury

  20. Supply Chapter 5

  21. Section 5.1 Understanding supply

  22. Thinking Backwards • Now you understand DEMAND • You naturally think like a CONSUMER • Demand occurs AFTER the goods are made • You must think backwards to understand SUPPLY • You must think like a SUPPLIER • Supply planning occurs BEFORE the goods are made

  23. Supply • Supply • The amount of goods available • Quantity Supplied • The amount of a good offered for sale at a specific price

  24. The Law of Supply Price $ • Law of Supply • The tendency of suppliersto offer more of a goodat a higher price • New suppliers will entera market as prices rise • DIRECT relationship between price and supply Quantity Supplied units

  25. Simple Supply Curves Individual Supply Curve Market Supply Curve

  26. Supply of Cookies Supply Schedule Supply Curve

  27. Elasticity of Supply • Elasticity of Supply • The measure of the way quantity supplied reacts to a change in price • Inelastic Supply • Supply is NOT SENSITIVE to a change in price • Agricultural products in the short term • Elastic Supply • Supply is VERY SENSITIVE to a change in price • Barber shops in the short term

  28. Section 5.2 Costs of production

  29. Cost Elements (Consumables) • Labor • Workers assigned to production of a good or service • Materials • Other resources required to produce a good or service

  30. Production Costs • Fixed • Does not change, no matter how much output is produced • Variable • Rises or falls depending on the level of output • Total • Fixed plus variable costs • Marginal • Cost of producing one more unit of output

  31. Marginal Analysis - Revenue • Marginal Revenue • Revenue received from one additional unit of output • Usually the market price • Total Revenue • Revenue received from all units of output at each level

  32. Marginal Analysis - Cost • Marginal Cost • Cost to produce one additional unit of output • Total Cost • Cost to produce all units of output at each level

  33. Marginal Analysis - Profit • Profit • Total Revenue minus Total Cost • MarginalProfit • Profit generated by one additional unit of output • Marginal Revenue – Marginal Cost

  34. Production Cost Schedule

  35. Optimum Production Level - 1 Total Cost and Revenue Marginal Cost and Revenue

  36. Optimum Production - 2

  37. Maximum Profit when MC = MR

  38. Conclusion • The optimum production level is the one that gives maximum profit • Maximum profit occurs whenMarginal Cost = Marginal Revenue

  39. Marginal Product of Labor • Increasing the number of workers increases the output of the good or service, until … Increasing Marginal ReturnsMore workers – more output Diminishing Marginal ReturnsMore workers – less output Negative Marginal ReturnsMore workers – output stops

  40. Marginal Product of Labor – cont’d. Adding workers improves productivity … until it doesn’t “Too many cooks spoil the broth”

  41. Section 5.3 Changes in Supply

  42. Shifts in the Supply Curve • Firms change the supply in order to maximize profits

  43. Factors That Affect Supply • Input Costs • Government Influence • Global Economy • Other Influences • Supplier Location

  44. Input Costs • Higher Costs → Lower Profits • e.g., higher raw material costs • Marginal costs increase • Firms reduce supply • Lower Costs → Higher Profits • e.g., higher process efficiency from improved technology • Marginal costs decrease • Firms increase supply

  45. Government Influence • Subsidies • Payments by the government to firms • Encourage production by lowering costs • e.g., farm subsidies • Excise taxes • Payments collected by the government from firms • Discourage production by raising costs • e.g., cigarette and alcohol taxes

  46. Government Influence (cont’d.) • Regulation • Government intervention in the market that affects price, quantity or quality • Usually increases costs • Compliance with regulation • Design changes • Can decrease revenue • Restrictions on advertising • Firms often reduce supply

  47. Influences of Global Economy • Changes in supply in manufacturing countries • Import restrictions • Ban – import not allowed • Quota – limited number of imports • Duty – tax on imports • Import restrictions affect supply • Reduce supply directly • Increase costs

  48. Other Influences on Supply • Future Expectations • Expected price rise • Sellers hold product off the market until prices rise • Expected price drop • Seller push supply onto the market to capture the current price • Number of Suppliers • As suppliers enter the market, supply increases • As suppliers leave the market, supply decreases