chapters45-100610222844-phpapp02

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Chapters 4 & 5:Supply and Demand

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4-1: What is Demand?• Microeconomics is the part of economic theorythat deals with the behavior and decision making

by individual units, such as people and firms.– Microeconomic concepts help explain how prices are

determined.

• Demand is the desire, ability, and willingness tobuy a product.

• Demand is a concept specifying the differentquantities of an item that will be bought atdifferent prices.

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• The Law of Demand:There is an inverse relationship between the price ofan item and the quantity demanded.

As price goes up, the quantity demanded will go down.As price goes down, the quantity demanded will go up.

•

Marginal Utility is the additional satisfaction orusefulness a consumer gets from having one more unit of aproduct.

• Diminishing Marginal Utility states that the extrasatisfaction we get from using additional quantities of theproduct begins to decline.

“How many cars do you really need?”

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Demand Schedule – tablethat lists how much of a

product consumers willbuy at all possible prices

Price Quantity

Demanded$30 0$25 1$20 1$15 3$10 5$5 8

Demand Curve – a graphshowing the quantitydemanded at each andevery price that mightprevail in the market

(graphs in motion)

http://glencoe.com/sites/common_assets/socialstudies/in_motion_08/epp/EPP_p94.swf


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4-2: Factors Affecting Demand

When it comes to demand, there are two types of changes– When the price of a product changes while all other factors

remain the same , there will be a change in the quantitydemanded.

• Price of hamburger decreases at McDonalds, people will buymore hamburgers.

– Sometimes when other factors change while the price remains the same , there will be a change in demand.

• If McDonalds redesigns its restaurants to appeal to morepeople, they will have more customers.

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4-3: Elasticity of Demand• Elasticity is a measure of responsiveness.– “cause and effect”

– how much does a dependent variable respond to achange in the independent variable

– How much does the quantity demanded respond to anincrease or decrease in price? Depends on itselasticity.

• Demand is elastic when a change in price results in arelatively larger change in quantity demanded. (m<-1)

• Demand is inelastic when a change in price results in arelatively smaller change in quantity demanded. (m>-1)

• A product is unit elastic when a change in price resultsin a proportional change in quantity demanded. (m=-1)

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Type of demand Elastic Inelastic Unit Elastic

Change in Price Down Down Down

Change in quantitydemanded

Up Up Up

Change in expenditures(price times quantity)

Up Down Same

Some determinants of Elasticity• Can the purchase be delayed?• Are adequate substitutes available?• Does purchase use a large portion of income?

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5-1: What is Supply?

• Supply is the amount of a product that would beoffered for sale at all possible prices that could prevailin the market

•

The Law of Supply:– There is an direct relationship between the price ofan item and the quantity supplied.

– As price goes up, the quantity supplied will go up.

– As price goes down, the quantity supplied will go down.(graphs in motion)



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Change in Quantity Supplied• Caused by a change in price

• Graphically represented by a move along the supply curve

Change in Supply

• Caused by a change in factors other than price• Producers offer different amounts of the product to sell at thesame prices

• Graphically represented by a shift of the demand curve, givingan entirely new demand curve

• Can be caused by changes in:– cost of resources, productivity, technology, expectations– taxes and subsidies, government regulations– number of sellers

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Supply is elastic when a change in price results in arelatively larger change in quantity supplied. (m<+1)

Supply is inelastic when a change in price results in arelatively smaller change in quantity supplied. (m>+1)

A product is unit elastic when a change in price resultsin a proportional change in quantity supplied. (m=-1)

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5-2: Theory of Production

The production function showshow total output changeswhen the amount of a singlevariable (usually labor)changes over the short run.

The marginal product is theextra output or change intotal product caused byadding one more unit of

variable input.Can be illustrated with a

production schedule orgraph

(graphs in motion)

Stages of ProductionI. Increasing marginal returns- Each additional worker adds moreto the total output than the workerbefore. II. Decreasing marginal returns- Each additional worker is making a

diminishing, but still positive,contributionIII. Negative marginal returns- Each additional worker decreasestotal output

.




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5-3: Cost, Revenue, and ProfitMaximization

Fixed Costs or Overhead - coststhat an organization incurseven when the is little or noactivity, usually machineryand capital resources

Variable Costs – costs thatchange when the business’srate of production or output

changes, usually labor andraw materialsTotal Costs – sum of the fixed

and variable costs

Break-Even Point – level ofproduction thatgenerates just enoughincome to cover its total

operating costsTotal Revenue – all therevenue that a companyreceives

Marginal Revenue– additional revenue acompany receives fromthe production and saleof one additional unit of

output

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