Supply and DemandSupply and Demand

Goal 8 NotesGoal 8 Notes

Economic Interdependence Economic Interdependence

Everything is linked together in economics. One economic decision will affect other parts of the economy. Some factors that affect economic interdependence are:

New products Consumer income—fixed incomes, layoffs, and pay

raises Inflation—when the price of goods rise faster than your

income Cost of resources—gas, electricity, and water Natural disasters—floods, hurricanes, and earthquakes

Everything is linked together in economics. One economic decision will affect other parts of the economy. Some factors that affect economic interdependence are:

New products Consumer income—fixed incomes, layoffs, and pay

raises Inflation—when the price of goods rise faster than your

income Cost of resources—gas, electricity, and water Natural disasters—floods, hurricanes, and earthquakes

Law of Diminishing Returns Law of Diminishing Returns

This happens when you want to increase productivity, so you keep adding one or more of the factors of production to increase your output.

Your output will increase to a point, but there will be a point when if you add another factor, that output will start to decrease.

At this point it is not a benefit to you to keep spending money on more factors of production.

This happens when you want to increase productivity, so you keep adding one or more of the factors of production to increase your output.

Your output will increase to a point, but there will be a point when if you add another factor, that output will start to decrease.

At this point it is not a benefit to you to keep spending money on more factors of production.

Diminished Returns Diminished Returns

Law of Diminishing Marginal Utility

Law of Diminishing Marginal Utility

This happens when the product that you purchase, even at a bargain price, will give you less satisfaction.

This is because you may become bored, and tired or overstocked with that product.

Example: 39-cent cheeseburgers, buy one get two free pizzas, or a low price on toilet tissue.

This happens when the product that you purchase, even at a bargain price, will give you less satisfaction.

This is because you may become bored, and tired or overstocked with that product.

Example: 39-cent cheeseburgers, buy one get two free pizzas, or a low price on toilet tissue.

Basic Observations about Consumers

Basic Observations about Consumers

You can not have it all! Decisions must be made that involve an opportunity cost (economic decision).

You are responsible for your decisions. You must pay your bills (credit Cards).

You should have some information about what you are buying. The more expensive the product, the more research you should do. Methods of research include: the internet, consumer reports, and advice from friends

You can not have it all! Decisions must be made that involve an opportunity cost (economic decision).

You are responsible for your decisions. You must pay your bills (credit Cards).

You should have some information about what you are buying. The more expensive the product, the more research you should do. Methods of research include: the internet, consumer reports, and advice from friends

Supply and Demand Supply and Demand

Demand Demand

Is the amount that the consumer will buy.

It is called consumer sovereignty.

Is the amount that the consumer will buy.

It is called consumer sovereignty.

Demand CurveDemand Curve

The Law of Demand The Law of Demand

The Law of Demand states that people are willing to buy more of a product if the price is lower. Price and demand move in opposite directions

This is also known as the price effect.

Down with Demand!!!!!!!!!

The Law of Demand states that people are willing to buy more of a product if the price is lower. Price and demand move in opposite directions

This is also known as the price effect.

Down with Demand!!!!!!!!!

Factors That Shape Demand Factors That Shape Demand

The price effect is the most important factor.

The quality and durability of a product. Consumer taste or desire. What's in style. Types of substitutes Availability of the product Season

The price effect is the most important factor.

The quality and durability of a product. Consumer taste or desire. What's in style. Types of substitutes Availability of the product Season

Normal v Inferior GoodNormal v Inferior Good

A normal good- is a product whose demand increases with rising incomes. Example: Lexus, BMW, or a cruise trip.

An inferior good- is a product whose demand decreases with a rising income, (Generic or Wal-Mart goods).

A normal good- is a product whose demand increases with rising incomes. Example: Lexus, BMW, or a cruise trip.

An inferior good- is a product whose demand decreases with a rising income, (Generic or Wal-Mart goods).

Substitutions Substitutions

Sometimes stores offer generic or off brands offer lower prices without compromising quality.

(Wal-Mart Soda). This is a substitution. Another example is Fruit Rings

Sometimes stores offer generic or off brands offer lower prices without compromising quality.

(Wal-Mart Soda). This is a substitution. Another example is Fruit Rings

Substitution effect Substitution effect

A price increase in one product (Dr. Pepper) will cause the demand of a substitute product to increase (Dr. Thunder).

A price increase in one product (Dr. Pepper) will cause the demand of a substitute product to increase (Dr. Thunder).

Complementary good Complementary good

When the demand for one product is linked to the demand of another product.

Examples: VCR and tapes, computers and disks, and shoes and socks.

When the demand for one product is linked to the demand of another product.

Examples: VCR and tapes, computers and disks, and shoes and socks.

Elasticity of Demand Elasticity of Demand

How much a price change affects the amount demanded.

How much a price change affects the amount demanded.

Elastic Demand Elastic Demand

When the amount demanded varies greatly with a price change.

These are wants

When the amount demanded varies greatly with a price change.

These are wants

Inelastic Demand Inelastic Demand

When a price change does not affect the amount demanded.

These are needs Example, medicine

When a price change does not affect the amount demanded.

These are needs Example, medicine

Supply Supply

The amount that producers will offer for sale

The amount that producers will offer for sale

Supply CurveSupply Curve

The Law of Supply The Law of Supply

The Law of Supply states that production or the supply will increase if prices are higher and the producers are making more profit (self-interest).

Supply to the Sky!!!!!!!!!!!!

The Law of Supply states that production or the supply will increase if prices are higher and the producers are making more profit (self-interest).

Supply to the Sky!!!!!!!!!!!!

Change in Supply (causes)Change in Supply (causes)

The major reason is the cost of production. There is a fixed supply; a limited number of the

product is available. Example: sporting events, concerts, and hospital beds.

There are substitutes or alternative choices available.

New businesses. Government policy- Deregulation, allows more

competition. (Phone companies, airlines, Microsoft)

The major reason is the cost of production. There is a fixed supply; a limited number of the

product is available. Example: sporting events, concerts, and hospital beds.

There are substitutes or alternative choices available.

New businesses. Government policy- Deregulation, allows more

competition. (Phone companies, airlines, Microsoft)

Supply and the Consumer Supply and the Consumer

Surplus- is an oversupply. This will usually result in lower prices.

Shortage- is a lack in supply. This will usually result in higher prices. However, these high prices may not last long because new producers will enter the market seeking high profits. If a shortage is severe enough, then rationing could take place.

Rationing is selling a product in limited quantities.

Surplus- is an oversupply. This will usually result in lower prices.

Shortage- is a lack in supply. This will usually result in higher prices. However, these high prices may not last long because new producers will enter the market seeking high profits. If a shortage is severe enough, then rationing could take place.

Rationing is selling a product in limited quantities.

Market Clearing Price Market Clearing Price

The Market- is anyplace where producers and consumers make exchanges. In capitalism, the price is usually set in a free market.

Market Price- is the price that satisfies both producers and consumers. It is also called the equilibrium price.

The market price is affected by the balancing between supply and demand, shortage V. surplus. These cycles usually vary on a regular basis.

The Market- is anyplace where producers and consumers make exchanges. In capitalism, the price is usually set in a free market.

Market Price- is the price that satisfies both producers and consumers. It is also called the equilibrium price.

The market price is affected by the balancing between supply and demand, shortage V. surplus. These cycles usually vary on a regular basis.

Market Clearing PriceMarket Clearing Price

Profit and CompetitionProfit and Competition

Profit- is income after all the expenses have been paid

Profit- is income after all the expenses have been paid

Normal Profit- is the amount of profit needed to break even.Economic Profit- is profit in excess of the break even point.

Operating expensesRed- means that a business is operating at a loss.

Black- means that a business is operating with a profit

Competition Competition

Competition- is the rivalry between businesses to attract customers. Here are some benefits of businesses trying to attract customers.

Competition- is the rivalry between businesses to attract customers. Here are some benefits of businesses trying to attract customers.

Why Do We Need Competition?Why Do We Need Competition?

The efficient use of resources. Controls prices Better quality and service Encourage research and development Competition is Adam Smith’s Invisible

Hand.

The efficient use of resources. Controls prices Better quality and service Encourage research and development Competition is Adam Smith’s Invisible

Hand.

Non-price Competition Non-price Competition

Advertising. Catchphrases Endorsements Exploiting fears Sex appeal Numerical claims Bargain appeal Bandwagon Product improvement Styles and Services Location or availability

Advertising. Catchphrases Endorsements Exploiting fears Sex appeal Numerical claims Bargain appeal Bandwagon Product improvement Styles and Services Location or availability

The Circular Economic Flow of Money and Goods

The Circular Economic Flow of Money and Goods

This chart explains how money and goods are exchanged between consumers producers and the growers of crops in the factor market.

This chart explains how money and goods are exchanged between consumers producers and the growers of crops in the factor market.

Circular Flow of MoneyCircular Flow of Money

The Business CycleThe Business Cycle

The business cycle is a measure of the strength of the economy.

There are 4 cycles of the business cycle. Peak Recession Depression Recovery

The business cycle is a measure of the strength of the economy.

There are 4 cycles of the business cycle. Peak Recession Depression Recovery

PeakPeak

Is the highest phase of the business cycle. It is the top of the roller coaster A peak is also known as a boom time. This period is marked by low interest rates,

low unemployment rates, and low inflation. There is a high consumer confidence and a

high GDP.

Is the highest phase of the business cycle. It is the top of the roller coaster A peak is also known as a boom time. This period is marked by low interest rates,

low unemployment rates, and low inflation. There is a high consumer confidence and a

high GDP.

RecessionRecession

Is when there is a decline in the GDP for 6 months.

The economy is starting to shrink. Unemployment is rising along with interest

rates as well as inflation. Consumer confidence is falling.

Is when there is a decline in the GDP for 6 months.

The economy is starting to shrink. Unemployment is rising along with interest

rates as well as inflation. Consumer confidence is falling.

DepressionDepression

Is the lowest phase on the business cycle. It is also known as a trough period. There is high unemployment, inflation, and

interest rates. There is no consumer confidence, and the

GDP is in a steady decline. We had a “great depression” in 1929 in the

US.

Is the lowest phase on the business cycle. It is also known as a trough period. There is high unemployment, inflation, and

interest rates. There is no consumer confidence, and the

GDP is in a steady decline. We had a “great depression” in 1929 in the

US.

RecoveryRecovery

Is a rebound after a recession or a depression.

Interest rates, unemployment rates, and inflation are falling.

Consumer confidence is beginning to climb. The GDP is beginning to increase.

Is a rebound after a recession or a depression.

Interest rates, unemployment rates, and inflation are falling.

Consumer confidence is beginning to climb. The GDP is beginning to increase.

Business CycleBusiness Cycle

Economic IndicatorsEconomic Indicators

These are certain parts of the economy that we use to determine the health of the nation’s economy.

The Business Cycle shows this graphically. The main indicators are: inflation, unemployment,

interest rates, GDP, and Consumer confidence. The most important id the GDP.

These are certain parts of the economy that we use to determine the health of the nation’s economy.

The Business Cycle shows this graphically. The main indicators are: inflation, unemployment,

interest rates, GDP, and Consumer confidence. The most important id the GDP.

Gross Domestic ProductGross Domestic Product

This is the measure of all new finished goods and services produced in the US every year.

Finished- Something you buy that is not an ingredient in another product.

Good- A product that you buy that yo ucan physically touch (A cheeseburger).

Service- Something that is provided for you (haircut).

This is the measure of all new finished goods and services produced in the US every year.

Finished- Something you buy that is not an ingredient in another product.

Good- A product that you buy that yo ucan physically touch (A cheeseburger).

Service- Something that is provided for you (haircut).