Microeconomics: Supply and Demand

Microeconomics: Supply and Demand

Bellringer -Age restrictions on labor -overtime/ holidayof pay Provide 2 examples laws passed inspectionthe US is a Mixed that-food demonstrate -anti-monopoly and anti-trust Economy. laws Anything used to produce goods: land, Labor, Capital and What is a factor of production? Entrepreneurs

Factors such as unemployment, poor why technology, lack ofcan not be Explain economies resources, poor management completely efficient. and unskilled laborers prevent 100% efficiency Bellringer When price increases, demand decreases; when price Explain thedemand inverse increases relationship of decreases,

the Law of Demand. $600*50= $30,000 What price$375,000 should this watch $500*750= company charge to maximize $400*3,600= $1,440,000 $300*4,000=revenue? $1,200,000 $200*5,400=$1,080,000 Show your math Price per watch $600 Quantity

demanded 50 $500 750 $400 3,600 $300 4,000 $200 5,400 Bellringer Revenue is all the money a

business brings in, but profit is what afterrevenue all costs differ? are How doremains profit and paid Demand increases when the curve shifts right, and When a demand curve decreases when the curveshifts right, whatleft does it mean for demand? shifts

Elastic means a small change in price has a huge impact on What is the difference between supply/demand. Inelastic elastic and change inelastic? means a price does not change the amount demanded Microeconomics: Supply and Demand Review The United States runs a mixed economy called

Capitalism. This is closest to a market economy. The basic questions of economics are What, how and for whom to produce. In the Market economy these are all answered through individuals, and through supply and demand. The US practices Free Enterprise by limiting regulations of the economy to protect consumers and workers. Microeconomics The branch of economics that deals with the behavior and decision making by individual businesses and households. Micro-economists study concepts such as supply and demand, opening and closing of businesses and individual household budgets. Demand Amount of a good or service that consumers are willing and able to buy There are two conditions, the ability and the desire to buy goods. A person may want a new computer but not have the

means to purchase it. Law of Demand The law of Demand is an inverse relationship between price and quantity demands. The Law of demand states that an increase in price causes a decrease in the quantity demanded. A decrease in price causes an increase in demand Law of Demand Price Demand or Price Demand Example: Law of Demand Susie wants a new computer. She has saved $700 to buy it. When she goes to Best Buy to purchase her computer she finds the price has increased to $1200. She does not have that extra money, so she can not buy the computer. However, she may not

even be willing to pay that increased price. This is an example of the increase in price lowering demand. It also shows how Susie is using her resources, in this case money. There are three economic concepts that explain the relationship between demand and price: Income Effect Substitution Effect Diminishing Marginal Utility The Income effect The amount of money, or income, that people have available to spend on goods and services is called their Purchasing Power An increase in a consumers purchasing power caused by a change in PRICE is called the Income Effect. Example:

If a person has $60 to spend on CDs but the price changes from $15 each to $10 their purchasing power has increased. Instead of being able to afford 4 CDs, they can now purchase 6 CDs. Substitution Effect Describes the tendency of consumers to substitute a similar, lower priced product for another product that is relatively more expensive. Example: the price of steak increases, so many consumers will switch to chicken, a lower priced substitute. Generic Products: typically sell for up to 40% less and are roughly identical products **Important** The Income Effect and the Substitution effect are only for goods and services

that are wanted. Goods and services that are needed will still be purchased regardless of price. Example: Although a consumer may substitute Chicken for Steak when the price goes up, when the price for Milk goes up, there are no comparable substitutes. Therefore, an increase in price on Milk will not affect the amount demanded. Diminishing Marginal Utility Utility describes the usefulness of a product, or amount of satisfaction that an individual receives from consuming a product. A products overall utility usually increases as more of the product is consumed. However, as more units of product are consumed, the satisfaction received from consuming each additional unit declines. Example: Going out to eat tacos for $3 each. The first two tacos are well worth the $3 because you are so hungry. However, as you think about the third taco, you realize you are nearly full, and the $3 taco may not be as worth it to you.

Diminishing Marginal Utility Same idea. The more pizza The utility of each bowl is toconsumed feed him but satisfaction diminishes the thehis lower the more he consumes. satisfaction, or utility Demand Schedules To show the relationship between the price and demand we often refer to demand schedules. A demand schedule lists the quantity of a good consumers are willing and able to buy at a number of prices.

Demand schedules allow businesses to set their price to achieve the largest profit. Sometimes they will charge more even though they sell less because their profit is higher. Price per watch Quantity demanded $600 0 $500 1,500 $400

2,750 $300 3,750 $200 4,500 Demand Schedules To determine the best price for their watches, this business only needs to multiply the price per watch by the quantity demanded. This is a rough estimate of the revenue, or money, they would bring in. Example: $500 a watch x 1,500 sold= $750,000

Price per watch Quantity demanded $600 0 $500 1,500 $400 2,750 $300 3,750

$200 4,500 Demand Curve A Demand Curve is another way to show the relationship between the price and quantity demanded. The Demand curve plots the information from a Demand Schedule. Demand Shifts Demand can change for a variety of reasons other than price including: Consumer tastes and preferences market size income price of related goods consumer expectations Markets are constantly changing. The factors above are able to shift the ENTIRE demand curve

A Right shift means an increase in demand A Left shift means a decrease in demand Demand Shifts Consumer Tastes and Preferences As a new band becomes popular the demand for that band grows. When the band gets poor reviews the demand decreases Income Generally when income increases they have more money to spend, or more ability. This leads to a greater demand for goods

Demand Shifts Market Size A larger market means more demand, but a smaller market means less demand. Markets are the people that will be purchasing. For instance, a pizza shop will deliver to a 5 mile radius. The people in that area are their market. If they increase delivery to 10 miles they are increasing their market size Demand Shifts Price of Related Goods Consumer Expectations Two types: substitute goods or complementary goods Substitute good- similar goods that replace higher priced goods Complimentary goodgoods commonly used with

other goods (ex: paint and paintbrushes) When a consumer expects an increase in pay they tend to spend more, increasing demand. When expecting a lower income they spend less, decreasing Demand. Reading Demand Graphs To read demand graphs, you need to find the point where price and quantity meet. That point is the Demand. When looking at the graph to the right, you will see the y-axis shows price and the x-axis shows quantity in thousands. At $20 the demand is 30 thousand. At $10 the demand is 50 thousand.

Elastic Demand Elasticity of demand refers to the degree in which a change in price can affect the quantity demanded. There are two types: Elastic and Inelastic Demand Elastic- when a small change in a goods price causes a major, opposite change in the quantity demanded Inelastic- when a change in a goods price has little impact on the quantity demanded (usually necessities like milk) The Big Idea: A small increase in price may actually cut profit. For example, a pizza shop sells 500 pizzas at $10 each. But when they increase the price to $12.50 they only sell 300. (500x10=$5000 or 300x12.50= $3750) Elasticity Watch the video to gain further understanding of the concept of elastic and inelastic: Elastic- change in price dramatically changes

demand Inelastic- change in price will not change demand Watch the video below to further understand elasticity: Elasticity Supply Supply is the quantity of goods and services that producers are willing to offer at various possible prices. Law of Supply Producers supply more goods and services when they can sell them at higher prices. They will supply fewer goods and services when they must sell them at lower prices Profit Amount of money remaining after producers have paid all of their costs is called profit. Businesses make money when revenues (incoming money) is greater than

the Costs of production . Businesses take risks and make decisions based on profits. They rely on Supply schedules and Supply Curves to make decisions on what, how and for whom to produce. Supply Schedule Show the relationship between price of a good and the quantity producers are willing to supply. The supply schedule lists each quantity of a product that producers are willing to supply at various market prices. Supply schedules and curves are a snapshot because they represent a specific time period. Supply curves A supply curve plot the information from a Supply Schedule on

a graph. This allows us to easily and quickly make decisions on supply. Normal supply curves reflect a steady relationship between quantity and price, like the graph on the right. Elasticity of Supply Degree to which price changes affect the quantity supplied. There are two sides; Elastic and Inelastic. Elastic- when a small change in price causes a major change in the quantity supplied. Inelastic- When a change in price does not affect the quantity supplied. The Big Idea: A small increase in the cost of production may result in a cut back in quantity supplied.

Supply Shifts Supply can change for a variety of reasons other than price including: price of resources government tools technology competition prices of related goods producer expectations Markets are constantly changing. The factors above are able to shift the ENTIRE supply curve A Right shift means an increase in Supply A Left shift means a decrease in Supply Supply Shifts Prices of Resources Technology Any price increase or

decrease in resources will effect their costs Resources include raw materials, electricity and workers wages. New technology can reduce the costs of production, leading to an increase in supply Supply Shifts Government tools Tools include taxes, subsidies and regulation Taxes: payment to fund government services. Taxes add to cost of production Subsidies: payments to private businesses to ensure an affordable supply of some essential goods like dairy, wheat, etc. Regulation: rules on how a business can operate which are meant to protect the consumer

Supply Shifts Competition Competition increases supply because there are more companies producing similar goods Example: As New video game consoles come out, the demand for new games increases. As such more suppliers come to the market, creating plenty of supply. Supply Shifts Prices of related goods Producer Expectations Suppliers may choose to produce different goods which are selling for a higher profit If the producers think the demand for or the price of their products will increase they will

increase their supply Equilibrium The goal of Supply and Demand is to reach equilibrium between the two. By reaching the equilibrium there are exactly enough goods to be sold, at a price the producers are willing to supply at. All items will be sold, and there will be nothing left over, nor anyone still demanding the product. Watch this video for more information: Market Equilibrium Shortages Sometimes shortages can occur, or a difference in the amount demanded and the amount supplied. Shortages occur in competitive markets when prices are too low or when supply is too low. When prices are too low more people buy the goods, and when supply is too low there are not enough to be purchased. Surplus Sometimes Surplus supply can occur, or a difference in the amount demanded and the amount supplied.

Surplus occur in competitive markets when prices are too high or when supply is too high. When prices are too high more people refuse to buy the goods, and when supply is too high there are too many goods to be purchased. Making Production Decisions Decisions are made based on productivity, how many goods or services can be produced per unit of input. Producers want to make the greatest Total Output- amount produced in a given period of time with current resources and input. Once total output is calculated the producers also determine their marginal outputthe change in output by adding one more unit of input. Labor input Total Product Marginal

Product 0 0 0 Marginal Product- change in output by one more unit of input (input may be human resources, raw materials, etc) 1 10 10 2 50

40 3 110 60 Study the chart below which shows the production amounts and marginal product of a the Golden Rubber duck factory. 4 175 65 5

245 70 6 320 75 7 400 80 8 485 85

9 575 90 10 675 100 11 875 200 12

985 110 13 1000 15 14 975 -25 15 925 -50

Marginal Product As the Labor input goes up, the total and marginal product tend to increase. However at a certain point you will notice marginal product starts to decrease, eventually becoming negative. This represents the law of diminishing returns. Law of Diminishing Returns Describes the relationship the level of an input has on total and marginal products. It states that as more of one input is added to a fixed supply of other resources, productivity increases up to a point. This law works when ONLY one input is changed. If more than one is changed then it is difficult to make a cause and effect relationship

Law of Diminishing Returns The Law of Diminishing Returns is similar to the Diminishing Marginal Utility. Putting more in does not always equal more output or usefulness. At some point diminishing returns will eventually hit negative returns. Think back to the Taco Example on slide 10. As you continue to eat your hunger is no longer being satisfied and at some point you will become sick (negative returns) Costs of Production Producers also examine their costs of production to determine the best amount of goods to supply. Costs include any goods and services used to make a product. There are several categories of production costs: 1) 2) 3)

4) Fixed Variable Total Marginal costs Fixed Costs Some production costs do not change, no matter how many goods are made, these are known as fixed costs. Examples of fixed costs include rent, interest on loans, property insurance, property taxes and salaries. Big Idea: Even if the Golden Duck factory makes zero ducks, they still owe rent, taxes and other fixed costs. Variable Costs These are costs that change as the level of output changes. These include raw materials and wages.

For example, the Golden Duck factory raises production from 100 ducks to 1000 a day. The cost of production will go up because the factory must pay more workers and buy more raw materials. Marginal Costs Marginal costs are the additional costs of producing one more unit of output. To determine this they must look at the variable costs ONLY. These are the costs that will change to increase production. This makes sense because these costs include price of materials, workers wages and electricity. Total Costs The sum of the fixed and variable production costs are the total costs. When a factory has no production it has no variable costs, but will still owe the fixed costs of rent, taxes, and

others. Companies graph their total costs by including the fixed costs (element) and then calculating the variable costs. You will notice that as the xaxis activity level increases, the total costs increase. In this case activity level means the output, or quantity produced. Task Study the table to answer the questions in the Task at the end of these notes Labor Input Total product Marginal product

Fixed costs Variable costs Total costs Marginal costs 0 0 0 $3,400 0 3,400 -

2 50 50 $3,400 430 3830 $5.38 4 175 125

$3,400 860 4260 $3.07 6 320 145 $3,400 1290 4690 $2.69

8 485 165 $3,400 1720 5120 $2.39 10 675 190

$3,400 2150 5550 $1.08 12 985 310 $3,400 2580 5980 $14.33

14 975 -10 $3,400 3010 6410 - 16 825 -150

$3,400 3440 6840 - Task 1) A Local pizza shop currently sells an average of 550 pizzas a week at $10 each. They want to increase revenue. Study the table to the right and explain which new price the pizza shop should charge assuming total costs do not change. Price per pizza Number of pizzas sold

8.00 750 10.00 550 12.00 475 2) Which way does a demand curve shift when demand increases? What about when demand decreases? 3) Study the table on slide 37. What are the fixed costs of the Golden Duck factory? What bills could this include? 4) Study the table on Slide 37. What are the marginal costs of increasing the work force from 4 to 12? What costs could this include? 5) If the price of gasoline goes up, but the amount demanded remains unchanged, is gasoline elastic or inelastic? 6) View the table on slide 12/13. What is the best price for the watch to maximize

revenue?

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