Chapters 4 & 5

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Chapters 4 & 5

  1. 1. Chapters 4 & 5:Supply and Demand<br />
  2. 2. 4-1: What is Demand?<br />Microeconomics is the part of economic theory that deals with the behavior and decision making by individual units, such as people and firms.<br />Microeconomic concepts help explain how prices are determined.<br />Demand is the desire, ability, and willingness to buy a product. <br />Demand is a concept specifying the different quantities of an item that will be bought at different prices.<br />
  3. 3. <ul><li>The Law of Demand:</li></ul>There is an inverse relationship between the price of an item and the quantity demanded.<br />As price goes up, the quantity demanded will go down.<br />As price goes down, the quantity demanded will go up.<br />Video<br /><ul><li>Marginal Utility is the additional satisfaction or usefulness a consumer gets from having one more unit of a product.
  4. 4. Diminishing Marginal Utility states that the extra satisfaction we get from using additional quantities of the product begins to decline. </li></ul>“How many cars do you really need?”<br />
  5. 5. Demand Schedule – table that lists how much of a product consumers will buy at all possible prices<br />Demand Curve – a graph showing the quantity demanded at each and every price that might prevail in the market<br />(graphs in motion)<br />Individual vs. Market Demand Curves<br />
  6. 6. 4-2: Factors Affecting Demand<br />When it comes to demand, there are two types of changes.<br />When the price of a product changes while all other factors remain the same, there will be a change in the quantity demanded. <br />We move along the existing demand curve. Demand curve does not shift.<br />Price of hamburger decreases at McDonalds, people will buy more hamburgers.<br />Sometimes other factors change while the price remains the same. Then there will be a change, or shift, in total demand.<br />If McDonalds redesigns its restaurants to appeal to more people, they will have more customers, even at the same price.<br />video<br />
  7. 7. Change in Quantity Demanded<br />Change in Demand<br />Caused by a change in price<br />Graphically represented by a move along the demand curve<br />Income effect – the change in quantity demanded due to the change in a buyers real income<br />Price goes down, you spend less, you “feel” richer, you buy more.<br />Substitution effect – the change in quantity demanded due to a price change that makes other products more or less costly<br />Caused by a change in factors other than price<br />Consumers decide to buy different amounts of the product at the same prices<br />Graphically represented by a shift of the demand curve, giving an entirely new demand curve (graphs in motion)<br />Can be caused by changes in:<br />consumer income<br />consumer tastes (trends)<br />cost of substitutes<br />cost of complements<br />consumer expectations<br />number of consumers<br />
  8. 8. 4-3: Elasticity of Demand<br />Elasticity is a measure of responsiveness.<br />“cause and effect”<br />how much does a dependent variable respond to a change in the independent variable<br />How much does the quantity demanded respond to an increase or decrease in price? Depends on its elasticity.<br />Demand is elastic when a change in price results in a relatively larger change in quantity demanded. (m<-1)<br />Demand is inelastic when a change in price results in a relatively smaller change in quantity demanded. (m>-1)<br />A product is unit elastic when a change in price results in a proportional change in quantity demanded. (m=-1)<br />
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  11. 11. 3,000 pounds of product A sells for $2.40/pound. If the price drops by 1/6, the amount sold will increase by 25%.<br />New price = 2.40 * (5/6) = 2.00 New quantity = 3000 * 1.25 = 3750<br />Old: 3000 * 2.40 = 7200<br />New: 3750 * 2.00 = 7500<br />20,000 kilos of commodity B sells for $15.00/kilo. The quantity sold decreases by 15% as the price increases by 1/5.<br />New price = 15.00 * (6/5) = 18.00 New quantity = 20000 * .85 = 17000<br />Old: 20000 * 15 = 300000<br />New: 17000 * 18 = 306000<br />1,000 kilo of commodity C brings in $150.00/kilo. The quantity purchased drops 25% when the price is increased by 1/3.<br />New price = 150 * (4/3) = 200 New quantity = 1000 * .75 = 750<br />Old: 1000 * 150 = 150000<br />New: 750 * 200 = 150000<br />5,000 bales of crop D sell for $45.00/bale. The price drops 20%, causing the number of bales purchased to increase 18%.<br />New price = 45 * .80 = 36 New quantity = 5000 * 1.18 = 5900<br />Old: 1000 * 5000 * 45 = 225000<br />New: 5900 * 36 = 212400<br />Price Down & Revenues Up = Elastic<br />Price Up & Revenues Up = Inelastic<br />Price Up & Revenues Unchanged = Unit Elastic<br />Price Down & Revenues Down = Inelastic<br />
  12. 12. 5-1: What is Supply?<br />Supply is the amount of a product that would be offered for sale at all possible prices that could prevail in the market<br /><ul><li>The Law of Supply:</li></ul>There is an direct relationship between the price of an item and the quantity supplied.<br />As price goes up, the quantity supplied will go up.<br />As price goes down, the quantity supplied will go down. (graphs in motion)video<br />
  13. 13. Change in Quantity Supplied<br />Caused by a change in price<br />Graphically represented by a move along the supply curve<br />Change in Supply<br />Caused by a change in factors other than price<br />Producers offer different amounts of the product to sell at the same prices<br />Graphically represented by a shift of the supply curve, giving an entirely new supply curve <br />Can be caused by changes in:<br />cost of resources, productivity, technology, expectations<br />taxes and subsidies, government regulations<br />number of sellers<br />
  14. 14. Supply elasticity is based solely on the nature of the production of a product. <br />Can it be made quickly without large influxes of capital or skilled labor?<br />Supply is elastic when a change in price results in a relatively larger change in quantity supplied. (m<+1)<br />Supply is inelastic when a change in price results in a relatively smaller change in quantity supplied. (m>+1)<br />A product is unit elastic when a change in price results in a proportional change in quantity supplied. (m=-1)<br />
  15. 15. 5-2: Theory of Production<br />The production function shows how total output changes when the amount of a single variable (usually labor) changes over the short run.<br />The marginal product is the extra output or change in total product caused by adding one more unit of variable input.<br />Can be illustrated with a production schedule or graph<br />(graphs in motion)<br />.<br />
  16. 16. Stages of Production<br />I. Increasing marginal returns<br />- Each additional worker adds more to the total output than the worker before.<br />II. Decreasing marginal returns<br /> - Each additional worker is making a diminishing, but still positive, contribution<br />III. Negative marginal returns<br /> - Each additional worker decreases total output<br />
  17. 17. 5-3: Cost, Revenue, and Profit Maximization<br />Break-Even Point – level of production that generates just enough income to cover its total operating costs<br />Total Revenue – all the revenue that a company receives<br />Marginal Revenue – additional revenue a company receives from the production and sale of one additional unit of output<br />Fixed Costs or Overhead - costs that an organization incurs even when there is little or no activity, usually machinery and capital resources<br />Variable Costs – costs that change when the business’s rate of production or output changes, usually labor and raw materials<br />Total Costs – sum of the fixed and variable costs<br />

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