Lesson 7-1

The “Marketplace”Consumers influence the price of goods in a market economy.

-A market represents actions between buyers and sellers.

Voluntary Exchange

– The seller sets the price.– The buyer agrees to the product and price through

the act of purchasing product.• Supply and demand analysis is a model of how

buyers and sellers behave in the marketplace

Graphing the Demand Curve

– A demand schedule is a table of prices and the quantity demanded at each price.

– Lists quantity demanded are different prices.– A demand curve graphs the quantity demanded of

a good or service at each possible price.

Demand

• Demand: the amount of a good or service that buyers are willing and able to buy at different prices at a given time

• • *Demand does not mean desire or want

Law of Demand• Law of demand: also called the price effect- people will buy less of a good at

a higher price and more of a good at a lower price (price goes up, quantity demanded goes down)

• 1. real income effect- as price goes up people can’t afford to buy as much (Buying power- you can get more at a lower price)

• • 2. Diminishing personal value- as price goes up, it might seem less important

to have • • 3. Diminishing marginal utility- (marginal= additional, utility= usefulness)• -point when next additional item consumed is less satisfying than the

previous• • 4. substitution effect- as price goes up people find other alternatives to the

good•

Change in quantity demanded (the price effect)

• price- if price goes up the quantity demanded goes down (demand does not change)

Changes in Demand

• 1.Population (number of buyers)- if the number of buyers increases, demand will increase

• 2.buyers’ incomes- increase/decrease in income will change demand– In general, if income goes up, demand for all things goes up

• – Ex. If I earn more I might trade in my Mitsubishi and buy a

BMW. (My demand for expensive things goes up or I might by two cars; I’ll also buy more tater tots)

•

• 3. tastes- changes in taste affects demand– Ex. A music group becomes popular- demand for their merchandise increases.

If they lose their popularity, demand decreases.• • 4. related goods

– Complements- two goods that are used together. ( camera and film, tires and cars)

– Price of product goes down the demand for its complement will increase. Ex. If hot dogs go on sale, people will probably buy more hot dog buns. ( Because they are buying more hotdogs)

• – substitutes- good that can be used in place of another good

• ex. Pepsi and Coke, butter and Margarine• If the price of a good increases the demand of a substitute increases.

• 5. expectations- if people expect the price of a good to increase, demand for that good will probably go up (people rush in to buy it at the current price expecting prices to go up)

• • 6. Changes in weather or season- some products

are seasonal • Ex. Demand for snow blowers goes up after

snow storms

The Price Elasticity of Demand

• Elastic demand: change in price of product will bring about a big change in the amount demanded

• bigger % of budget= more elastic• when more substitutes are available= more elastic• - something has elastic demand when the change in

quantity demanded is larger than the change in price ( ex. The price rises by 2% but the quantity demanded drops by 10%)

• Ex. Luxury items people can do with out. Most people have a set limit on what they’ll pay for let’s say a snowmobile. If the price goes over that people won’t buy them)

• Inelastic demand: change in price will bring about little or no change in demand (ex. Toothpaste. Even if the price of toothpaste doubles, people will still buy the same amount. If the price of motorcycles doubled would people still buy them?)

Lesson 7-3The Law of Supply

– Supply is the willingness and ability of producers to provide goods to the consumer.

– As prices rise, the quantity supplied generally rises.

– As prices fall, the quantity supplied falls.– A direct relationship exists between price and

quantity supplied.

• The incentive of Greater Profits– Increase in price and increase in production leads

to an increase in profits– Higher prices encourage more competitors to join

the market.– Higher prices turn potential suppliers into actual

suppliers, adding to total output.

• The Supply Curve– Graphs and table can explain the law of supply.– A supply schedule shows the quantity supplied at

each given price.– A supply curve graphs the quantities supplied at

each possible price.• The relationship between quantity and price is

direct and always moving in the same direction

• Quantity Supplied Vs. Supply– A change in quantity supplied is caused by a

change in price.– Something other than price can cause a change in

supply as a whole to increase or decrease.

• The Determinants of Supply– The price of inputs, or the cost of production-raw

materials, wages, insurance, utilities, etc- can cause increase in supply.

– Competition, or the number of companies in an industry, can cause an increase in supply.

– An increase in taxes can cause a decrease in supply.– An improvement in technology, or the science used

to develop new products or methods of production and distribution, can cause an increase in supply.

• The Law of Diminishing Returns– Adding units to increase production increases total

output for a limited time period.– The extra output for each additional until will

eventually decrease.• Businesses will continue to add units of factor

of production until doing so no longer increase revenue

Lesson 7-4

• Equilibrium Price– In the real world, demand and supply work

together.• The price at which the supply meets the

demand- where the two curves intersect- is the equilibrium price

• Shifts in Equilibrium Price– If the demand curve shifts due to something other

than price, the equilibrium price will change.– If the supply curve shifts due to something other

than price, the equilibrium price will change.

• Prices Serve as Signals– Rising prices signal producers to make more and

consumers to purchase less.– Falling prices signal producers to make less and consumers

to purchase more.– Shortages occur when the quantity demanded (at

equilibrium price) is greater than quantity supplied.– Surpluses occur when the quantity supplied (at

equilibrium price) is greater than quantity demanded.• Market forces can cause the prices to rise or fall to correct

shortages and surpluses.

• Price Controls– Price ceilings are a maximum price set by the government

to prevent goods from going above certain levels.– Items in short supply might be rationed.– Shortages can lead to a black market, or illegal places to

purchase such products at exorbitant prices.– Price floors are minimum prices also set by the

government to prevent prices from going below a certain level.

– Price floors set minimum wage levels and support agricultural prices.