unit 2 econ

demand

the desire, ability, and willingness to buy a product

characteristics of demand

-you must be able to make a purchase -you must be willing to make a purchase -purchases made during a given time period -(ready, willing, and able)

The law of demand

-states that the quantity demanded of a good will be greater at lower prices than will be demanded at higher prices -the the quantity demanded varies inversly with its prices

A demand schedule

a list of the quantities comsumers demand at various prices

demand curve

a graphic illustration of the relationship between price and the quantity demanded

market demand curve

shows the quantities demanded by everyone who is interested in purchasing the product

marginal utility

the extra usefulness or satisfaction a person gets from acquiring or using one more unit of a product

diminishing marginal utility

the principle that as additional units of a product are consumed during a given time period, the additional satisfaction decreases

movement along the curve

responds to a change in price

consumer income(change in income)

-when your income goes up, you can afford to buy ore products -Normal good: income increases, demand increases(lawnmover, etc) -Inferior good: income increases, demand decreases (generics) FACTOR AFFECTING DEMAND

change in consumer tastes/preferences

-advertising, news, reports, fashion trends, the introduction of new products, and even changes in the season can affect consumer tastes -a change in consumers attitude can cause demand to increase or decrease -ex: pumpkin spice, sillybandz FACTOR AFFECTING DEMAND

substitute products

-are products whose uses are similar enough that one can replae the other -ex: almondmilk and milk FACTOR AFFECTING DEMAND

complementary products

-are products that are used together. if two goods are complementary products, a decrease in the price of one can increase the demand of another and vice versa -ex:pb and jelly FACTOR AFFECTING DEMAND

changes in expectations

-the way people think about the future and the purchasing decisions made with those expectations -ex: natural disasters=water, generators FACTOR AFFECTING DEMAND

increase in population

-an increase in the number of consumers will shift the market demand curve to the right -a decrease shifts the curve to the left -ex: middle class in india growing and buying cars FACTOR AFFECTING DEMAND

input costs

-labor, raw materials, and shipping costs can increase or decrease supply -if the price to make goods go up, you will get less FACTOR AFFECTING SUPPLY

productivity

-when workers decide to work more efficiently more products are produced FACTOR AFFECTING SUPPLY

technology

-improving technologies usually increase supply FACTOR AFFECTING SUPPLY

Government

-can affect supply through increasing or decreasing product costs -Taxes paid by the producer adds to costs which raises prices, thus reducing supply -subsidies received by the producer reduce costs which lower prices, thus increases supply -Regulations add to costs which raise prices, thus reducing supply FACTOR AFFECTING SUPPLY

expectations

-expectation about future price changes will cause the producer to either withhold products or sell products quickly to take advantage of change in price FACTOR AFFECTING SUPPLY

Number of sellers (change in number of sellers)

-as firms enter or leave the market, the market supply will either increase or decrease FACTOR AFFECTING SUPPLY

price ceiling

-when the government puts a legal limit on how high the price of a product should be -IS ONLY EFFECTIVE IF UNDER MARKET EQUILIBRIUM -when a price ceiling is set, a shortage occurs because there is more demand at that price then at equilibrium, and less supply -QS<QD -can be solved through "first come first serve" or black market

price floor

-the lowest legal price a commodity can be sold at -most common example is minimum wage -IS ONLY EFFECTIVE IF OVER EQUILIBRIUM -this causes a surplus, as there is less quantity demanded than quantity supplied -QD<QS -can be solved by gov buying surplus

elasticity

-the responsiveness of quantities demanded and supplied to changes in price

Price elasticity of demand

E=%change in Qd/%change in Pd

formal for calculating elasticity

E= (q2-q1)/q1/(p2-p1)/p1

inelastic demand

-if the elasticity of demand is less than one, demand is inelastic -Qd is smaller/Pd is larger -quantity demanded is less reponsive to changes in price -steep line -ex. cigarettes

Elastic demand

-if the elasticity of demand is greater than one, the demand is elastic -QD is larger/PD is smaller -quantity demanded is more responsive to changes in price -horizontal line

unitary elasticity

-a change in price will result in an identical change in demand -on a graph, a unitary elasticity curve will have a slope of 1 (45)

revenue of inelastic goods

-when price rises, total revenues rise -when price falls, total revenue falls

revenue of elastic demand

-when price rises, total revenues fall -when price falls, total revenues rise

revenue of unitary goods

-when price rises or falls, total revenues stay the same

Availability of substitutes

-goods that have substitutes are more elastic than goods that don't -factor affecting demand elasticity

Nature of the item

-goods that are necessities are more elastic than goods that are luxuries -factor affecting demand elasticity

fraction of income spent on the item

-goods that are expensive are elastic -goods that are inexpensive are inelastic -factor affecting demand elasticity

amount of time available

-goods overtime become mire elastic as consumers find substitutes for them -factor affecting demand elasticity

profit maximization

-profit is maximized when marginal revenue=marginal cost

Profit

Total revenue-total cost

Total revenue

price x quantity

Total cost

fixed cost+variable cost

marginal cost

the increase or decrease in costs as a result of one more or one less unit of output

marginal revenue

the increase or decrease in revenue by adding/subtracting one item