Econ chapter 4 & 5 - Supply and Demand

Demand

the desire, ability, and willingness to buy a product

Microeconomics

deals with behaviour decision making by small units, such as individuals and firms 

Law of Demand

quantity demanded of a good or service varies inversely with its price

demand schedule

A listing that shows the quantities demanded of a particular product at all prices that might prevail in the market at a given time

demand curve

a graph showing the quantity demanded at each and every price that might prevail in the market.

change in quantity demanded

a movement along the demand curve that shows a change in the quantity of the product purchased in response to a change in price. 

Substitution effect

change in the quantity demanded because of the change in the relative price of the product

6 factors that affect demand

1. consumer income

2. consumer taste

3. substitutes

4. complements

5. changes in expectations

6. the number of consumers

Consumer Income

Increase in income allows consumers to buy more products at each price (shift right) 

A loss in income would shift the demand curve left showing a decrease in demand.  

Consumer Taste 

Advertising, news reports, fashion trends, introduction of new products and changes in the season can affect consumer taste 

Also, sometimes tastes and preferences change over time like the demand for healthier foods.  

Substitutes 

The demand for a product increases of the price  

Complement 

The use of one good increases the good for another.  

Changes in expectations 

The way people think about the future 

The number of consumers 

A change in income, tastes, and prices of related products 

elasticity

A measure of responsiveness that tells us how a dependent variable such as quantity responds to a change in an independent variable such as price 

demand elasticity

a change in price causes a change in quantity demanded 

elastic

a given change in price causes a relatively larger change in quantity demanded

elastic demand

the demand for vegetables is higher in the summer because the prices are cheaper as opposed to the winter where the prices are higher and demand is lower 

• Luxury Brands 

• Smartphones 

inelastic demand

a given change in price causes relatively smaller change in quantity demanded 

• Prescription medication 

• Gas 

unit elastic demand

some products or services falls midway between elastic and inelastic 

This means that a given change in price causes a proportional change in quantity needed.  

• Gas 

• Goods that aren't a need but a want to people 

Total expenditures

the amount that consumers spend on a product at a particular price

total expenditure test

found by multiplying the price of a product by the quantity demanded for any point along the demand curve

Supply

amount of a product that would be offered for sale at all possible prices that could prevail in the market

What causes change in supply

1. cost of input

2. productivity

3. technology

4. tax and subsidies

5. government regulations

6. number of sellers

7. expectations

cost of input

A decrease in cost of input such as labor packaging, allows producers to produce more of the product at every price. 

productivity

The supply curve can go right or left in relation to the workers productivity if workers are motivated or work more efficiently productivity will increase resulting in more products produced.  

Technology

When a new machine or chemical is invented to lower cost of productions, producers will make more products. 

Tax and subsidies

If the producer’s inventory is taxed or if fees are paid to receive a license to produce the cost of production goes up causing a curve shift left.  

Government regulations

If the producer’s inventory is taxed or if fees are paid to receive a license to produce the cost of production goes up causing a curve shift left.  

Number of sellers

As more firms enter an industry, the supply curve shifts to the right. In other words, the larger the number of suppliers, the greater the market supply 

Expectations

If the producers think the price of their product will go up, they may withhold some of the supply. Thus, causing the curve to go left 

Subsidy

government payment to an individual, business, or other group to encourage or protect  a certain type of economic activity. 

Supply elasticity

is a measure of the way in which quantity supplied responds to a change in prices

Determinates of Supply Elasticity 

• The elasticity of a business’s supply curve depends on the nature of its production

• If a firm can adjust to new prices quickly, then supply is likely to be elastic.

• The elasticity of supply is different from the elasticity of demand in seeral important respects.

• Number of substitutes has no bearing on the elasticity of supply 

• Ability to delay the purchase or the portion of income  

Theory of production

Relationship between the factors of production and th output of goods and services

Short Run

period of production that allows producers to change only the amount of the variable input called labor

Long run

period of production long enough for producers to adjust the quantities of all their resources, including capital.  (4 resources)

Production Function

A schedule that relates changes in output to different amounts of a single input

Law of Variable proportion

States that, in the short run, output will change as one input is varied while others are held constant.

Diminishing Returns

output increases at a diminishing rate as more units of a variable input are added

Stages of production

based on the way marginal product changes as the variable input of the labour id changed 

Three stages of return

1. increasing return (stage 1)

2. diminishing return (stage 2)

3. Negative Return (stage 3)

Increasing return

As long as each new worker hired contribute more to total output than the worker before, total output rises at an increasingly faster rate. Because marginal output increases by a larger amount every time a new worker is added, stage one is known as the stage of increasing returns.  

Diminishing return

The total production keeps growing but by smaller and smaller amounts Machines may replace workers and rate of increase in total production is beginning to slow down

Negative Return

In stage three the firm has hired too many people and marginal product becomes negative and total plant output decreases.

Fixed cost

a cost that a business incurs even if the plant is idle and output is zero (rent)

• include salaries paid to executives, interest changes on bonds, rent payments on leased properies and local and state propery taxes. It also includes machine repairs

overhead

Total fixed cost 

Variable cost

cost that changes when the business rate of operation or output changes 

• generally associated with labour and raw materials 

  • E.g. wage-earning workers may be laid off or worked overtime as output changes or the electric power to run the machines and shipping costs 

Total cost

the sum of the fixed and variable costs

• takes into account all the costs a business faces in the course of its operations

Marginal cost

extra cost incurred when a business  produces one additional unit of a product