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Chapter 2 Demand and Supply

Chapter 2 Demand and Supply. GR. 12 ECONOMICS (CIA4U1) M. NICHOLSON. Markets and Circular Flows. Households / Consumers Businesses Factor / Resource Market Product Market. The Role of Demand. What is Demand?

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Chapter 2 Demand and Supply

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  1. Chapter 2Demand and Supply GR. 12 ECONOMICS (CIA4U1) M. NICHOLSON

  2. Markets and Circular Flows • Households / Consumers • Businesses • Factor / Resource Market • Product Market

  3. The Role of Demand What is Demand? • Demand: the relationship between the various possible prices of a product and the quantities of that product consumers are willing to purchase • Quantity demanded: the amount of a product consumers are willing to purchase at each price

  4. The Role of Demand Law of Demand: • Law of demand: states that there is an inverse relationship between a product’s quantity demanded and it price • Demand schedule: a table that shows possible combinations of prices and quantities demanded of a product • Demand curve: a graph that expresses possible combinations of prices and quantities demanded of a product • Change in quantity demanded: the effect of a price change on quantity demanded

  5. The Role of Demand Change in Demand: • Market Demand: the sum of all consumers’ quantity demanded for product at each price • Demand determinants: factors that can cause an increase or decrease in a product’s demand • Increase in demand: an increase in the quantity demanded of a product at all prices • Decrease in demand: a decrease in the quantity demanded of a product at all prices

  6. Demand Determinants: • Consumer’s taste • Personal income • Normal goods: products whose demand changes directly with income • Inferior goods: products whose demand changes inversely with income • Change in price of other products • Substitute goods: products that can be consumed in place of one another • Complementary goods: products that are consumed together • Consumers expectation concerning price • Population increase/decrease

  7. Price Elasticity of Demand: • Price elasticity of demand: the responsiveness of a product’s quantity demanded to a change in its price • Elastic demand: demand for which a % of change in a product’s price causes a larger % change in Qd • Inelastic demand: demand for which % of change in a product’s price causes a smaller % change in Qd • Perfectly elastic demand: demand for which a product’s price remains constant regardless of Qd • Perfectly inelastic demand: demand for which a product’s Qd remains constant regardless of price

  8. Factors that affect price elasticity of demand: • Portion of consumer incomes • Access to substitutes • Necessities vs luxuries

  9. Price Elasticity of Demand + Supply: • Supply: the relationship between the various possible prices of a product and the quantities of the product that businesses are willing to supply • Quantity supplied: the amount of a product businesses are willing to supply at each price • Market supply: the sum of the producers’ quantities supplied at each price

  10. The Law of Supply: • Law of supply: states that there is a direct relationship between a product’s quantity supplies and its price • Supply schedule: a table that shows possible combinations of prices and quantities supplied of a product • Supply curve: a graph that expresses possible combinations of prices and Qs • Change in quantity supplied: the effect of a price change on Qs • Supply determinants: factors that can cause an increase or decrease a product’s supply • Increase in supply: an increase in the Qs of a product at all prices • Decrease in supply: a decrease in the Qs of a product at all prices

  11. Supply Determinants: • Change in cost of production • Increased productivity • Government subsides • Taxes • Change in # of producers in market • Climatic conditions

  12. Price Elasticity of Supply: • Price elasticity of supply: the responsiveness of a product’s quantity supplied to a change in price • Elastic supply: supply for which a % change in a product’s price causes a larger % change in Qs • Inelastic supply: supply for which a % change in a product’s price causes a smaller % change in Qs

  13. Factors that Affect Supply Elasticity: • Immediate run: the production period during which none of the resources required to make a product can be varied • Perfectly inelastic supply: supply for which a product’s Qs remains constant regardless of price • Short run: the production period during which at least one of the resources required to make a product cannot be varied • Long run: the production period during which all resource required to make a product can be varied, and businesses may either enter or leave the industry • Constant-cost industry: an industry that is not a major user of any single resource • Increasing-cost industry: an industry that is a major user of at least one resource • Perfectly elastic supply: supply for which a product’s price remains constant regardless of Qs

  14. Marginal Utility • William Stanley Jevons: developed the law of diminishing marginal utility • As a consumer purchases more units of a particular product in a give time period, that consumer’s extra satisfaction from each additional unit falls • MU/P1 = MU/P2

  15. Elasticity

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