Unit II: How Markets Work

1. Unit II: How Markets Work Part I – Supply and Demand

2. Demand • The desire, willingness and ability to buy a good or service

3. Affective Demand • Must want to buy • Must be willing to buy • Must have the resources to buy

4. What is market demand? • The total amount of demand created by all consumers for a product

5. Demand Schedule • A table that lists the various quantities of a product that will be bought at different prices

7. Demand Curve • A graph that shows the amount of a product that will be bought at all possible prices

9. Direction of the Demand Curve • Downward Slope

10. What does the law of demand state? • As price goes UP demand goes DOWN and visa versa

11. What does utility refer to? • Satisfaction

12. Diminishing Marginal Utility • Principle that additional satisfaction goes down as we consume more of a product

13. Determinants of Demandchanges in: • Buyers (#of) – changes in population • Income – people earn more they spend more • Tastes – change in popularity or fads • Expectations – feelings of the future • Related goods • Substitutes – goods that can replace others • Compliments – goods that go along with another

14. Decrease in demand at every price will produce a Left shift in demand curve

15. An increase in demand at every price will produce a right shift in demand curve

16. Demand Elasticity • How much demand for a product is affected by a change in price

20. Factors affecting elasticity • Percentage of Income • Availability of substitutes • Necessity or Luxury • Length of time

24. What is supply? • The various amounts of a good or service that producers will supply at different prices

25. The Law of Supply • Suppliers will generally offer more for sale at higher prices and less at lower prices.

26. What does a Supply Schedule illustrate? • How much will be supplied at different prices

27. Supply Schedule for Video Games

28. What does a supply curve illustrate? • The amount of a good or service that will be supplied at different prices

30. In what direction does the supply curve slope reading from left to right? • Upward

31. What can cause a shift in supply at every price?

32. The Cost of Resources • The materials used to produce

33. Productivity • How efficient the work force is

34. Technology • The methods used to make goods and services

35. Government Policies • Gov regulations increase costs of production

36. Taxes • Higher taxes = higher costs • Lower taxes = lower costs

37. Subsidies • Government payment to help do something (decreases costs)

38. Expectations • What owners believe demand will be

39. Number of Suppliers • More suppliers = more supply • Less suppliers = less supply

40. Shift in Supply

42. When market supply increases at every price the supply curve shifts to the • Right

43. Now suppose the government increases taxes on the industry. • It will decrease • Label this on the graph assuming that 100 less will supplied label it S3

44. What does supply elasticity mean? • How much supply is affected by a change in price • Elastic Supply – quantity changes a great deal when price changes • Inelastic Supply – quantity changes little when price changes

45. What affects the elasticity of supply? • How quickly a company can change how much it produces

47. Equilibrium Price • The price at which the amount demanded is equal to the amount supplied

48. What is the equilibrium price of video games in our market? • $25

49. What is a surplus? • When there is more supply than demand

50. What is a shortage? • When there is greater demand than supply