UNIT 2- HOW MARKETS WORK; Demand, Supply, Prices, Market



UNIT 2- HOW MARKETS WORK; Demand, Supply, Prices, Market

Structures Chapter 4 pg. 79

Section 1 Understanding Demand: key terms: demand, law of demand, substitution effect, income effect, demand schedule, market demand schedule, demand curve

I Understanding Demand

A. Demand is the desire to own something and the ability to pay for it willing and able

B. Law of Demand pg. 79

1. when price is lower consumers will buy more; when Price is high consumers will buy less

2. is an effect of two separate patterns of behavior that Over lap: Substitution effect and income effect

II. Substitution Effect fig. pg.80

A. when a consumer reacts to a rise in prices of one good buy Consuming less and buying something else

B. can also occur when prices drop

C. Examples: pizza gets expensive people eat less and buy tacos,

Tacos get cheap, people eat more Tacos, less pizza

III. Income Effect

A. economies are measured by production

B. but income is effected by cost

IV Demand Schedule pg. 81 chart

A. Law of demand explains how the price of an item affects

The quantity of the item produced

B. Understanding Demand

1. to have a demand for a good consumer must be willing to

Buy at a specified price

2. if you can afford you won’t demand credit cards?

3. demand schedule is a table that lists the quantity

Of a good that a person will purchase as each price

In a market pg. 83 book figure 4.5

4. Market Demand Schedules is helpful to producers

Or store owners

a. shows the quantities demanded by consumers

at each price

b. not different then and individual demand

V. Demand Graph is plotting a demand schedule

A. Result is a Demand Curve fig. pg. 83

1. vertical axis has the lowest possible prices at bottom

2. horizontal axis has the lowest possible quantities left

B. Reading a demand curve

1. assumes all other economic factors are constant;

Income, quality of good

2. constant in the demand curve is that as prices

Are lower demand will increase

3. can be useful for very specific market conditions

C. Limits of a Demand Curve are that it is only accurate

For very specific market conditions

Chapter 4 Section 2 SHIFTS IN THE DEMAND CURVE

Key terms: ceteris paribus, normal good, inferior good, complements, Substitutes

Ceteris paribus- term used by economists who are making plans based

On demand schedules. The term is Latin for “all other things held constant,”

I. Changes in Demand

A. decrease or increase in the quantity demanded changes

A demand curve

B.. drop the ceteris paribus rule and allow other factors

Change the entire demand curve shifts

C.. economics label this shift change in demand

Figure 4.6 pg. 86 read concepts

II. What causes a shift

A. income; higher income more demand; lower less demand

1. Normal goods consumers demand more of when income

Increases

2, Inferior goods are goods that have a fall in demand when

Income increases

a. if you really prefer veal you stop buying pizza

So pizza becomes an inferior good

b. if you can buy a new car; used is inferior

B. Consumer expectations

1. future sales

2. expected product cost increases

C. Population- Changes in size ex. Baby boomers, disasters

D. Consumer Tastes and Advertising

1. consumer changes in demand can be the result

Of advertising; taste can be influenced

2. advertising is its own business and must pay off

Because it is big business

III. Prices of Related Goods

A. Complements: two goods bought and used together ex?

B. Substitutes: goods used in place of one and other ex?

Profile: Mary Kay Ash: Personal Motto? Unique approach?

Chapter 4 Section 3: ELASTICITY OF DEMAND. Key terms: elasticity of demand, inelastic, elastic, unitary elastic, total revenue

Focus: Elasticity of Demand focuses on how consumers react to a change in the price of a

Good. Reaction is related to original price and use of good.

I. Calculating Elasticity

A. Computation is made by taking the % change in the demand of a good

And dividing it buy the percentage change in the price of a good

Fig. 4.7 pg. 92

1. price range

a. elasticity of demand for a good varies at every price level

b. some goods are unresponsive to price changes inelastic

c. if you buy less of a good after a price change the good

was elastic

2. Values of Elasticity

a. inelastic and elastic terms used to describe consumers reaction

to price changes

1). exact mathematical definitions

2). inelastic is when the figure is less then one

3). elastic is greater then one

b. unitary elastic is when elasticity is exactly equal to one

II. Factors Affecting Elasticity: What is essential to me; What goods must I have,

Ever if prices raise greatly

A. Availability of Substitutes

1. fewer substitutes less chance to buy something else; not good

Alternative= inelastic

2. life saving medicines=inelastic

B. wide ranges of choices can make a demand elastic; apple juice

C. relative importance

D. Necessities vs. Luxuries

1. milk is inelastic

2.. soda is elastic

E. Change over time.

1. demand sometimes becomes more elastic over time

2. example gasoline and switching to more efficient cars

III. Elasticity and Revenue

A. computing a firm’s total revenue

1. revenue is defined as the amount of money a company receives

Selling its goods

2. determined by two factors

a. price of goods

b. quaintly sold

B. Total revenue and elastic demand

1. law of demand= increase in price leads to decrease in

quantity demanded

2. process also reverses= decrease in price leads to increase

in demand

1. elastic demand comes from one or more factors

a. availability of substitute goods

b. limited budget that does not allow price changes

c. perception of good as a luxury item

d. if these conditions are present the demand for

the good is elastic and price increases may

decrease demand

A. Total Revenue and inelastic demand

1. if the good is inelastic consumers demand does not

respond to price changes

2. a decrease in price can still lead to in increase in the

Quantity of demanded if demand is inelastic

B. Elasticity and Pricing policies

1. firms need to know if the demand for their product is

2. elastic or inelastic at a given price

good pricing decisions lead to greater revenue

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