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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