Supply and Demand Voluntary exchange, agreeing on terms Demand in economics, the different amounts we will purchase at various prices. Market Law of demand, how people react to changing prices. Inverse relationship Diminishing Marginal Utility Utility, the power that a good or service has to satisfy a want. Law of diminishing marginal utility, You get more satisfaction from each additional purchase of an item, but the utility will diminish for each additional unit. One candy bar is great, two are better, three is good, four is too much for that price. Real Income Effect No one will be able to buy everything they want. Real Income Effect, people can not keep buying the same amount of a product if the price rises. This can work in reverse also, the price declines, your real income increases. Substitution Effect Substitute, two items that are not exactly the same but satisfy the same need. If the price of one drops people will purchase, substitute, that item. Example, butter and margarine As the price goes down, the demand goes up. Quantity demanded is usually measured by the year. Assume a constant-quality unit. If demand increases, the curve shifts to the right. Elasticity is how responsive consumers are to price changes on given items. Elastic Demand, price changes greatly affect the amount bought. A brand of coffee, rise in price makes consumers go to a substitute. Inelastic demand, price change does not affect substantially. Electricity, salt 1. The existence of substitutes. 2. The percentage of a persons total budget devoted to the purchase of that good. 3. How much time we allow for the consumer to adjust to the change in price. Changes in population and income. Changes in taste. Substitutes available. The use of complimentary goods. More bread bought = more butter sold. The willingness and ability of producers to provide goods and services at different prices. As price rises, the quantity supplied rises. Profit drives this concept. After some point, when adding additional units to the factors of production, there will be a decrease in the amount of units per factor. Example, hiring workers to the point of more workers versus machines. Less output. The supply curve works exactly opposite of the demand curve. On a graph, the curve rises as you go left to right. Higher cost = more supply. 1. The price of inputs, if the price of inputs drops, more can be produced at the same price, ( shift to the left on the curve). 2. Technology 3. Taxes 4. Number of firms in the industry. Equilibrium price- The price of any good or service will find the level at which the quantity demanded and the quantity supplied are balanced. Shortage, The quantity demanded is higher than the quantity supplied. The price is below the equilibrium price (EP). Surpluses occur when more is produced than demanded, above the EP. Market forces take care of shortages and surpluses when no government is involved Price controls- Government Price ceilings Rationing Black Market Price Floors