Unit 1 - Supply and Demand

Unit 1- Supply & Demand

1/13/2016

Supply & Demand

Elasticity of Demand: a measure of how consumers react to a change in price. 

Elastic Demand: demand that is very sensitivity to a change in price. (Greater than 1) E>1 (The product is not a necessity and there are available substitutes)

Inelastic Demand: demand that is not very sensitive to a change in price. (Less than 1) E<1 (Product is an necessity; few or no substitutes; people will buy no matter what)

Unit or Unitary Elastic: always equal to 1. E=1 

Watch this YouTube video to see how Supply & Demand was used in the movie, Frozen. http://youtu.be/M4eVvk3xeH8

Elastic demand vs. Inelastic demand 

Elastic demand examples

1. Soda

2. Stakes

3. Candy 

4. Fur coats

Inelastic demand examples

1. Gas

2. Salt

3. Insulin

4. Milk

5. Toothpaste

Calculating Price of Demand 

Step 1: Quantity

New Quantity minus (-) Old Quantity divided (/) by Old Quantity 

Step 2: Price

New Price minus (-) Old Price divided (/) by Old Price

Step 3: Price Elasticity of Demand (PED)

% change in quantity demanded divided (/) by % change in price 

Total Revenue: TR= P x Q

A better understanding in the business aspect of Supply & Demand. http://youtu.be/8-yWKgZv9JY

1/14/2016

Costs of Production

Fixed Cost: A cost that does not change no matter how much is produced. (Ex: rent, mortgage, insurance & salary)

Variable Cost: a cost that rises or falls depending upon how much is produced. (Ex: electricity)

Marginal cost: the cost of producing one more unit of a good. (Cost: what you spend) (Revenue: money coming in)

Formulas:

1. TFC + TVC = TC

2. AFC + AVC = ATC

3. TFC / Q = AFC

4. TVC / Q = AVC

5. TC / Q = ATC

6. TFC = AFC (x) Q

7. TVC = AVC (x) Q

Watch this YouTube Video for an explanation of Costs of Production http://youtu.be/IqvoxkBAlEw

Note sheet: Demand & Supply

Demand is: the quantities that people are willing and able to buy at various prices. 

The Law of Demand: there is an inverse relationship between price and quantity demanded. (Price increases, quantity decreases or price decreases and quantity increases)

Supply is: the quantities that producers or sellers are willing and able to produce at various prices. 

The Law of Supply: there is a direct relationship between price and quantity supply. (Price increases, quantity increases or price decreases, quantity increases)

What causes a "change in demand"? 

1. Change in buyer's taste. (Advertisement) 

2. Change in the number of buyer's. (Population)

3. Change in income. (Normal goods and inferior goods) 

4. Change in the price of related goods. (Complementary goods and Substitute goods)

5. Change in expectations. (Looking at the future) 

What causes a "change in supply"?

1. Change in weather.

2. Change in number of sellers or suppliers. 

3. Change in technology.

4. Change in cost of production. 

5. Change in taxes or subsidies. (Money that the government provides)

6. Change in expectations. (Consumer, buyer & seller)

Supply curve shifts to the left (decreases) 

1. Cost of production increases.

2. Technology increases.

3. Taxes increase.

4. Subsidies decrease.

5. Number of sellers decrease.

6. Weather decreases.

Supply curve shifts to the right (increases)

1. Cost of production decreases.

2. Technology increases.

3. Taxes decrease.

4. Subsidies increase.

5. Number of sellers increase.

6. Weather increases.

Price Ceiling vs. Price Floor

Price Ceiling: This occurs when the government puts a limit on how high a good or product can be. 

Price Floor: This shows the lowest price a good or product can be sold at.