Chapters 6,7,8

                Supply and Demand in the Market Place

Microeconomics

Studying small parts of the economy

Chapter 6

Concepts of explaining

The Law of Demand

Important topics to understand

The Income Effect – When the price of a good decreases, the buyers income increases.

There is an incentive to buy more.

(a sale tends to make consumer purchase more) 

  *Rockefeller, Carnegie, Morgan*

Substitution Effect - when a price of an article drops, it tends to sell more and effect related products

*Price of gas drops, related items increase (waxing, washing)

Diminishing Marginal Utility

as you increase marginal utility, there a decrease in worth

One perfect rose

(the only one available for miles)

is worth more to you than a dozen in which you could purchase at the Mobile Mart

Scarcity, Rare, Singular make it worth more to the consumer.

Car enthusiasts covet the

1964 Corvette Stingray (T-Back)roof

They will pay top dollar at a car auction.  (Rare, scarce, singular)

Prices

1) Influence Production - how much a company has to produce including quality and competition.

2) Influence Labor - During boom periods and high growth periods are high; benefits are many because of high prices.

3) Influence Rationing,

buying power and production.

Scarce Resources - Higher prices

Less purchasing Power

                                                          **

Demand – refers to the quantities of a good that consumers are willing and able to purchase at various prices during a given time.

Elasticity of Demand

Measuring what the consumers will purchase at different prices

Demand Schedule        

The chart which describes what is being purchased and at what price  

Elastic Demand Schedule-Potatoes/lb.

Price  Quantity Buyers              Revenue

will Buy

$.10                        500                                                  $50.00

 .09                       1,000                                                 90.00

 .08                       1,500                                                 120.00

 .07                       2,000                                                 140.00

 .06                       2,500                                                 150.00

 .05                       3,000                                                 150.00

 (law of increased marginal utility)

(Graphing demand info – Demand Curve)

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Remember

The Law of Demand

The quantity of a good that people will buy varies inversely with the price of the good. 

The Consumer’s Reaction

Buyers are usually pleased to purchase at a lower price rather than a higher one and probably will purchase more.

Note:          Boutiques, Department Stores, Supermarkets, Specialty Wear

DO NOT publish price increases

Shop Rite’s “can,can” sale

          *5 cans for less* (Overstocking)

Syms,  Men’s World

*published adjusted pricing*

(suits, sport jackets, shirts)

Lord and Taylors

Published pricing

(Original price/Sale 30% off price)

 at the Clearance Rack

(Designer Clothes)

*Also note that

Revenue = price x quantity

In addition you must remember that revenue can increase by raising the prices and selling less goods.

Inelastic Demand - When total revenue from sales decreases with a price decrease and the demand is relatively unresponsive or inelastic 

1) good is a necessity

2) There are no substitute goods

3) Small effect on a budget

Inelastic Demand - Salt

Number

Price                     Bought                                               Revenue

.10                                  500                                                    $50.00

.09                                  540                                                    48.60

.08                                  570                                                    45.60

.07                                  590                                                    41.30

.06                                  600                                                    36.00

                                                                     ***

Chapter 7

Supply - is the quantity of a good that sellers are ready to sell in a market at a specified price.

From the perspective of the producer

*        The higher they can sell their product, the more they will produce.

Supply Schedule tells the producer what he can sell certain items for and how much he can produce and still make a profit

Price                              Amount                                   Revenue

Produced

.10                                           2,500                              $250.00

.09                                           2,000                              180.00

.08                                           1,500                              120.00

.07                                           1,000                              70.00

.06                                             500                         30.00

(Graphing the supply schedule

illuminates the Supply Curve)

Remember!  Sellers react positively to higher prices