Unit 1: Topic 3- Demand and Supply

Unit 1 Topic 3

Demand and Supply

Demand- The quantities that people are willing and able to buy at various prices.
P↑Q↓, P↓Q↑

Demand schedule- Always down flowing.

As price decreases the quantity increases.]
Supply- The quantities that supplies/ producers (Sellers) are willing and able to produce/sell at various prices.
P↑Q↑, P↓Q↓

Supply Schedule- Always upwards flowing.

The Law of Demand- Inverse relationship between price and quantity demanded.

Delta (🔺)- Change in price

Determinants of Demand- What causes the change in Price

1. 🔺 in buyers taste -advertising
2. 🔺 in number of buyers -population
3. 🔺 in income- Normal Goods- goods that buyers buy more of when income rises. Inferior Goods- goods that buyers buy less of when income rises.
4. 🔺 in price of related goods- Substitute Goods- goods that serve roughly the same purchase to buyers. Complimentary Goods- goods that are often consumed together. (EX. Hamburgers and Fries)
5. 🔺 in expectation (future)

The Law of Supply- There is a direct relationship between price and quantity supplied.

Determinants of Supply

1. 🔺 in number of sellers (supplies/producers)
2. 🔺 in the cost of production (salary, wages)
3. 🔺 in technology 
4. 🔺 in weather 
5. 🔺 in taxes/ subsides- government gives money
6. 🔺 in expectation (future)

Total Revenue- Price multiplied quantity.

Elasticity of Demand- Measure of how consumers react to a change in price.
Inelastic Demand- The demand of good will not change or will change very little regardless of price. I<1
Elastic Demand- Demand will change greatly given a small change in price. E>1
Unitary Elastic Demand- E=1

Price Elastic of Demand

Step one: Quantity- new-old

                                   old

Step two: Price-       new-old

                                    old

Step three: Price Elasticity of Demand (PED)-  % 🔺 of quantity

                                                                            % 🔺 of price

Fixed Cost- it is a cost that does not change, no matter how much of a good is produced. (EX. salary, insurance, mortgage)

Variable Cost- a cost that rises and falls depending upon how much is being produced. (EX. electricity) 

Marginal Cost- the cost of producing one more unit of a good.

Price Ceiling- a legal maximum price meant to help buyers. (EX. Rent control)

4 Consequences of Price Ceiling

1. Lower prices for some consumers.
2. Shortage
3. Long line for buyers
4. Illegal sales above the equilibrium price.

Price Floor- a legal minimum price meant to help the sellers, keeps prices from falling. (EX. Minimum wage)

4 Consequences of Price Floor

1. Higher product prices.
2. Surplus
3. Higher Taxes
4. Waste (never been used products)

💣Formulas💣

• TFC+TVC=TC
• AFC+AVC=ATC
• TFC/Q=AFC
• TVC/Q=AVC
• TC/Q=ATC
• 🔺TC/ 🔺Q= MC
• TFC= AFCxQ
• TVC= AVCxQ
• TC= ATCxQ