Chapter 3: Supply, Demand, and the Market ProcessECO20231Consumer Choice and the Law of Demand: - As the price of a good increases, we have to give up more of other goods if we want to buy it. - As the price of a good rises, its opportunity cost increases (in terms of other goods that must be forgone to purchase it). The Law of Demand- The inverse relationship between price and quantity demanded; when price rises, quantity demanded falls. When price falls, quantity demanded rises. *Inverse relationship means that price and the quantity consumers wish to purchase move in opposite directions. Substitutes – products that serve similar purposes. An increase in the price of one will cause an increase in demand for the other. EX: Butter and margarine, Chevrolets and Fords. Quantity demanded is a number, its how many units of a good you bought. “how much you put in your cart”Demand schedule- a table listing the various quantities of something consumers are willing to purchase at different prices. Ways to Express Law of Demand: 1. Words2. Table3. Math Equation4. PictureHow do consumers react to price changes?(1) When the price of one good falls, people substitute away from relativelymore expensive goods to relatively cheaper goods.SUBSTITUTION EFFECT!!(2) When the price of one good falls, real consumers income rises so people buymore. (it’s like getting a raise).INCOME EFFECT!! Consumer Surplus- the difference between the maximum price consumers are willing to pay and the price they actually pay. It is the net gain derived by the buyers of the good. We can use the demand curve to clarify the difference between the marginal value and total value of a good.Why is the Demand Curve Sloping Downward? Deminishing Marginal Utility: The marginal benefit you receive from an item falls as you gain more of an item. The only way to get you to buy more is to lower the price. EX: Eating marshmallows. The way your stomach feels as you eat the first marshmallow versus the 20th one. Goods that have an easy and available substitute are elastic.Goods that have a substitute that in unavailable are inelastic. The demand curve represents your willingness to pay (your maximum price), not how much you actually paid. If the actual price is lower than your willingness to pay -> we call this consumer surplus. Graph of Consumer Surplus: Changes in Demand VS Changes in Quantity Demanded: - Change in quantity demanded is simply a movement along a demand curve from one point to another. - Change in the quantity of a good purchased in response to solely a price chance – “change in quantity demanded”- Demand is the relationship between two variables price and quantity demanded. *** Failure to distinguish between a change in demand and a change in quantity demanded is one of the most common mistakes made by beginning economics students ***A change in demand is a shift in the entire demand curve. A change in quantity demanded is a movement along the same demand curve. Changes:(1) When price changes, quantity demanded changes, but demand does NOT change. This is movement along the demand curve!! (2) When something else changes (besides price) demand changes. This is movement of the entire curve. Factors that Change Demand: (1) Changes in Consumer Income- A change in consumer income will result in consumers buying more or less ofa product at all possible prices. *** Demand curve shifts out ***(2) Changes in the Number of Consumers in the Market- Example: Businesses that sell products in college towns are greatly saddenedwhen summer arrives because they have less costumers. *** Demand curve shifts inward ***(3) Changes in the Price of a Related Good- - Economists define goods as substitutes when there is a direct relationship between the price of one and the demand for another. (Meaning an increase in price of one leads to an increase in demand for another),- Complements- products that are usually consumed jointly (for example peanut butter and jelly, bread and butter). o A decrease in the price of one will cause an increase in demandfor the other. o As a complement becomes more expensive, the quantity demanded of it will fall, and so will the demand for its complements. (4) Changes in Expectations- EX: If consumers begin to expect that a major hurricane will strike the area, the current demand for batteries and canned food will rise. - Expectations about the future direction of economy can also affect current demand. - When consumers expect the price of a product to rise in the near future, their current demand for it will increase. o Example: Gasoline. (5) Demographic Changes- The demand for many products is strongly influenced by the demographic composition of the market. - EX: An increased use of cell phones and iPods among teenagers has led to a dramatic reduction in the demand for wristwatches.(6) Changes in Consumer Tastes and Preferences- Preferences change because people change and because people aquire new information. - Trends in the markets for clothing, toy, collectibles, and entertainment are constantly causing changes in the demand for theseproducts. - Firms may even try to change consumer preferences for their own products through advertising and information brochures. The price for one good can be intimately tied to demand for another. Graphs: Same Consumer, Same Good. 2Producer Choice and The Law of Supply: The price of one good can be intimately tied to the demand for another good. Substitute Goods: Example cereal and oatmeal. If the price of cereal rose, the quantity demanded of cereal would fall and consumerswould purchase less cereal. An increase (decrease) in price for the first good will increase (decrease) demand for the second good. The demand for oatmeal would rise, causing the demand curve to shift right. GRAPHS: Complement Goods: usually consumed at the same time.An increase (decrease) in price for the first good will decrease (increase) demand for the second good. Example: Peanut butter and jelly. If the price of peanut butter rose, the quantity demanded of peanut butter would falland consumers would purchase less peanut butter. The demand for jelly would fall, causing the demand curve to shift left. GRAPHS: The sum of the producers cost of each resource used to produce a good will equal the opportunity cost of production. The willingness of consumers to pay a price greater than a good’s opportunity cost indicated that they value the good more than other things that
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