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Supply and Demand Goal 8 Notes Economic Interdependence Everything is linked together in economics. One economic decision will affect other parts of the economy. Some factors that affect economic interdependence are: New products Consumer income—fixed incomes, layoffs, and pay raises Inflation—when the price of goods rise faster than your income Cost of resources—gas, electricity, and water Natural disasters—floods, hurricanes, and earthquakes Law of Diminishing Returns This happens when you want to increase productivity, so you keep adding one or more of the factors of production to increase your output. Your output will increase to a point, but there will be a point when if you add another factor, that output will start to decrease. At this point it is not a benefit to you to keep spending money on more factors of production. Diminished Returns Law of Diminishing Marginal Utility This happens when the product that you purchase, even at a bargain price, will give you less satisfaction. This is because you may become bored, and tired or overstocked with that product. Example: 39-cent cheeseburgers, buy one get two free pizzas, or a low price on toilet tissue. Basic Observations about Consumers You can not have it all! Decisions must be made that involve an opportunity cost (economic decision). You are responsible for your decisions. You must pay your bills (credit Cards). You should have some information about what you are buying. The more expensive the product, the more research you should do. Methods of research include: the internet, consumer reports, and advice from friends Supply and Demand Demand Is the amount that the consumer will buy. It is called consumer sovereignty. Demand Curve The Law of Demand The Law of Demand states that people are willing to buy more of a product if the price is lower. Price and demand move in opposite directions This is also known as the price effect. Down with Demand!!!!!!!!! Factors That Shape Demand The price effect is the most important factor. The quality and durability of a product. Consumer taste or desire. What's in style. Types of substitutes Availability of the product Season Normal v Inferior Good A normal good- is a product whose demand increases with rising incomes. Example: Lexus, BMW, or a cruise trip. An inferior good- is a product whose demand decreases with a rising income, (Generic or Wal-Mart goods). Substitutions Sometimes stores offer generic or off brands offer lower prices without compromising quality. (Wal-Mart Soda). This is a substitution. Another example is Fruit Rings Substitution effect A price increase in one product (Dr. Pepper) will cause the demand of a substitute product to increase (Dr. Thunder). Complementary good When the demand for one product is linked to the demand of another product. Examples: VCR and tapes, computers and disks, and shoes and socks. Elasticity of Demand How much a price change affects the amount demanded. Elastic Demand When the amount demanded varies greatly with a price change. These are wants Inelastic Demand When a price change does not affect the amount demanded. These are needs Example, medicine Supply The amount that producers will offer for sale Supply Curve The Law of Supply The Law of Supply states that production or the supply will increase if prices are higher and the producers are making more profit (self-interest). Supply to the Sky!!!!!!!!!!!! Change in Supply (causes) The major reason is the cost of production. There is a fixed supply; a limited number of the product is available. Example: sporting events, concerts, and hospital beds. There are substitutes or alternative choices available. New businesses. Government policy- Deregulation, allows more competition. (Phone companies, airlines, Microsoft) Supply and the Consumer Surplus- is an oversupply. This will usually result in lower prices. Shortage- is a lack in supply. This will usually result in higher prices. However, these high prices may not last long because new producers will enter the market seeking high profits. If a shortage is severe enough, then rationing could take place. Rationing is selling a product in limited quantities. Market Clearing Price The Market- is anyplace where producers and consumers make exchanges. In capitalism, the price is usually set in a free market. Market Price- is the price that satisfies both producers and consumers. It is also called the equilibrium price. The market price is affected by the balancing between supply and demand, shortage V. surplus. These cycles usually vary on a regular basis. Market Clearing Price Profit and Competition Profit- is income after all the expenses have been paid Normal Profit- is the amount of profit needed to break even. Economic Profit- is profit in excess of the break even point. Operating expenses Red- means that a business is operating at a loss. Black- means that a business is operating with a profit Competition Competition- is the rivalry between businesses to attract customers. Here are some benefits of businesses trying to attract customers. Why Do We Need Competition? The efficient use of resources. Controls prices Better quality and service Encourage research and development Competition is Adam Smith’s Invisible Hand. Non-price Competition Advertising. Catchphrases Endorsements Exploiting fears Sex appeal Numerical claims Bargain appeal Bandwagon Product improvement Styles and Services Location or availability The Circular Economic Flow of Money and Goods This chart explains how money and goods are exchanged between consumers producers and the growers of crops in the factor market. Circular Flow of Money The Business Cycle The business cycle is a measure of the strength of the economy. There are 4 cycles of the business cycle. Peak Recession Depression Recovery Peak Is the highest phase of the business cycle. It is the top of the roller coaster A peak is also known as a boom time. This period is marked by low interest rates, low unemployment rates, and low inflation. There is a high consumer confidence and a high GDP. Recession Is when there is a decline in the GDP for 6 months. The economy is starting to shrink. Unemployment is rising along with interest rates as well as inflation. Consumer confidence is falling. Depression Is the lowest phase on the business cycle. It is also known as a trough period. There is high unemployment, inflation, and interest rates. There is no consumer confidence, and the GDP is in a steady decline. We had a “great depression” in 1929 in the US. Recovery Is a rebound after a recession or a depression. Interest rates, unemployment rates, and inflation are falling. Consumer confidence is beginning to climb. The GDP is beginning to increase. Business Cycle Economic Indicators These are certain parts of the economy that we use to determine the health of the nation’s economy. The Business Cycle shows this graphically. The main indicators are: inflation, unemployment, interest rates, GDP, and Consumer confidence. The most important id the GDP. Gross Domestic Product This is the measure of all new finished goods and services produced in the US every year. Finished- Something you buy that is not an ingredient in another product. Good- A product that you buy that yo ucan physically touch (A cheeseburger). Service- Something that is provided for you (haircut).
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