Unit 2: Activities 1-4 Flashcards
Demand is…
Refers to consumers and their desire to obtain a product. There is an inverse relationship between the price of a product and the quantity demanded by consumers of a particular product or service.
The Law of Demand is…
For most products, as the price increases, consumer demand for the product drops. This may be because more and more consumers are either unwilling or unable to pay the higher prices. This relationship can be analyzed using a chart.
What causes decrease in demand?
- bad publicity,
- a recession leading to a decrease in disposable income for consumers,
- a decrease in the price of a competing product,
- an expectation that the price of a product will decrease in the future.
What causes an increase in demand?
- changes in tastes (e.g., suddenly pomegranate juice is popular);
- changes in income or personal taxes;
- prices of related goods (e.g., things that go together or competitors’ goods;)
- number of buyers;
- expected change in price or quantity (e.g., If consumers feel that a product will be harder to get in the future or its price will increase, they will buy more now).
Supply is…
Quantity producers are prepared to offer for sale at each price.
The Law of Supply is…
the quantity supplied varies directly with the price. So, if the price rises, then the quantity supplied rises and if the price of a product (or service) falls, then the quantity supplied falls. Why? Suppliers are in business to make money-they want to ‘move’ items that are higher priced!
What causes a decrease in supply?
- Price of the product lowers
- Increase in production costs (e.g. as costs increase, production decreases)
- Increase in Corporate Taxes
- Producer Expectations (pessimism)
- Weather conditions (think of agriculture!);
- Prices of other products using the same resources.
What causes an increase in supply?
- Price of the product raises
- Decrease in production costs
- Technological changes (costs may decrease);
- Decrease in Corporate Taxes
- Producer Expectations (optimism)
- Weather conditions (think of agriculture!);
- Prices of other products using the same resources.
Elastic Supply is…
a certain percentage change in the product’s price leads to a larger percentage change in its quantity supplied. (The quantity that producers are willing to offer for sale is very responsive to price changes).
Inelastic Supply is…
a given percentage in price results in a smaller percentage change in quantity supplied.
What Affects Supply Elasticity?
- Time: more time available, easier for producers to adjust to price changes
- Perishability and Cost of Storage: goods such as fish/flowers that are expensive to store and will spoil must be sold at any price. Supply of these are inelastic.
- Ease of Shifting Production: if productive resources can be easily switched to produce a different good, the supply of the goods are elastic.
- EX. if the price of corn falls, farmers can switch to oats or wheat easily
Immediate-Run Supply Elasticity is…
time period is so short producers cannot generally change their output, therefore not reacting to changes in price/demand. In immediate supply period, supply is fixed/inelastic/perfectly elastic.
Short-Run Supply Elasticity is…
this is the period during which the quantity of at least one of the resources used by businesses in an industry cannot be varied. They can use their existing plant and equipment more intensively. Supply is more responsive to price changes and thus more elastic than in the immediate period.
Long-Run Supply Elasticity is…
Over the long run, businesses can make almost all necessary changes. They can enlarge their existing plant and/or buy new equipment. They can also leave the industry and move into producing some other good to provide another service. The supply in the long-run, therefore, is much more elastic than in the short run.
Equilibrium is…
- Quantity of product consumers want to buy equals the quantity producers are willing to supply
- Intersection of supply and demand curves on a graph
- There is a human element to supply and demand. By casting your votes (in purchasing dollars), you are sending a message to the producer/supplier that the price is acceptable or unacceptable.
