Supply and Demand

Law of Demand

The rule people will buy more at lower prices than at higher prices if all other factors are constant

You must be able, willing, during a given period of time

The Demand Curve slopes down and to the right.

Diminishing Marginal Utility

The principle that as units of a product are consumed during a given time period, the additional satisfaction becomes less and less

As price of the product falls, there are income and substitution effects that encourage consumption

Income Effect/Substitution Effect

The income effect is the increasing or decreasing prices on the buying power of income

The substitution effect is the effect of increasing or decreasing relative prices on the mix of goods purchased.

Increase in Demand

Consumers’ income may increase Consumers attitude may change The price of the complimentary product may

decrease The price of a substitute product may

increaseDEMAND DECREASES WHEN THE

OPPOSITE OF THESE OCCUR!!

Supply

The amount of goods and services that producers are willing to sell at each specific price in a given market as a given point in time.

*** Supply involves the amount that producers are willing to sell at different prices; it does not mean that they will be able to sell the goods at the prices they desire

Law of Supply

Assuming all things are constant, the price of a good increases, the quantity supplied of the good also increases

This is why the Supply Curve slopes upward and to the right

As with demand, changes in the price of a product will affect quantity supplied- movements will occur on the same supply curve.

Four Factors of production

Land Labor Capital Entrepreneurship

Measuring production

Businesses measure how much is produced during a given time period to make sure they are not producing to much or to little

Count units instead of dollars Average product- The number of units of

output produced per unit of input.

Marginal product- The amount that total product increases or decreases if one more unit of an input is used.

The Short Run and Long Run

The short run is any period during which the usable amount of at least one input is fixed

The long run is a period during which the amounts of all inputs used can be changed

Diminishing Marginal Productivity

The principle that as more of any variable input is added to a fixed amount of other inputs, the rate at which output goes up becomes less and less.