DEMAND ELASTICITY

MARGINAL UTILITYpeople want the most useful and most satisfactory combination of goods and services in spending their income most utilityMarginal utility – the extra usefulness or satisfaction a person gets from acquiring one more unit of a product

DIMINISHING MARGINAL UTILITY

Consumers generally keep on buying a product until they reach a point where the last unit consumed gives enough, and only enough, satisfaction to justify the priceAs you continue to buy something, the marginal utility diminishesreflected in the downward sloping

demand curve

DIMINISHING MARGINAL UTILITY

the first unit of a product will give you the most marginal utility (lemonade), the second will give you some marginal utility but not as much as the first, and so on.

you’ll continue to buy the lemonade until the marginal utility received from the additional glass does not justify its cost

ELASTICITYDemand elasticity is the extent to which changes in price cause changes in the quantity demandedDemand is elastic when a relatively small change in price causes a relatively large change in the quantity demanded - A change in price leads to a larger change in demand i.e. a sell for T-Bone steaks/digital cameras

can lead to a huge increase in demand

DEMAND INELASTICITY

Demand is inelastic when a given change in price causes a relatively smaller change in the quantity demanded- demand remains stable regardless of a change in price Price of gasoline can skyrocket over $3

but we don’t see people stop consuming large quantities of gasoline

3 DETERMINANTS OF ELASTICITY

ARE ADEQUATE SUBSTITUTES AVAILABLE?

CAN THE PURCHASE BE DELAYED?

DOES THE PURCHASE USE A LARGE PORTION OF MY INCOME?

Are Substitutes Available?

If a product has many substitutes, the demand for the good tends to be elastic T-bones and chicken Hollister vs. Abercrombie

If a product does NOT have substitutes, the demand tends to be inelastic Medication Gasoline in General Milk

CAN PURCHASE BE DELAYED?

If the purchase of a product can be delayed, the demand for the good tends to be elastic T-bones, Digital Camera, Concert Tickets

If the purchase can NOT be delayed, the demand for the good tends to be elastic Gasoline, Electric, Medical attention

Does Purchase Use Large Portion of Income?

When the product requires a large portion of income, demand for that product tends to be elastic Cars, Homes, Digital Cameras, I-Pods

When the product does NOT require a large portion of income, demand for that product tends to be inelastic Mountain Dew, Bread, Coffee

What is Supply?

A schedule of quantities that would be offered for sale at all possible prices that could prevail in the marketAlso deals with the ability and willingness, this time of producers to offer products for salePart of a suppliers decision making is to decide how much to offer for sale at various prices depends on the cost of producing the goods

or services

LAW OF SUPPLY

In general, the higher the price, the greater quantity the seller will offer for sale, the lower the price, the less they will offer for sale As long as cost of oil continues to

increase, we will see an increase in the amount of people who will want to sell gasoline

Supply Schedule

A listing that shows the quantity supplied at all prices that might prevail in the market at a given time Price vs. Quantity Supplied Can graph in a supply curve

SUPPLY CURVE

A graphic depiction of the points corresponding to a supply schedule

Also illustrates the quantity that suppliers will supply at each and every priceupward sloping therefore displaying

the law of supply

Changes in Supply

A change in the quantity supplied is a change in the quantity of the product supplied in response to a change in its pricemovement along the supply curveThis is different than a change in supplymovement of the entire curve

FACTORS CAUSING CHANGE IN SUPPLY

Cost of inputs

Productivity

Technology

# of Sellers

Taxes and Subsidies

Expectations

Government Regulations