Unit 3 — Supply and Demand

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Purpose:

To help viewers understand the factors that determine the quantity of goods demanded by consumers and the factors that determine the quantity of goods supplied.

Objectives:

  1. The amount of a good that consumers purchase depends on how much they value it in relation to the selling price.

    1. The more units of a good an individual (or society in general) has consumed in a given period, the less he or she values an additional unit (diminishing marginal utility).
    2. If the value the consumer places on an additional unit of a good is less than the selling price, he will not purchase it.
  2. At a given price, consumers will generally demand more of a good if their income rises, if the price of a substitute good rises, if the price of a complementary good falls, or if consumers’ tastes change in favor of the good in question. All these factors will shift the demand curve.
  3. As producers expand production they may initially experience economies of scale, but as they continue to expand production the cost of producing each additional unit will increase.
  4. A firm will not maximize its profits if it expands production past the point at which the additional cost per unit is greater than the revenue earned by selling that unit (the marginal revenue = marginal cost criterion for profit maximization).

    1. If the selling price increases, firms will produce more units of output because they will then be able to make a profit on these units.
    2. If the costs of production increase, firms will produce fewer units.

Audio and Transcripts

Meet the Series Experts

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Brenda Gall

Brenda Gall

Financial Analyst and First Vice President at Merrill Lynch and Company, specializing in the textile and apparel industries.

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James Schlesinger

James Schlesinger

Secretary of Defense under presidents Richard Nixon and Gerald Ford, and the first U.S. Secretary of Energy, under President Jimmy Carter.

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  1. A basic assumption that economists make about consumer behavior is that...

    consumers are consistent about their preferences as measured by the satisfaction derived from various goods.

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  2. Utility is a measure of...

    satisfaction.

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  3. The law of diminishing marginal utility implies that...

    increase in personal satisfaction will eventually decline as more and more units of a commodity are consumed.

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  4. A consumer is in equilibrium if...

    any other allocation of her income would lead to a reduction in total utility

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  5. If the marginal cost of a given commodity is lower than the average variable cost, we can conclude that...

    average variable cost will decline.

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  6. According to Economics U$A economist Richard Gill the experience of Marin County residents during the drought of the early 1970s shows that...

    people tend to make better use of resources when they are scarce.

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