LN_Topic2LN_Topic2.doc

Topic 2: Demand and Supply The Basic Decision-making Units In our society, there are two main decision-making units: households and firms. Firms: An organization that transforms resources (inputs) into products (output). A person who organizes, manages, and assumes the risks of a firm, taking a new idea or a new product and turning it into a successful business is what we called entrepreneur. Households: The consuming units in an economy. Even though households have wide-range preferences, they also have some things in common: all have limited incomes, and all must pay in some way for things they consume. -- The Circular Flow Households and firms interact in two basic kinds of markets: Product market and input market. Firms determine the quantities and character of outputs produced and the quantities of inputs demanded. Households determine the types and quantities of products demanded and the quantities and types of inputs supplied. Demand 2.1 Demand and Quantity Demanded -- Demand It refers to the quantities of specific goods or services that people will purchase at any possible price level during a specified time period, other things being constant. -- Quantity Demanded The total amount of any particular commodity that all households are willing to purchase at a given price over a fixed period of time, ceteris paribus. 2.2 Law of Demand Quantity demanded and price is inversely related: The lower the price, the higher the quantity demanded, and the higher the price, the lower the quantity demanded. 2.3 Demand Schedule and Demand Curve Demand schedule is a table showing how much of a given product a household would be willing to buy at different prices, ceteris paribus. For example: Demand for diskettes per year Combination Price per unit (P) ($) Quantity demanded per year (Q) (in thousand unit) A 5 10 B 4 20 C 3 30 D 2 40 E 1 50 Demand Curve It is the second way showing the relationship between quantity demanded and the price through a