Overview

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 consumerís purchase depends on how much they value it in relation to the selling price.
    a) The more units of a good an individual (or society in general) has consumed in a given period, the less he values an additional unit (diminishing marginal utility).
    b) 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 consumersí 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).
    a) 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.
    b) If the costs of production increase, firms will produce fewer units.

Key Economic Concepts marginal utility, shifts in the supply and demand curves, substitute goods, movement along the supply and demand curve, marginal cost marginal revenue, profit, diminishing returns, complementary goods.

Contemporary Issues Cable companies have to make large investments and incur sizeable fixed costs in order to serve any given community. The average cost per user of these fixed investments falls as more people subscribe to the cable services. Based on this, is it reasonable to assume that there are economies of scale in the cable industry? Could this lead to the domination of the local cable markets by one or possibly a couple of providers? Would it be wasteful for more companies to make the same type of investment? Is this necessarily bad? How should governments respond?

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