SUPPLY AND DEMAND

Cause
In communities around the country, people and firms act in their own best interest to answer the 3 basic economic questions.

Effect
Developing out of this process are MARKETS.

Markets represent the interaction of buyers and sellers.

They set the prices we pay for goods and services, therefore allocating scarce goods and services.

What is Demand?
Definition The desire, ability, and willingness to buy a product.
In order for demand to be counted in the market place, 2 conditions must exist.

Consumers must be willing and able to buy G&S

Demand for a product must be examined for a specific time period.

What is Microeconomics?
Definition:

Part of the economy that deals with behavior and decision-making by small units (individuals, business firms).

Knowledge of microeconomic concepts helps explain how prices are determined, and how individual economic decisions are made.

What is Quantity-demanded?
Definition Describes the amount of a G/S that a consumer is willing and able to buy at each particular price during a given time period.

The Demand Schedule

Listing that shows the quantity

of G/S consumers are willing and able to buy at ALL prices that might prevail in the market at a given time.

Price per DVD $ 30 $ 25 $ 20 $15 $10 $5

Number of DVDs Demanded 0 0 1 3 5 8

The Demand Curve

Graphic depiction of points corresponding to a

demand schedule. Illustrates the quantity that consumers will demand at each and every price. Downward sloping. Price
Demand Curve

Quantity Demanded

Law of Demand
Other things equal, consumers buy more of a

product when the price decreases, and less when the price increases.
When price goes up Q-demanded goes down. When price goes down Q-demanded goes up.

Understanding the Inverse Relationship between Price and Quantity-demanded

What types of things affect consumers spending behavior?

Income Effect and Substitution Effect

Price of a good , consumers experience in purchasing power. Price of a good , consumers experience in PP.

Income Effect

P.P. amount of G/S you can buy with a unit of currency.

Substitution Effect

When the price of a good changes, consumers have a tendency to substitute a similar, lower priced product for another product that is relatively more expensive.

Critical Terms and Understandings

Utility
Marginal Utility WHY IT MATTERS

Usefulness of a product OR Amount of satisfaction an individual receives from consuming a product. Extra usefulness or satisfaction a person gets from acquiring one more unit of a product. As consumers, we want to get the most useful and satisfying combination of G/S when spending our $$$.

~ Debriefing the Simulation ~ Law of Diminishing Marginal Utility

As more units of a product are consumed, the

satisfaction received from consuming each additional unit declines.

In the donut simulation, your classmate received the

most MU from the 1st donut, and each additional donut gave some MU but not as must as the first.

As consumers, you would continue to buy (consume) a product until eventually you reach negative utility.

This helps explain why the demand curve is downward sloping!

A Change in Quantity-Demanded
Movement along the demand curve Shows a change in the quantity of the product purchased in response to a change in price, other things equal. Example:
Price 400 200

If the price of an I-Phone decreases, the quantity-demanded of I-phones would increase.

Quantity Demanded

Other things equal , a change in any of the five non -price determinants of demand shift the ENTIRE demand curve left or right, and this means a different quantity will be demanded at each and every price.

Demand Shifters Change in Consumer Income

When income goes up, When income goes down,

demand goes up (consumers buy more)

Price

demand goes down (consumers buy less)

Price

D1

D2

D2

D1

Quantity Demanded

Quantity Demanded

Demand = Rightward Shift

Demand = Leftward Shift

Demand Shifters Change in Consumer Tastes and Preferences

Then Now

What are some factors that may influence changes in tastes and preferences?

C.T./C.P. = D C.T./C.P. = D

Demand Shifters - # of Consumers (Buyers)

When # of buyers goes up, When # of buyers goes down,

demand goes up
P

demand goes down

P

D1
Qd

D2

D2
Qd

D1

Demand Shifters Change in Consumer Expectations

Your expectations about the future may affect the demand for a G/S today.

If your income will rise in

If your income will decline in

the future, demand goes up today

Price

the future, demand goes down today

Price

D1

D2

D2

D1

Quantity Demanded

Quantity Demanded

Demand Shifters
Change in Price/Availability of Substitute Goods

When the price of a product , demand for substitute

When the price of a product , demand for substitute

Demand Shifters
Change in Price/Availability of Complement Goods

When the price of a product , demand for complement

When the price of a product , demand for complement

Change in Quantity-Demanded v. Change in Demand

Caused by a change in the price of the Change in product, other things equal. quantitydemanded Illustrated by a movement along the current demand curve.

Caused by a change in one of the four non-price determinants of Change in demand, other things equal. demand Illustrated by a shift of the entire demand curve left or right.

Define
What images come to mind when you hear this term?

Elasticity of Demand
Measures how sensitive consumers are to a change in

price.

Have you ever bought a product that you needed and the cost was not important?

What was it?

Why didnt the cost matter to you?

Formula for calculating Demand Elasticity

change in q-demanded change in price

x 100

Types of Demand Elasticity

Elastic
Responsive to a change in price spending habits altered Demand Elasticity Calculation > 1

Unit Elastic
Change in price causes a proportional change in quantitydemanded
Demand Elasticity Calculation = 1

Inelastic
Unresponsive to a change in price spending habits not impacted Demand Elasticity Calculation < 1

Can the purchase be delayed?

Are there adequate substitutes?

Does the purchase use a large portion of your income?

Determinants of Demand Elasticity

Ways to Estimate Elasticity of Demand

Decision-making grid Total-revenue test
Total Revenue (Total Income)

Quantitydemanded

Price

Generalization
Elastic demand results in a drop in Total Revenue as price . Inelastic demand results in a rise in Total Revenue as price .

What is Supply?
Definition The ability and willingness of producers to offer products for sale at various prices during a given time period.

This decision depends on the cost of producing goods and services.

What is Quantity-supplied?
Definition Describes the amount of a G/S that a producer is willing to see at each particular price during a given time period.

The Supply Schedule

Listing that shows the quantity

of G/S producers are willing to supply at various market prices.

Price per Sneaker $ 30 $ 40 $ 50 $60 $70 $80 $90

Number of Sneakers Supplied 4 5 6 7 8 9 10

The Supply Curve

Graphic depiction of points corresponding to a

supply schedule. Illustrates the quantity that producers will supply at each and every price. Supply Upward sloping. Price
Curve

Quantity Supplied

Law of Supply
Other things equal, producers will supply more of a

product when the price increases, and less when the price decreases.
When price goes up Q-supplied goes up. When price goes down Q-supplied goes down.

PROFIT MOTIVE

Profit is the $ remaining after all costs of production are paid

GOAL: Revenue > Costs of Production

A Change in Quantity-Supplied
Movement along the supply curve Shows a change in the quantity of the product supplied in response to a change in price, other things equal. Example:
Price 400 200

If the price of an I-Phone increases, the quantity-supplied of I-phones would increase.

Quantity Supplied

4 mil

8 mil

Changes in Supply shift entire curve LEFT or RIGHT

1. Cost of Resources 2. Taxes 3. Subsidies 4. Government Regulations 5. Technology / Productivity 6. Competition (# of sellers)

7. Future Expectations

Remember: Suppliers want to sell more at a higher price. Anything that will affect the cost of producing a product will impact the quantity supplied at each and every price.

Changes in Supply
The following situations

will lower the costs of production, thus supply and shifting the supply curve .

The following situations

Cost of resources Taxes Subsidies Government regulations Technology / Productivity Number of sellers* Future expectations*

will raise the costs of production, thus supply and shifting the supply curve .

Cost of resources Taxes Subsidies Government regulations Technology / Productivity Number of sellers* Future expectations*

Manipulating a Supply Curve

Supply
Price S1 S2 Price

Supply
S2 S1

Quantity Supplied

Quantity Supplied

Rightward Shift

Leftward Shift

Change in Quantity-supplied v. Change in Supply

Change Caused by a change in the price of the product, other things equal. in quantitysupplied Illustrated by a movement along the current supply curve.
Caused by a change in one of the seven non-price determinants of supply, other things equal. Illustrated by a shift of the entire supply curve left or right.

Change in Supply

Who determines the price of a good/service?

Price is determined by both the buyer and the seller.

Hypothesize How do you think the goals of buyers and sellers differ?
Buyers
Buy more at lower prices

Sellers
Sell more at higher prices

Result
Compromise is needed to balance the forces of supply and demand

Review Characteristics of a Free Enterprise Economy

What role do prices play in a modern mixed economy?

Convey information, motivate workers, help markets respond to changing conditions, allocate resources efficiently Bottom Line, a free enterprise economy relies on the price system to answer the 3 basic economic questions

Hypothesize How do you think the goals of buyers and sellers differ?
Market Equilibrium
At a given price, quantity supplied equals quantity demanded Everyone is happy!

Disequilibrium in the Price System

Shortage Q-d > Q-s

Exists when
Price is below market equilibrium

At a lower price
Consumers want to buy more Producers want to supply less

To fix the shortage

Producers raise the price As price , Q-s and Q-d
The market will adjust until it reaches market equilibrium, and at this point the excess demand is eliminated.

Surplus Q-d < Q-s All who want it, have it

Exists when
Price is above market equilibrium

At a higher price
Consumers want to buy less Producers want to supply more

To fix the surplus

Producers lower the price As price , Q-s and Q-d
The market will adjust until it reaches market equilibrium, and at this point the excess supply is eliminated.

 Sometimes the government intervenes and

sets prices; ultimately rationing goods.

Government Intervention
To achieve social goals, the government fixes prices.

Cause

Effect

Prices cannot adjust to their equilibrium levels.

Price Ceiling
Government sets a maximum legal price that can be

paid for a good or service.

Ceiling ~ Producers

cannot charge prices above this level.

Example:

Rent Control

Drawbacks of a Price Ceiling

Causes a persistent shortage

Leads to rationing of goods

Consequence: A Black Market could develop and goods/services are exchanged illegally at prices higher than the official market price.

Price Floor
Government sets a minimum legal price that can be

paid for a good or service.

Floor ~ Producers cannot

charge prices below this level

Examples:

Minimum Wage Agricultural Products

Drawbacks of a Price Floor

Causes a persistent surplus

Problem Arises: How can we dispose of a surplus of goods?

Illustrating Price Floors and Price Ceilings

Persistent Surplus

Persistent Shortage