DemandDemandandand

SupplySupply

Starter Key TermsStarter Key Terms• Demand• Demand Schedule• Demand Curve• Law of Demand• Market Demand• Utility• Marginal Utility• Substitute• Complement• Demand Elasticity• Price Floor

• Supply• Law of Supply• Supply Schedule• Supply Curve• Profit• Market Supply• Subsidy• Supply Elasticity• Surplus• Equilibrium price• Price Ceiling

What Is Demand?What Is Demand?

The desire, willingness and ability The desire, willingness and ability to buy a good or serviceto buy a good or service

For Demand to Exist:For Demand to Exist:

You must want or need a good or service You must be willing to buy the good or

service You must have the resources available to

buy it

Demand Schedule v. Demand CurveDemand Schedule v. Demand Curve

Demand schedule Table that shows

various quantities of a product or service that an individual is willing to buy over a range of possible prices

Individual Demand Chart pg 571

Demand curve Graph that shows the

amount of a product that would be brought at all possible price.

Vertical is price Horizontal is quantity

Law of DemandLaw of Demand

The quantity of an item demanded and price move in opposite directions.

INVERSELY RELATED Price is high then demand will be ? Price is low then demand will be ?

Typically you will buy more of an item at a lower price.

Individual v Market DemandIndividual v Market Demand

What you want and are willing to pay and resources to pay for it (individual)

Total of what all consumers want and are willing to pay for it and have resources to pay for it

Companies hope to sell to as many people as possible so this is what they look at

Demand Illustrated:Demand Illustrated:

Knowledge of demand is essential to understand how a market economy works

People act in their own best interest Would you buy a concrete company near

the beach today? Why? Or Why not?

Diminishing Utility:Diminishing Utility:

Almost everything that we buy provides utility Utility: pleasure or usefulness or satisfaction we

get from using a product Movie Candy This is diminishing marginal utility: our marginal

utility tends to go down as more units are consumed of it

Helps explain the demand curve and why it slopes downward

Shift in Demand curveShift in Demand curve

Shift to right: demand increases

Shift to left: demand decreases

Change in DemandChange in Demand• Market demand can change when more

consumers enter the market; when consumers income changes, tastes or styles change, and expectations change and when prices of related goods change.

• A graph of a market demand curve can show these changes. When demand goes down, people are willing to buy fewer items at all possible prices. In this case, the curve shifts to the left. When demands goes up, the curve shifts to the right. People are willing to buy more of the item at any given price.

Change in Demand ContinuedChange in Demand Continued

• Competing products are called substitutes because consumers can use one in place of the other. A change in the price of one good causes the demand for its substitute to move in the same direction.

• Complements are products that are used together. The demand for one moves in the opposite direction as the price of the other.

Factors That Affect DemandFactors That Affect Demand

Demand for any product is variable over time for several reason and this affects your demand for it. Change in number of consumers (population) Change in consumer’s income (recession) Change in consumer’s taste (preference for) Change is consumer’s expectations (future) Change in substitutes (competing products) Change in complement (complementing products)

Elasticity of DemandElasticity of Demand

• When prices rise, we know that quantity demanded will go down, but we don’t know by how much. Demand elasticity is the extent to which a change in price causes a change in the quantity demanded for a product.

• For some goods and services, demand is elastic. Each change in price causes a relatively larger percentage change in quantity demanded. This is, when the price of a product changes a little, the quantity demanded change a lot.

Elasticity ContinuedElasticity Continued

• Demand for a good or service tends to be elastic if it has an attractive substitute. Demand also tends to be elastic when the purchase can be postponed.

• For other goods and service, demand is inelastic. Price changes have little effect on the quantity demanded.

• Demand for goods with few or no substitutes trends to be inelastic.

Elasticity of DemandElasticity of Demand

The extent to which a change in price causes a change in the quantity demanded.

Elastic demand: Change in cost causes a relatively larger percentage

change in quantity demanded. Substitutes Expensive items have elastic demand

Inelastic demand: Price change has little effect on demand Few substitutes

What is Supply?

WHAT IS SUPPLY?WHAT IS SUPPLY?

REFERS TO THE VARIOUS QUANTITIES REFERS TO THE VARIOUS QUANTITIES OF A GOOD OR SERVICE THAT OF A GOOD OR SERVICE THAT

PRODUCERS ARE WILLING TO SELL AT PRODUCERS ARE WILLING TO SELL AT ALL POSSIBLE MARKET PRICESALL POSSIBLE MARKET PRICES

LAW OF SUPPLYLAW OF SUPPLY

• PRINCIPLE THAT SUPPLIERS WILL NORMALLY OFFER MORE FOR SALE AT A HIGHER PRICE AND LESS FOR SALE AT A LOWER PRICE

• PRICE AND SUPPLY DIRECTLY RELATED TO EACH OTHER

• AS PRICE GOES UP SO DOES SUPPY• AS PRICE GOES DOWN SO DOES

SUPPLY

SUPPLY SCHEDULE VS CURVESUPPLY SCHEDULE VS CURVE

• SUPPLY SCHEDULE• NUMERICAL CHART

THAT ILLUSTRATES THE PRICE AND WHAT QUANTITY WILL BE SUPPLIED AT THAT PRICE

• SUPPLY CURVE• GRAPH THAT SHOWS

THE AMOUNT OF A PRODUCT THAT WOULD BE SUPPLIED AT ALL POSSIBLE PRICES

THE PROFIT MOTIVETHE PROFIT MOTIVE

• PROFIT IS THE MONEY A BUSINESS RECEIVES FOR ITS PRODUCTS OR SERVICES OVER AND ABOVE ITS COST TO MAKE IT

• PROFIT MOTIVE IS THE IDEA THAT BUSINESS WANT TO MAKE A PROFIT THEREFORE THEY SELL TO DO SO

GRAPHING MARKET SUPPLYGRAPHING MARKET SUPPLY

• MARKET SUPPLY IS THE COMBINATION OF ALL BUSINESS SUPPLY SCHEDULES THAT PROVIDE THE SAME PRODUCT (TOTAL OF ALL)

• UPWARD SLOPING JUST LIKE INDIVIDUAL SUPPLY CURVE

INFLUENCE OF PRICE ON SUPPLYINFLUENCE OF PRICE ON SUPPLY

• PRICE: IS THE MOST SIGNIFICANT INFLUENCE ON THE QUANTITY SUPPLIED OF ANY PRODUCT

• OTHER FACTORS CAN AND DO MOVE THE SUPPLY CURVE ON THE GRAPH TO THE LEFT AND RIGHT ALSO

FACTORS THAT AFFECT SUPPLYFACTORS THAT AFFECT SUPPLY

• WHEN SUPPLY GOES DOWN THE SUPPLY CURVE SHIFTS TO THE LEFT

• WHEN SUPPLY GOES UP THE SUPPLY CURVE SHIFTS TO THE RIGHT– CHANGE IN COST OF RESOURCES– CHANGE IN COST PRODUCTIVITY– CHANGE IN TECHNOLOGY– CHNGE IN GOVERNMENT POLICY– CHANGE IN TAXES– CHANGE IN SUBSIDIES

ELASTICITY OF SUPPLYELASTICITY OF SUPPLY

• SUPPLY ELASTICITY: MEASURE OF HOW QUANTITY SUPPLIED OF A GOOD OR SERVICE CHANGES IN RESPONSE TO CHANGES IN PRICE

• INELASTIC? DOES IT OCCUR?

MARKETS & PRICESMARKETS & PRICES

• SUPPLY AND DEMAND WORK TOGETHER TO SET PRICES AND IN OUR ECONOMY PRICES FORM BASIS FOR OUR ECONOMY

PRICE ADJUSTMENT PROCESSPRICE ADJUSTMENT PROCESS

• OCCURS WHEN YOU COMBINE SUPPLY AND DEMAND CURVE TO REACH THE EQUILIBRIUM PRICE BUT CAN BE INTERUPTED AND HAVE TO ADJUST ITSELF

SURPLUSSURPLUS

• THE AMOUNT BY WHICH THE QUANTITY SUPPLIED IS HIGHER THAN QUANTITY DEMANDED– PRICE IS USUALLY HIGHER THAT PEOPLE

WILL PAY FOR AN ITEM

SHORTAGESHORTAGE

• THE AMOUNT BY WIHC THE QUANTITY DEMANDED IS HIGHER THAN QUANTITY SUPPLIED– PRICE IS USUALLY TOO LOW

GOVERNMENT INTERVENTION AND GOVERNMENT INTERVENTION AND IMPACT OF ITIMPACT OF IT

• PRICE CEILINGS: MAX PRICE THAT CAN BE CHARGED FOR GOODS AND SERVICES– RENT APARTMENTS/INTEREST RATES

• PRICE FLOOR: MIN PRICE THAT CAN BE CHARGED FOR GOODS AND SERVICES– MINIMUM WAGE

PRICE AS SIGNALSPRICE AS SIGNALS

• THEY HELP US MAKE DECISIONS AND ANSWER THE 3 QUESTIONS– WHAT – HOW– FOR WHOM

ADVANTAGES OF PRICESADVANTAGES OF PRICES

• PRICES ARE NEUTRAL

• PRICES ARE FLEXIBLE

• PRICES AND FREEDOM OF CHOICE

• PRICES ARE FAMILAR