SUPPLY AND DEMANDW H AT A R E S U P P LY A N D D E M A N D , A N D W H AT FA C T O R S

I N F LU E N C E T H E M ?

WARM UP: DEMAND SCHEDULEPrice Number willing to

buy • Why might some students be willing to pay $X for this product?

• Why might some students choose not to pay even $1 for this product?

• You have created a demand curve for the product. What happens to the quantity demanded when the price goes down? When the price goes up?

• Most demand curves look similar to the one you created. Given this, what do you think the “law of demand” might say?

DEMAND AND PRICE

• Demand• The amount of a good or service that consumers are

willing and able to buy at all prices in a given period• Quantity demanded• The amount of a good or service that consumers are

willing and able to buy at a specific price.• Demand curve• Shows the relationship between price and the quantity

that buyers are willing and able to pay.

GRAPHING INDIVIDUAL DEMAND

MARKET DEMAND

• Market demand• The sum of all the individual quantities demanded in a

market.

THE LAW OF DEMAND

• As price increases, quantity demanded decreases.• Why is this?• The law of diminishing marginal utility• People will buy ever larger quantities of a good or service

only if the price is low enough.• The income effect• Income is scarce, only so much money can be spent. If the

price of a good or service increases, they will not be able to buy the same quantity as they did at the original price.

• The substitution effect• A different good can satisfy the same want.

DEMAND SHIFTERS: FACTORS THAT CAUSE A CHANGE IN DEMAND

• Changes in income• Changes in the number of consumers• Changes in consumer tastes and preferences• Changes in customer expectations• Changes in the price of substitute goods• Changes in the price of complementary goods• A product that is consumed along with some other

product

DEMAND SHIFTERS• Increased demand=

demand curve shifts to the right• Decreased demand=

demand curve shifts to the left• When a factor other

than price causes the quantities demanded at every price to change, a demand curve has shifted.

ELASTICITY OF DEMAND

• The measure of a customers’ sensitivity to a change in price• Inelastic• Price increase on necessities• toothpaste

• Elastic• Price increase in a non-necessity item, may chose to buy

another product/brand• Calculating and graphing elasticity of demand• Demand elasticity=percentage change in quantity

demanded/percentage change in price

TOTAL REVENUE TEST

• Used to gauge the impact of prices on revenue.• Total revenue= (quantity of a good sold)(price of the good)

FACTORS THAT INFLUENCE ELASTICITY OF DEMAND

• Availability of substitutes• Price relative to income• Necessities versus luxuries• Time need to adjust to a price change

SUPPLY AND PRICE

• Supply• The amount of a good or service that producers are

willing to offer for sale at all prices in a given period.• Quantity supplied• The amount of a good or service that producers are

willing and able to offer for sale at a specific price.• Supply curve• Shows the relationship between the price and the

quantity that producers are willing and able to supply.

GRAPHING INDIVIDUAL SUPPLY

MARKET SUPPLY

• The sum of all the individual quantities supplied

THE LAW OF SUPPLY

• As price increases, quantity supplied increases• Why is this?• Production decisions by existing producers• Producers want to maximize profits, and one way to do this is

based on revenue• When prices increase, the desire to make a profit leads producers

to increase production of goods, and as a result expect profits to increase.

• When prices fall, producers are likely to decrease production.• Market entries and exits• When the price of a good or service increases, new firms may

enter a new market because they see the potential for profit.• If prices drop, the reverse will happen, and the producer will exit

the market.

SUPPLY SHIFTERS: FACTORS THAT CAUSE A CHANGE IN SUPPLY

• Changes in the cost of inputs• Changes in the number of producers• Changes in conditions due to natural disasters or

international events• Changes in technology• Changes in producer expectations• Changes in government policy• Subsidy- cash payment to the producer• Excise tax- tax on the manufacture or sale of a good

SUPPLY SHIFTERS• Increased supply=

supply curve shifts to the right• Decreased supply=

supply curve shifts to the left• When a factor other

than price causes the quantities supplied at every price to change, a supply curve has shifted.

SUPPLY ELASTICITY

• Measures a producer’s sensitivity to price changes• Law of supply- the quantity supplied moves in the

same direction as price• A producer who has an elastic supply will respond

to an increase in price with an increase in the quantity supplied.• Yogurt makers- flexible producers• Antiques dealer- nonflexible producers• Supply of antiques is inelastic

CALCULATING AND GRAPHING ELASTICITY OF SUPPLY

• Supply elasticity=percentage change in quantity supplied/percentage change in price

• Unitary elastic supply- a supply elasticity equal exactly to one

• The flatter the supply curve, the more likely it is elastic. The steeper the curve, the more likely it is inelastic.

FACTORS THAT INFLUENCE ELASTICITY OF SUPPLY

• Supply chain• Availability of

inputs• Mobility of inputs• Storage capacity• Time needed to

adjust to a price change