Unit 5 Supply and Demand

Quantity Demanded

• Two characteristics of demand for consumers; willingness to buy and ability to buy

• How much would you pay for a certain item?• If you buy one phone at $500; that is your quantity

demanded• Quantity demanded-the amount of a good or service that

consumers are willing and able to pay at a specific price• The quantity demanded is a specific spot on the demand

curve• Example: if 10 people each buy one phone@ $500 then that

is the quantity demanded for that item; 10 @$500

Demand

• Demand is expressed in terms of a time frame• When all the quantities demanded at all the

different prices are combined, the result is the demand

• Demand- the amount of a good or service that consumers are willing to buy at all prices in a given time period

• Example; 1,000 phones were sold in seven days is the demand for that phone

Demand Schedule/Demand Curve

• Price is a huge factor in determining demand• A demand schedule is a chart that shows the

quantities of a good that one person will purchase depending on the price

• A demand curve is an economic model that shows the relationship between price and quantity; it shows how price influences the quantity demanded

• Page 77 in your textbook

Market Demand

• Market demand- the sum of all quantities demanded in a market

• When economists refer to demand; they usually mean market demand

Law of Demand

• Law of demand states that as the price of goods increase the quantity demanded decreases and vice versa

• Three factors affect consumers’ spending behavior:– Law of diminishing marginal utility- consumers will weigh the

“utility” they will receive from each additional unit before purchasing

– Income effect- because of scarcity people’s incomes are limited and they must make choices (trade-offs) when deciding what to purchase

– Substitution effect- sometimes two different goods can satisfy the same want. These products are considered substitute goods.

List three examples of substitute goods:Sandals/Flip-flops1. 2.3. • All three factors cause consumers to react in

predictable ways to a change in price up or down

• This moves the quantity demanded along the demand curve; what economists call a change in quantity demanded

• Only a change in price will effect quantity demanded

Change in Demand

• Sometimes a factor other than price will cause a change in demand

• Change in demand- occurs when quantities demanded increase or decrease at all prices

• An increase shifts the demand curve to the right-decrease to the left

Demand Shifters• Demand shifters- things that will change demand

independent of price– Changes in income– Changes in the number of consumers, ex. Beach town

shops– Changes in consumer tastes and preferences, ex.

Sushi, organic foods– Changes in consumer expectations, ex. Upcoming sales– Changes in the price of substitute goods– Changes in the price of a complementary good- a

product that is consumed along with some other product, ex. Tennis balls and tennis rackets

Supply

• Quantity supplied- the amount of a good or service that producers are willing and able to offer for sale at a specific price

• Supply- the amount of a good or service that producers are willing to and able to offer for sale at all prices in a given time period

• Supply schedule- a table that shows the quantities supplied at different prices in a market

• Supply curve- shows the relationship between price and quantity supplied

Supply

• Market supply- the sum of all the individual quantities supplied

• Law of supply- direct relationship between price and quantity supplied; as the price goes up the quantity supplied goes up

• Revenue- the amount of money received in the course of doing business

• The only factor that changes quantity supplied is price

Change in supply

• Variables other than price can cause a change in supply- a change in market supply at all prices

• Factors that lead to a change in supply– Change in the cost of inputs– Changes in the number of producers– Changes in conditions due to natural disasters or

international events, ex. Wars– Changes in technology– Changes in producer expectations

– Changes in government policy- governments can directly affect supply in two ways• Subsidy- a cash payment aimed at helping a producer to continue to operate• Excise tax- a tax on the manufacture or sale of a goodhttp://minnesota.cbslocal.com/2011/05/12/good-question-why-does-big-oil-get-taxpayer-subsidies/

http://www.liveleak.com/view?i=9ea_1331337881

http://live.huffingtonpost.com/r/segment/new-farm-bill-hurts-the-poor/51af65a002a7607788000065

http://www.glennbeck.com/2012/03/09/american-taxpayers-subsidizing-50-light-bulbs/

Elasticity• Elasticity- a measure of the degree to which a

quantity demanded or a quantity supplied changes in response to a change in the price

• Elasticity of demand- a measure of consumer’s sensitivity to a change in price

• Elasticity of supply- a measure of the sensitivity of producers to a change in price

• Unitary elastic supply or demand- when the % change in price is = to the % change in quantity supplied or demanded

• Inelastic- items that do not show a change in demand no matter the price, necessities

Demand elasticity= % change in quantity demanded /% change in price

Total Revenue

• Economists can also use the total revenue test to measure elasticity of demand

• Total revenue is calculated by multiplying the quantity of a good sold by the price of a good

Turn to page 90 in your text

Factors that Influence Elasticity of Demand

• Availability of substitutes• Price relative to income-consumers notice

changes to “big ticket” items more than lower priced items

• Necessities vs. luxuries• Time needed to adjust to a price change

Factors that Influence Elasticity of Supply

• Supply chain- the network of people, organizations, and activities involved in supplying goods and services to consumers

• Availability of Inputs• Mobility of Inputs• Storage capacity• Time needed to adjust to a price change• Turn to page 94 in your text