Supply and Demand Chapter 3

What is demand? Demand is the willingness and ability to buy a product. Has to have both characteristics or it is not demand!

Demand schedule Data the shows the relationship between price of the product and how much people are willing and able to buy. PriceQuantity

Law of demand As the price of the product increases, the quantity demanded decreases. P  Qd Inverse relationship PriceQuantity $1.008 $1.251

Graph PriceQuantity $1.008 $1.251 P Q D1D1

Price elasticity of demand When price changes occur how “much” do buyers adjust? Magnitude of change Businesses want to know how buyers react to a price change. Which makes more $? Raising or lowering P Guess wrong and lose money for your company Inelastic or Elastic demand

Determinants of Price Elasticity ELASTIC DEMAND Luxury Large portion of budget Large number of substitutes Longer time period, durable goods INELASTIC DEMAND Necessities Small portion of budget No substitutes Short time period, non-durable goods

Price Elasticity of Demand ELASTIC DEMAND  Small change in price leads to large change in Qd INELASTIC DEMAND  Large change in price leads to small change in Qd

Total Revenue Test Total Revenue (TR) = P * Q Law of demand; inverse relationship between variables. P * Qd = TR Elastic demand; decrease P  increase TR Quantity effect > Price effect Inelastic demand; decrease P  decrease TR Price effect > Quantity effect

Worksheet Elasticity # 1 Price rises from $5 to $6. Quantity demanded decreases from 15 to 10. Old price * old quantity demanded = old total revenue New price * new quantity demanded = new total revenue P T. R. Elastic/Inelastic

Worksheet Elasticity # 2 Price rises from $6 to $9. Quantity demanded decreases from 60 to 50. Old price * old quantity demanded = old total revenue New price * new quantity demanded = new total revenue P T. R. Elastic/Inelastic

Worksheet Elasticity # 3 Price rises from $6.50 to $6. Quantity demanded increases from 100 to 200. Old price * old quantity demanded = old total revenue New price * new quantity demanded = new total revenue P T. R. Elastic/Inelastic

Worksheet Elasticity # 4-6 #4 Why do businesses care about price elasticity of demand? #5 Which effect is greater for elastic demand, P or Q? #6 Which effect is greater for inelastic demand, P or Q?

Change in Demand Six non-price factors (determinants of demand) which impact buying at each and every price causing a SHIFT to a new demand line. P Q D1D1

Change in Consumer Income When there is an increase in income  demand increases. Everyone gets $1 INCREASE demand; shift curve RIGHT P Q D1D1 Mt. Dew D2D2

Change in Tastes & Preferences Bad news, unhealthy, out of fashion  demand decreases. Drinking Mt. Dew causes migraines DECREASE demand; shift curve LEFT P Q D1D1 Mt. Dew D2D2

Change in Price of Substitute Good This or That; goods that are rivals. You would want only one not both! Price of Mellow Yellow goes up  P Q D1D1 Mt. Dew

Change in Price of Complimentary Good This and That; goods that go together like peanut butter and jelly Would want both or neither! Price of chips goes up  P Q D1D1 Mt. Dew

Change in Consumer Price Expectations Anticipate future price change, influences buying behavior today P Q D1D1 Mt. Dew

Change in Number of Consumers If there is an increase in the number of consumers  P Q D1D1 Mt. Dew

REVIEW D Shifts occur because something OTHER than the price of product has changed. Shift means that at each and every price more/less is being bought. New D line Increase; shift right Decrease; shift left

Show and explain the difference between a change in quantity demanded and a change in demand.

Both show changes in people’s willingness & ability to buy QdD

What is supply? Supply is the willingness and ability to make a product. Has to have both characteristics or it is not supply! Profit motive

Supply schedule Data the shows the relationship between price of the product and how much businesses are willing and able to make. PriceQuantity $908,000 $12020,000 $15030,000 $18039,000 $21045,000

Law of Supply As the price of the product increases, the quantity supplied increases. P  Qs Direct relationship Graph the data! PriceQuantity $908,000 $12020,000 $15030,000 $18039,000 $21045,000

Price elasticity of supply When price changes occur “how much” do businesses adjust? Magnitude of change Businesses want to react to a price change but limited by time. Inelastic supply Unresponsive to price changes, takes time Natural resources, Agricultural products Elastic supply Responsive to price changes, can adjust quickly Factory or manufactured products

Change in Supply Six non-price factors (determinants of supply) which impact selling at each and every price causing a SHIFT to a new supply line. P Q S1S1

Change in Cost of Production When there is an increase in cost of production  supply decreases. Workers get a 10% increase in wages. DECREASE supply; shift curve left P Q S1S1 S2S2 Inline Skates

Change in Number of Sellers If new businesses open, increasing competition  supply increases. Skates R Us opens INCREASE supply; shift curve RIGHT P Q S1S1 S2S2 Inline Skates

Change in Technology Improvements in making products increases efficiency. Robotics used in inline skate factory  Inline Skates P Q S1S1

Change in Government Policy A. Taxes are a cost of production for a business. Decrease tax  B. Tariffs & quotas. Impose trade barriers  C. Subsidies are payments to business, lower cost of production. Decrease subsidy  Inline Skates P Q S1S1

Change in Profit Opportunities Business don’t care what they make as long as they make money! Skateboards are latest fad  Inline Skates P Q S1S1

Natural Disaster or Strike Bad news for producing product  decrease supply Inline Skates P Q S1S1

REVIEW S Shifts occur because something OTHER than the price of product has changed. Shift means that at each and every price more/less is being bought. New S line Increase; shift right Decrease; shift left

Show and explain the difference between a change in quantity supplied and a change in supply.

Both show changes in business’ willingness & ability to make a product QsS

Price floor Concern is sellers can’t make profit Government sets legal MINIMUM price in market (above EQ) Buyers  Sellers Creates surplus Inline Skates P Q S1S1 D1D1 P1P1 Q1Q1

Price ceiling Concern is buyers can’t afford product Government sets legal MAXIMUM price in market (below EQ) Sellers  Buyers Creates shortage Inline Skates P Q S1S1 D1D1 P1P1 Q1Q1

Supply and Demand summary How is price determined in a market economy? Interactions of buyers AND sellers Different motivations/strategies “Free” market is favored, government intervention disrupts ability of market adjustments and creates surpluses or shortages.

Real World… Read headline… a. Supply or Demand? b. Increase or Decrease? c. Identify “factor” d. Graph change e. Interpret graph, predict what will happen to EQ P & Q Pencils P Q S1S1 D1D1 P1P1 Q1Q1