S UPPLY AND D EMAND What is supply? Give an example. What is demand? Give an example. What happens to the price of goods if there is an increase in demand? Give an example. What happens to the price of goods if there is an decrease in demand? Give an example. What happens to the price of goods if there is an increase in supply? Give an example. What happens to the price of goods if there is a decrease in supply? Give an example.

S UPPLY AND D EMAND Economics , Ch. 21

I. C IRCULAR F LOW OF E CONOMICS A. Factor Market - where firms buy factors of production from households 1. Labor- earn wages from work 2. Capital- return on investments, sell goods the firms Factor market: Incomes Households Businesses

B. Product Market - business supply goods and services for sale to households 1. Households return money by buying from the firms Factor market: Incomes Households Businesses Product market: Expenditures

C. In a mixed economy, the government also plays a role 1. Individuals and businesses pay taxes to the government 2. The government uses that money to regulate the economy, make public works, and provide entitlements Factor market: Incomes Households Businesses Product market: Expenditures Taxes Taxes and Fees Entitlements and Services Regulation Government

W ARM U P -What is the difference between the factor market and the product market? -How does the government serve as an intermediary between the product market and factor market? -What is the difference between supply and demand?

II. S UPPLY AND D EMAND A. Demand (Consumers) 1. Demand - desire to own something and the ability to pay for it 2. Law of demand - When a good’s price is lower, consumers will buy more of it. When the price is higher, consumers will buy less of it.

B. Supply (Producers) 1. Supply - the amount of goods available 2. Law of supply - The higher the price, the larger the quantity produced. As price falls, quantity of supply falls. P RICE P ROFITS P RICE P ROFITS

C. Equilibrium Price 1. When quantity demand and quantity supplied are at the same price then they reach an equilibrium price 2. Equilibrium is ideal: a. Producers get more if their product gets sold b. the right amount of product is available for the consumers who want it

E XAMPLE PriceCars SuppliedCars Demanded $ $ $ $ $ $ Why does quantity supplied go up with price? 2.Why does quantity demanded go down with price? 3.What is the equilibrium price? 4.If the price was $10000, how many cars would be sold? Why? 5.If the price was $15000, how many cars would be sold? Why? 6.Why is the equilibrium price usually ideal for both consumers and producers?

20 K 15 K 10 K 5 K Quantity Supplied/Demanded Price in thousands Surplus Shortage

PriceRound 1Round 2Round 3 $1 $2 $3 $4 $5 $6 $7 $8 $9 $10

E XAMPLE : P IZZA ! Supply and Demand Schedule: Price per SliceSlices Supplied Slices Demanded $ $ $ $ $ $

1. If the price was $1, how many would be sold? What is this an example of? 2. If the price was $2.50, how many would be sold? What is this an example of? 3. What is the equilibrium price? 4. What would happen to the equilibrium price if many of America’s milk cows died? 5. What would happen to the equilibrium price if a new study demonstrated that pizza has hidden health benefits?

S UPPLY AND D EMAND : P IZZA S LICES Equilibrium price : 175 slices at $1.75 Shortage Surplus

D. Surplus 1. If supply exceeds demand there is a surplus 2. Price is too high so goods and services exchanged are limited by demand

E. Shortage 1. If demand exceeds supply, there will be a shortage 2. Price is too low so goods and services exchanged are limited by supply

PriceRound 1Round 2Round 3 $1 $2 $3 $4 $5 $6 $7 $8 $9 $10

III. SHIFTS IN MARKET EQUILIBRIUM A. Problem of Excess Demand 1. a sudden increase in demand leads to a shortage because demand>supply 2. When demand increases, equilibrium price will increase

B EANIE B ABIES S ALES E: $3.50 E: $4.00

B. Fall in Demand 1. After a fad passes its peak, excess demand turns into excess supply (surplus) 2. Price and quantity slide downward and eventually original equilibrium is restored

W ARM U P -What happens if there is too much supply? Is the price too high or too low when there is too much supply? -What happens if there is not enough supply to meet demand? Is the price too high or too low when there is too much demand? -What do you think would happen to the demand for new puppies if there was a new law that stated every dog owner had to get a mandatory $1000 yearly license? What about the price?

C.Changes in Demand 1. Substitutes - competing related goods a. Increase in price of one will cause a rise in demand of the other b.Ex: butter and margarine 2. Complements - goods that are dependent on each other a. Increase in price of one will cause a fall in demand of the other b.Ex: Xbox and games

3. Demand elasticity - market in which a change in price will cause a change in demand (luxury goods with substitutes) 4. Demand inelasticity - market in which a change in price will not cause a significant change in demand (necessary good with no substitutes)

S HIFTS IN S UPPLY AND D EMAND 1. Gold after a Glenn Beck says it is the best investment 2. Cheerios after a store brand version is released 3. Cranberry juice after a cranberry crop failure 4. Gasoline after a large oil reserve is discovered 5. Hannah Montana memorabilia after the next teen pop sensation comes out 6. Xbox consoles after the first Halo game was released 7. Michael Jackson music after he dies 8. Big screen TVs if income taxes are doubled 9. Would the market for Snickers be described as elastic or inelastic? 10. What would the result be if the government stated that no gasoline could be sold over $2.25?

D. Reasons for changes in supply 1. Cost of resources 2. Amount available 3. Productivity 4. Technology 5. Government: Regulations, taxes, and subsidies - gov’t money to help production 6. Expectations

E. Market inhibitors 1. Price ceiling - a maximum price is set for a good/service a. Ex: rent control b. Result: market shortage 2. Price floor - a minimum price is set for a good/service a. Ex: minimum wage b. Result: market surplus SHORTAGE SURPLUS

IV. COMPETITION A. Competition increases market efficiency, growth, quality while decreasing prices B. Market is most efficient when it is close to perfect competition - pure competition at equilibrium

1. Many buyers and sellers- a. no one is powerful enough to influence quantity or price b. Buyers benefit when more sellers- more goods at better quality at lower price

2. Identical products - no difference in product sold

3. Informed buyers and sellers- consumers know enough about the market to find the best deal

4. Free market entry and exit- firms must be able to enter markets when they can make money and leave when they can’t stay in business

Review Questions 1. In the circular flow free enterprise model, how are prices for goods established? 2. In what situation would a shoe store reduce the price of shoes? 3. A new technology increases the speed of computers without increasing production costs. What is the likely effect of this technology? 4. In a market economic system, what happens to the price of a good when its supply increases and its demand decreases? 5. What impact would healthy competition have on prices, quality, and choice of products?