Chapter 7 Supply & Demand

The Marketplace Demand is amount of g/s consumers are willing/able to buy at various prices during specific time frame Supply is amount of g/s producers are willing/able to sell at various prices during specific time frame

The Marketplace Market is process of freely exchanging g/s between buyer & sellers ◦ Local ◦ National ◦ International With your neighbor, come up w/ as many examples of markets as you can think of in a minute ◦ Classify as local, national or international

The Marketplace Voluntary exchange – transaction that buyers & sellers work out on their own terms What are some factors that buyers consider? What are some factors that sellers consider? In a market economy prices are set by voluntary exchange

Which are markets? Gap McDonalds Overstock.com Hair Salon Concert Dentist Movie theatre Ebay Shopko

Law of Demand As price goes up, quantity goes down and vice versa Example: Dark Knight DVD

Law of Demand Characteristics of Demand (Factors Affecting Quantity Demanded) 1. Real income effect 2. Substitutes 3. Diminishing marginal utility

Law of Demand Real Income Effect ◦ States we cannot keep buying same quantity of products if price rises while our income stays the same  Forces us to make tradeoffs ◦ Real income is purchasing power

Law of Demand Substitution Effect ◦ States have if have 2 similar items and the price of one rises, people will buy more of the other item Examples?????

Law of Demand Utility is power that a g/s has to satisfy a want Marginal utility is the additional amount of satisfaction Law of diminishing marginal utility says that the additional satasfaction a consumer gets from buying one more unit will lessen w/ each additional one purchased Example: Peanuts at bball game

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Graphing the Demand Curve Demand curve shows relationship between price & quantity demanded ◦ Downward sloping line (falls from left to right) Demand schedule is table of quantities at difference prices

Graphing the Demand Curve

Determinants of Demand Change in demand for an items shifts the demand curve to the left or right

Determinants of Demand Change in population Change in income Change in taste/preference Substitutes Complementary goods

Determinants of Demand Change in population ◦ Naturally if increases so does demand b/c there are more opportunities to buy/sell  Increases shifts demand curve to right  Decreases shifts to left

Determinants of Demand Change in income ◦ Demand for g/s depends on your income  Income increase, demand curve shifts to right  If decreases, shifts to left

Determinants of Demand Change in taste/preference ◦ When a fad is hot or not affects demand  If fad hot, shifts curve to right  When fad is over, shifts back to left

Determinants of Demand Substitutes

Determinants of Demand Complementary goods ◦ Produces used w/ another product

Price Elasticity of Demand Elasticity measures how much the quantity demanded changes when price goes up/down ◦ If prices lower, we buy more ◦ But how much lower should they be for us to buy Price elasticity of demand is how much demand varies according to changes in price

Elastic Demand Rise/fall in price affects the amount we are willing to buy ◦ Flexible about buying or not ◦ Luxury items ◦ Item has many substitutes

Inelastic Demand Price has little impact on quantity demanded ◦ Consumers not flexible (purchase not matter what) ◦ Staple items (milk, bread, salt, etc.) ◦ Necessities

What affects demand elasticity Availability of substitutes How much you have (budget) Amount of time you have to adjust to change in price

Law of Supply As price goes up, quantity supplied goes up and vice versa

Law of Supply Profit incentive motivated people in market economy ◦ At higher prices, greater incentive to produce more

Law of Supply Supply schedule is table showing quantities supplied at different prices Supply curve is graph showing relationship between price & quantity supplied

Supply Curve Supply curve is an upward sloping line showing quantities supplies at possible prices

Supply curve Change in supply causes entire curve to shift to left/right

Determinates of Supply Price of inputs Number of firms in industry Taxes Technology

Price of Inputs Items needed to make product ◦ If price of inputs drops (raw materials, wages) producers can supply more at lower production costs – (shifts curve to right)

Number of Firms in Industry As more enter industry, greater quantities of product/service, which would cause a shift to right

Taxes If gov’t imposes taxes on production of certain items, businesses will NOT supply as much b/c production costs are higher ◦ Causes shift to left

Technology New products & new methods of producing increase supply ◦ Allows to produce more goods at lower cost ◦ Shift to right

Law of Diminishing Returns Adding units of one factor of production increases total output, however, after a certain point output continues to increase but at a diminishing rate

Equilibrium Price Price where amount producers are willing to supply is equal to the amount consumers are willing to buy

Prices as signals Price communicates information and coordinates activities of producers and consumers

Prices as Signals Shortage – quantity demanded is greater than quantity supplied at current price Surplus – quantity supplied is greater than demanded at current price

Price Controls In certain circumstances, gov’t set price limits

Price Controls Price ceiling – legal maximum price that can be charged for g/s Price floors – legal minimum price that can be charged for g/s