Demand, Supply, Price

DEMAND

Demand The desire, ability, and willingness to buy a product Demand Schedule- shows the amount demanded at every price The Demand for CDs PriceQuantity Demanded $300 $250 $201 $153 $105 $58

Demand Curve Tells the quantity that consumers will demand at each and every price.

Law of Demand Demand is: higher at lower prices & lower at higher prices Inversely related to price Higher Demand Lower Price Higher PriceLower Demand

Change in Demand vs. Change in Quantity Demanded Change in Demand People buy different amounts at the same price Shows a move from one curve to the other Drop ceteris paribus rule Change in Quantity Demanded Shows a change in the quantity of a product purchased in response to a change in price. Move along the same curve Use ceteris paribus rule

Prices of related goods Substitutes and Complements Substitutes: Competing products that can be used in place of one another An increase in the price of one increases the demand for the other Ex: Butter and Margarine Complements: Products that increase the value of other products An increase in the price of one reduces the demand for both An increase in the use of one will increase the use of the other Ex: film and camera

Determinants Demand is also affected by non-price factors Consumer incomes Consumer tastes and preferences Prices of related goods Complementary Substitute Consumer price expectations Change in # of Consumers in Market

Elastic or Inelastic? Because some goods and services are affected by price more than others, we classify demand as either elastic or inelastic. Elastic Small price changes can make big changes in demand Amount bought will go up when price goes down You can wait to buy Inelastic Price changes don’t affect demand Lower price will NOT affect the amount bought You can’t wait to buy

How is elasticity determined? Can the purchase be delayed? Yes = elastic No = inelastic Are adequate substitutes available? Yes = elastic No = inelastic Does the purchase use a large portion of your income? Yes = elastic(Ex: car) No = inelastic(Ex: salt)

Elastic or Inelastic? Inelastic elastic Inelastic elastic

SUPPLY

What is supply? Supply is the quantities that would be offered for sale and all possible prices that could prevail in the market. Supply schedule PriceQuantity $

Supply Curve Supply Curve: Tells us the quantity supplied at each and every price

What is the Law of Supply? Law of Supply: The principle that suppliers will normally offer more for sale at high prices and less at lower prices. A change in overall supply will cause the Supply curve to shift. What is Quantity Supplied? The amount that producers bring to the market at any given price. A change in quantity supplied will move along the original curve. The quantity supplied, or offered for sale, varies directly with its price. Meaning, the change in amount offered for sale in response to a change in price.

What would cause a change in supply? Cost of inputs Productivity Technology Number of sellers Taxes and subsidies Expectations Government Regulations

PRICE

What kinds of cost do you have to consider? Fixed Cost – the cost that a business incurs even if the plant idle and output is zero. Salaries Rent Property Taxes Variable Cost – cost that does change when the business rate of operation or output changes Electric power Shipping charges Total Cost – Sum of the fixed and variable costs Marginal Cost – Extra cost incurred when a business produces one additional unity of a product.

Pricing What is market equilibrium – A situation in which prices are stable, and the quantity of goods supplied is equal to the quantity of goods demanded. What is a surplus – More supplied goods than demanded What is a shortage – More demanded goods than supplied.

Price Fixing Price Ceiling – The maximum legal price that can be charged. New York City does this with rent control to make housing more affordable. This can create a shortage. Price Floor – Lowest legal price that can be paid for a good or service Minimum wage at 7.15 This can create a surplus.