Introduction to Economics Johnstown High School Mr. Cox Supply and Demand

2 The Laws of Supply and Demand When people's actions are based on self-interest, people respond to incentives:self-interest When the cost of an activity is raised people do less of the activity; When the benefit of an activity is reduced people do less of the activity.

Adam Smith’s “Invisible Hand” The most famous term in the Wealth of Nations is "invisible hand." "...[B]y directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was not part of it.“ Def: a natural phenomenon that guides free markets and capitalism through competition for scarce resources.

The Law of Demand As the price gets higher, people want less of a particular product Quantity Price $40 $30 $20 $

Economic Topics in Law of Demand Purchasing Power Amount of money people have to spend on goods/services Income effect is the change in Purchasing Power that occurs when income changes Substitution Effect Tendency of consumers to substitute lower cost options for higher cost ones (i.e. Generic vs. Name Brand Products) Diminishing Marginal Utility Loss of usefulness/satisfaction when too much of a product is sold

Shift in Demand Curve Demand curve may shift to the left Not willing to pay as much Thus price drops Due to drop in income Demand curve may shift to the right willing to pay more for product Due to: Increased population Increased income Changes in taste Demand curve shift to the left

7 The Supply Curve As the price gets higher, suppliers are willing to supply more of a product Price Quantity $40 $30 $20 $

Shift in Supply Curve If it becomes easier to produce a product, supply curve will shift to right More farmland More children for labor Fertilizer available Water available Technology available Price drops

9 Equilibrium This represents what the price is at the moment in the marketplace. Price Quantity $40 $30 $20 $ Supply Demand

10 Examples of Supply and Demand Housing Gasoline Orange juice after a freeze in Florida Import quotas (affecting supply)

11 What if...?...peanut butter was discovered to be a cure for cancer?...a cheap, environmentally-friendly source of automobile fuel was discovered?... eating large quantities of Brussel sprouts caused rapid weight loss?...a safe, no-fail patented weight-loss pill was developed by a drug company?

Elasticity of Supply and Demand Supply and Demand Curves, and equilibriums, are not set in stone Many can change due to a variety of factors Cost of labor/goods needed for production Change in consumers values Government taxes/subsidies Elasticity is a measure how people respond to change Income Elasticity – changes due to consumer income Price Elasticity – changes due to fluctuating prices of a good Cross-Price Elasticity – changes due to fluctuating process of another good

Price Elasticity of Demand According to the law of demand, when price goes up, consumers demand fewer quantities of a product. If the price of a product falls, quantity demanded will rise. But when the price of a product changes, by how much more (or less) will consumers buy? To help answer this question, we will use a measurement called the Price Elasticity of Demand.

Price Elasticity of Demand For some products, consumers are highly responsive to price changes. Demand for such products is relatively elastic or simply elastic. For other products, consumers’ responsiveness is only slight, or in rare cases non-existent. Demand is said to be relatively inelastic, or simply inelastic.

Determinants of Price Elasticity of Demand In general, there are four determinants that can affect the price elasticity of demand: Substitutability Proportion of Income Luxuries versus Necessities Time

Determinants of Price Elasticity of Demand Price elasticity of demand is greater: the larger the number of substitute goods that are available the higher the price of a product relative to one’s income the more that a good is considered to be a “luxury” rather than a “necessity” the longer the time period under consideration

Price Elasticity of Supply Price elasticity of supply measures the responsiveness of sellers to changes in the price of a product. If producers are relatively responsive, supply is elastic. If producers are relatively insensitive to price changes, supply is inelastic.

Price Elasticity of Supply The amount of time it takes producers to shift resources between alternative uses to alter production of a good can determine the degree of price elasticity of supply. The easier and more rapid the transfer of resources, the greater is the price elasticity of supply. The longer a firm has to adjust to a price change, the greater the elasticity of supply.

Inelasticity The situation in which the supply and/or demand for a good or service are unaffected when the price of that good or service changes. Goods with inelastic supply? (Suppliers cannot meet demand in a timely fashion) Crops Custom items Goods with inelastic demand? (Goods that people need, so a change in price wouldn’t hinder consumption) Tap water Gasoline Tobacco…people still smoke in NY despite some of the nation’s highest tax rates