Laws of Demand

Discuss What is a market? In a market who is the consumer? How does the price of a good affect the consumer?

Market An arrangement that allows buyers and sellers to exchange things Markets exist because no one is self sufficient and no one produces all we require to satisfy all our needs and wants.

Demand Description The quantities of a particular good or service consumers are willing and able to buy at different possible prices at a particular time

Demand Illustration p.1 sec. 1 As price goes up, quantity demanded goes down Price D1 Quantity

Discuss How does demand and “want” or “desire” differ? You may want or desire a new car or a closet full of clothes, but you demand these things only when you are willing and able to buy them.

Quantity Demand The quantities of a particular good or service consumers are willing and able to buy at set prices at a particular time

Quantity Demand Illustration Price D2 Quantity

Demand Schedule Price How much people are going to buy at the various prices. Ex. The price of pizza Quantity $.50 $1.00 $1.50 $2.00 $2.50

Law of Demand As price goes up quantity goes down As price goes down quantity goes up People buy less of something at higher prices than they do at lower prices.

ELASTIC DEMAND: demand that is very sensitive to a change in price goods that one might stop buying or cut back on as price increased (SUVs, Luxury items)**on a graph this demand curve will be FLAT

INELASTIC DEMAND demand that is not very sensitive to a change in price goods that you would buy at any price; there are few if any substitutes for these goods. (milk, gas, prescription drugs) **on a graph this demand curve would be very steep.

Illustration of Decrease and Increase in Demand Decrease in Price Increase in Price Price Price D2 D2 D1 D1 Quantity Quantity The less you buy the more you will move to the left!

The Demand Curve The Demand Curve slopes downward to the right because the consumer is willing and able to buy more gasoline at lower prices than at higher prices.

Scenario #1 Publix is advertising a sale on hot dog buns. What is the impact on the demand for hot dogs?

Scenario #2 Playstation 4, the newest video game console, hits stores. What is the impact on the demand for Xbox 360?

Scenario #3 The weatherman forecasts rain for the weekend in Columbus. What is the impact on the demand for umbrellas?

Scenario #4 The GA General Assembly increases minimum wage to $15/hour. What is the impact on the demand for clothing?

Scenario #5 A snowy blizzard blows through Columbus. What is the impact on the demand for snow boots?

Scenario #6 The price of MP3 players decreases dramatically due to new technology. What is the impact on the demand for portable CD players?

Scenario #7 Summertime is approaching. What is the impact on the demand for shorts?

Scenario #8 The price of hamburgers increases at Publix. What is the impact on the demand for French fries?

Changes in Demand

Reasons Demand can change Change in consumer income Change in tastes and preferences Change in the price of a substitute good Change in the price of a complementary good Change in consumers’ price expectations Change in number of consumers in the market Weather

What is a Complementary Good? Complementary Good: Two goods that are usually consumed together (Hot Dogs & buns)

What is a Substitute Good? Substitute Good: An acceptable replacement for a good (Playstation & Xbox)

Shift in the Demand Curve This demand curve has shifted to the right. Quantity demanded is now higher at any given price. © OnlineTexts.com p. 27

People’s Income Increases Effect on Demand Demand Increases (shift right) D1 D2 Q

Bad Weather (for product) Effect on Demand Demand Decreases (shift left) P D1 D2 Q

Price of Complementary Good Decreases (ex: peanut butter & jelly) Effect on Demand Demand Increases (shift right) D1 D2 Q Peanut Butter

Price of Substitute Good Decreases (ex: Pepsi & Coca-Cola) Effect on Demand Demand Decreases (shift left) D1 D2 Q Pepsi

Complementary vs. Substitute Can YOU tell the difference????

Substitute

Complementary

Substitute

Complementary

Substitute

Substitute

Complementary

Elasticity of Demand How much the quantity demanded will change if the price rises or falls.

Supply

Discuss Now you are the producer Think about the business you are creating Things are now going to reverse

Law of Supply As price goes up, quantity Supplied goes up As price goes down, quantity Supplied goes down More items will be offered for sale at a higher price than at a lower price

Supply Description The quantity of goods a producer is willing and able to sell at various prices at a particular time.

Supply Schedule A numerical representation of quantities supplied by a producer at certain prices Price Quantity $.50 1 $1.00 2 $1.50 3 $2.00 4 $2.50 5

Supply Curve The Supply Curve slopes upward and to the right because the producer is willing and able to sell more products at higher prices than at lower prices.

Quantity Supplied The quantity of goods a producer is willing and able to sell at a set price at a particular time. P S1 Q

Illustrate an Increase in Supply Price S1 S2 Quantity

Illustrate a Decrease in Supply Price S2 S1 Quantity

Change in Supply

Reasons for change in Supply Change in the cost of productive resources (inputs) Change in technology/production Change in profit opportunities of producing other products Change in producers’ price expectations Change in number of sellers in the market Change in the government tax or subsidy Weather

Shift in the Supply Curve For a given rental price, quantity supplied is now lower than before. © OnlineTexts.com p. 52

Costs of Inputs Decrease Effect on Supply Supply Increases (shift right) Spending less to run the business Examples Land Labor Capital P S1 S2 Q

Number of Suppliers Increases Effect on Supply Supply Increases (shift right) Example: Basketballs Dicks Sporting Goods Sports Authority Footlocker P S1 S2 Q

Weather is bad for product Effect on Supply Supply Decreases (shift left) Example A hurricane during the orange growing season P S1 Q

SO… can you apply this knowledge? 1) Together lets decide if the following scenarios are a change in… Input costs Number of suppliers Weather 2) Then decide if it will Increase supply Decrease Supply

Situation #1 Dick’s Sporting Goods goes out of business. What is the impact on basketballs in Columbus? -number of suppliers changes -Supply Decreases

Situation #2 A hurricane destroys the orange groves in Florida. What is the impact on the supply of Orange Juice? -weather changes -Supply Decreases

Situation #3 The price of gas decreases. What is the impact of trucking companies? -cost of inputs change -Supply Increase

Situation #4 Nike moves their factory from the U.S. to China where workers are paid less. What is the impact on the supply of Nike’s shoes? -change in input costs -Supply Increases

Change in Quantity supplied

A change in quantity supplied occurs when there is a price change in the specific item being addressed (looked at, graphed) in the supply curve

Supply and Demand together

Equilibrium: the point at which quantity demanded and quantity supplied are equal

Equilibrium Equilibrium occurs at a price of $3 and a quantity of 30 units. © OnlineTexts.com p. 65

At a point of equilibrium…. the price and quantity are balanced the market for a good/service is stable

Disequilibrium: any price or quantity not at equilibrium

Equilibrium After a Demand Shift The shift in the demand curve moves the market equilibrium from point A to point B, resulting in a higher price and higher quantity. © OnlineTexts.com p. 68

Equilibrium After a Supply Shift The shift in the supply curve moves the market equilibrium from point A to point B, resulting in a higher price and lower quantity. © OnlineTexts.com p. 69

Price Ceilings & Floors © OnlineTexts.com p. 70

A price ceiling is a legal maximum that can be charged for a good. Results in a shortage of a product Common examples include apartment rentals and credit cards interest rates.

A price ceiling is set at $2 resulting in a shortage of 20 units. © OnlineTexts.com p. 72

A shortage occurs when quantity demanded exceeds quantity supplied. A shortage implies the market price is too low.

A price ceiling set above the equilibrium is ineffective

A price floor is a legal minimum that can be charged for a good. Results in a surplus of a product Common examples include soybeans, milk, minimum wage

Price Floor A price floor is set at $4 resulting in a surplus of 20 units. © OnlineTexts.com p. 76

A surplus occurs when quantity supplied exceeds quantity demanded. A surplus implies the market price is too high.

A price floor set below the equilibrium is ineffective

Inflation  a general Rise in prices There is too much money