The cornerstone of the Free Market Economic System Demand and Supply The cornerstone of the Free Market Economic System

What is Demand? Demand – “the Willingness and Ability of a buyer to purchase differing quantities of particular good and/or service at different prices.” There is NO demand for a good or service until this requirement is met I am Willing to buy a Hummer, but I do not have the Ability to buy one at its current price – I do not have a demand for a Hummer.

What is the Law of Demand? States that: As the price of a good or service decreases, the quantity demanded will increase, As the price of a good or service increases the quantity demanded will decrease There is an INVERSE relationship between the price and quantity demanded

Demand Curve The Market for Gasoline Demand Schedule Market Data – sum of all Individual quantity demanded/price combinations “Quantities Demanded At different Prices” $.50 200 $1.00 150 $2.00 50 Bill Sue John The Market 75 50 100 60 40 50 20 10 20 Individual Quantities Demanded at each price Market Quantity Demanded at each price

. . . Demand Curve Demand Schedule Market Data – sum Market for Gasoline Demand Curve Price Of Gasoline . Demand Schedule Market Data – sum of all Individual quantity demanded/price combinations “Quantities Demanded At different Prices” The individual quantities demanded are added HORIZONTALLY to derive the MARKET QUANTITY At each price (at $.50 add 75+50 +75 To get 200 gal. of gasoline $2.00 . $1.00 . $.50 Demand* 50 75 100 150 200 300 Quantity of Gasoline

. . . Demand Curve Demand Schedule Market Data – sum Market for Gasoline Demand Curve Price Of Gasoline The Demand Curve is comprised of an infinite number of Price/ Quantity Demanded combinations -a change in the price of gasoline causes movement ALONG the Demand Curve . Demand Schedule Market Data – sum of all Individual quantity demanded/price combinations “Quantities Demanded At different Prices” The individual quantities demanded are added HORIZONTALLY to derive the MARKET QUANTITY At each price (at $.50 add 75+50 +75 To get 200 gal. of gasoline $2.00 . $1.00 . $.50 Demand* 50 75 100 150 200 300 Quantity of Gasoline

Determinants of Demand (Factors That Shift The Demand Curve) Change in Consumer taste/preference Change in the number of buyers Change in consumer incomes Change in the prices of complementary and substitute goods Change in consumer expectations

. . . . . . Demand Curve Income INCREASES We can afford 50% more Market for Gasoline Demand Curve Price Of Gasoline . . What shifts the Demand Curve? Changes in Income Income INCREASES We can afford 50% more gallons of Gasoline at every price. $2.00 . . $1.00 . . Demand1 $.50 Demand* 50 75 100 150 200 300 Quantity of Gasoline

. . . . . . Demand Curve What shifts the Demand Curve? Market for Gasoline Demand Curve Price Of Gasoline . . What shifts the Demand Curve? Changes in Income Income DECREASES We can afford 50% fewer Gallons of Gasoline at every price $2.00 . . $1.00 . . $.50 Demand1 Demand* 25 50 100 200 Quantity of Gasoline

. . . . . . Demand Curve INCREASES – because of Market for gasoline Demand Curve Price Of . . What shifts the Demand Curve? Changes in Number of Buyers INCREASES – because of economic opportunities more people move to Texas. Texas needs 50% more Gallons of Gasoline at every price $2.00 . . $1.00 . . Demand1 $.50 Demand* 50 75 100 150 200 300 Quantity of Gasoline

. . . . . . Demand Curve What shifts the Demand Curve? Market for Gasoline Demand Curve Price Of Gasoline . . What shifts the Demand Curve? Changes in Number of Buyers DECREASES – because of economic opportunities more people move OUT OF Texas We need 50% fewer Gallons of Gasoline at every price $2.00 . . $1.00 . . $.50 Demand1 Demand* 25 50 100 200 Quantity of Gasoline

. . . . . . Demand Curve What shifts the Demand Curve? Market for Oranges Demand Curve Price Of Oranges . . What shifts the Demand Curve? Changes in Consumer Preferences Consumers express a positive preference for a good. “Study shows that eating an orange a day reduces cancer risks” $2.00 . . $1.00 . . Demand1 $.50 Demand* 50 75 100 150 200 300 Quantity of Oranges

. . . . . . Demand Curve Market for Oranges Price Of Oranges What shifts the Demand Curve? Changes in Consumer Preferences 1. Consumers express a negative Preference for a good. “Study shows that eating oranges stunts your growth” (or something Ridiculous like that…) $2.00 . . $1.00 . . $.50 Demand1 Demand* 25 50 100 200 Quantity of Oranges

. . . . . . What shifts the Demand Curve? Market for Apples Price Of Apples . . What shifts the Demand Curve? Availability of Substitutes – good that can be used in place of a good “The price of oranges INCREASES Dramatically because of a poor harvest.” $2.00 . . $1.00 . . Demand1 $.50 Demand* 50 75 100 150 200 300 Quantity of Apples

. . . . . . What shifts the Demand Curve? Market for Apples Price Of Apples . . What shifts the Demand Curve? 1. Availability of Substitutes “The price of Oranges DECREASES Dramatically because of a record harvest.” $2.00 . . $1.00 . . $.50 Demand1 Demand* 25 50 100 200 Quantity of Apples

. . . . . . What shifts the Demand Curve? Changes in the Price of a Market for Flashlights Price Of Flashlights . . What shifts the Demand Curve? Changes in the Price of a Complement – A good that is typically used with another good “Price of batteries DECREASES” $2.00 . . $1.00 . . Demand1 $.50 Demand* 50 75 100 150 200 300 Quantity of Flashlights

. . . . . . What shifts the Demand Curve? Changes in the Price of a Market for Flashlights Price Of SUV’s . . What shifts the Demand Curve? Changes in the Price of a Complement -A good that is typically used with another good “Battery prices INCREASE” $2.00 . . $1.00 . . $.50 Demand1 Demand* 25 50 100 200 Quantity of flashlights

Demand---The relationship of of one good to another when Income Changes IF Income INCREASES and the Demand for a good INCREASES, then that good is called a NORMAL GOOD. Make more money and you want more steak, luxury cars, vacations, etc. If Income DECREASES and the Demand for a good DECREASES , then that good is called a NORMAL GOOD. Make less money and you want less steak, fewer luxury cars, fewer vacations, etc

Demand---The relationship of of one good to another when Income Changes If Income INCREASES and the Demand for a good DECREASES, then that good is called an INFERIOR GOOD. Make more money and you want fewer Hot dogs, fewer Kia’s, fewer vacations to local parks, etc If Income DECREASES and the Demand for a good INCREASES, then that good is call an INFERIOR GOOD, Make less money and you want more hot dogs, more Kia’s, more trips to local parks, etc.

Substitutes If two goods are Substitutes: when the Price of Good 1 INCREASES then the DEMAND for the SUBSTITUTE (Good 2) INCREASES. If two goods are Substitutes: when the Price of Good 1 DECREASES then the DEMAND for the SUBSTITUTE (Good 2) DECREASES There is a DIRECT relationship when the price of one good changes and the effect on the DEMAND for the other--- SUBSTITUTES!!!

Complements If two goods are Complements: when the Price of Good 1 INCREASES then the DEMAND for the Complement (Good 2) DECREASES. If two goods are Complements: when the Price of Good 1 DECREASES then the DEMAND for the Complement(Good 2) INCREASES There is an INVERSE relationship when the price of one good changes and the effect on the DEMAND for the other--- COMPLEMENTS!!!

What is Supply? Supply – “The Willingness and Ability of sellers to produce and offer for sale different quantities of goods and/or services at different prices” You must now think as a producer – you want to get the highest price possible if you are going to work harder to supply more

What is the Law of Supply States that: As the price of a good or service increases the quantity supplied will increase As the price of a good or service decreases the quantity supplied will decrease There is a DIRECT relationship between price and quantity supplied

Supply Curve The Market for Gasoline Supply Schedule Market Data – sum of all Individual quantity supplied/price combinations “Quantities Supplied At different Prices” $.50 50 $1.00 100 $2.00 200 Gas #1 Gas #2 Gas #3 The Market 10 15 25 40 10 50 50 50 100 Individual Quantities Supplied at each price Market Quantity Demanded at each price

S* Supply Curve Quantity Supplied at each price Market for Gasoline Price Of Gasoline Supply Curve Quantity Supplied at each price Supply Curve – infinite Number of price and quantity combinations Supply schedule – Quantity supplied at Different prices “THE SAME LOGIC AS THE DEMAND SCHEDULE” $2.50 S* $2.00 $1.50 $1.00 $.50 50 100 150 200 Quantity of Gasoline

S* Supply Curve Quantity Supplied at each price Market for Gasoline Price Of Gasoline Supply Curve Quantity Supplied at each price Supply Curve – infinite Number of price and quantity combinations Supply schedule – Quantity supplied at Different prices “THE SAME LOGIC AS THE DEMAND SCHEDULE” The Supply Curve is comprised of an infinite number of Price/ Quantity Supplied combinations -a change in the price of gasoline causes movement ALONG the Supply Curve $2.50 S* $2.00 $1.50 $1.00 $.50 50 100 150 200 Quantity of Gasoline

S* Supply Curve Quantity Supplied at each price What SHIFTS the Market for Gasoline Price Of Gasoline Supply Curve Quantity Supplied at each price What SHIFTS the Supply Curve? $2.50 S* $2.00 $1.50 $1.00 $.50 50 100 150 200 Quantity of Gasoline

Determinants of Supply Things That Shift Supply Curve Change in Resource Prices (Input Prices) Change in Technology Change in Taxes or Subsidies Change in producer expectations Change in number of suppliers Change in exogenous variables (bad weather, Terrorism, etc) BOTTOM LINE ON SUPPLY CURVE SHIFTS Anything that increases the cost of production decreases supply Anything that decreases the cost of production increases supply

S* Supply Curve Quantity Supplied at each price What SHIFTS the Market for Gasoline Price Of Gasoline Supply Curve Quantity Supplied at each price What SHIFTS the Supply Curve? Change in the price of the resources used to make a good $2.50 S* $2.00 $1.50 $1.00 $.50 50 100 150 200 Quantity of Gasoline

S1 S* Supply Curve Quantity Supplied at each price What SHIFTS the Market for Gasoline Price Of Gasoline Supply Curve Quantity Supplied at each price What SHIFTS the Supply Curve? Resource Price INCREASES “Oil prices skyrocket because of a terrorist attack on key oil fields in the Middle East” – The cost Of producing gasoline INCREASES By $.50 S1 $2.50 $.50 S* $2.00 $1.50 $.50 $1.00 $.50 $.50 50 100 150 200 Quantity of Gasoline

S* S1 Supply Curve Quantity Supplied at each price What SHIFTS the Market for Gasoline Price Of Gasoline Supply Curve Quantity Supplied at each price What SHIFTS the Supply Curve? Resource Price DECREASES “Oil prices decrease because of new discoveries of Reserves off the coast of California – The cost Of producing gasoline DECREASES By $.50 $2.50 S* $2.00 S1 -$.50 $1.50 $1.00 -$.50 $.50 -$50 50 100 150 200 Quantity of Gasoline

S1 S* Supply Curve Quantity Supplied at each price What SHIFTS the Market for Gasoline Price Of Gasoline Supply Curve Quantity Supplied at each price What SHIFTS the Supply Curve? Change in Taxes Government INCREASES The Business Tax On gasoline production– The cost Of producing gasoline INCREASES By $.50 S1 $2.50 $.50 S* $2.00 $1.50 $.50 $1.00 $.50 $.50 50 100 150 200 Quantity of Gasoline

S* S1 Supply Curve Quantity Supplied at each price What SHIFTS the Market for Gasoline Price Of Gasoline Supply Curve Quantity Supplied at each price What SHIFTS the Supply Curve? Change in Taxes “Government DECREASES the Business Tax On gasoline production– The cost Of producing gasoline DECREASES By $.50 $2.50 S* $2.00 S1 -$.50 $1.50 $1.00 -$.50 $.50 -$50 50 100 150 200 Quantity of Gasoline

S1 S* Supply Curve Quantity Supplied at each price What SHIFTS the Market for Gasoline Price Of Gasoline Supply Curve Quantity Supplied at each price What SHIFTS the Supply Curve? Changes in Subsidies (Payment from govt. to Producer) – SUBSIDY DECREASES -The cost of producing gasoline INCREASES by $.50 S1 $2.50 $.50 S* $2.00 $1.50 $.50 $1.00 $.50 $.50 50 100 150 200 Quantity of Gasoline

S* S1 Supply Curve Quantity Supplied at each price What SHIFTS the Market for Gasoline Price Of Gasoline Supply Curve Quantity Supplied at each price What SHIFTS the Supply Curve? Changes in Subsidies (Payment from govt. to Producer) – SUBSIDY INCREASES -The cost of producing gasoline DECREASES by $.50 $2.50 S* $2.00 S1 -$.50 $1.50 $1.00 -$.50 $.50 -$50 50 100 150 200 Quantity of Gasoline

S* S1 Supply Curve Quantity Supplied at each price What SHIFTS the Market for Gasoline Price Of Gasoline Supply Curve Quantity Supplied at each price What SHIFTS the Supply Curve? Change in Producer Expectations/Exogenous variable - “Gas prices are expected to decrease in the future because of advances in alternative fuels” (producers make gas to get the higher price today” $2.50 S* $2.00 S1 -$.50 $1.50 $1.00 -$.50 $.50 -$50 50 100 150 200 Quantity of Gasoline

S1 S* Supply Curve Quantity Supplied at each price What SHIFTS the Market for Gasoline Price Of Gasoline Supply Curve Quantity Supplied at each price What SHIFTS the Supply Curve? S1 $2.50 $.50 S* $2.00 $1.50 $.50 Change in Producer Expectations/Exogenous variable - “Gas prices are expected to increase in the future because of an impending natural disaster (producers make LESS gas today to get the higher price in the future” $1.00 $.50 $.50 50 100 150 200 Quantity of Gasoline