Supply and Demand

Markets A market brings together buyers and sellers of particular goods and services Markets exists in many forms They determine the price and quantity of a good or service transacted

Supply, Demand, Price and the Consumer Video

A Lesson on Demand

Introduction to Demand In the United States, the forces of supply and demand work together to set prices. Demand is the desire, willingness, and ability to buy a good or service.

WILLING and ABLE willing and able to purchase are key words How many of you would like that Bugatti we saw earlier in the course? How many of you are able? What’s the difference between willing and able? Idea of time and place – at this time, you may be willing to buy a Bugatti, but are not able, therefore you do not have a “DEMAND”

The Law of Demand The law of demand - as the price of a good or service rises, its quantity demanded falls. The reverse is also true: as the price of a good or service falls, its quantity demanded increases.

Law of Demand (cont.) Based on: Income effect 2. Substitution effect 3. Diminishing marginal utility At a lower price, consumers can buy more of a product without giving up other goods (increased the purchasing power) Consumers have the incentive to substitute the cheaper good for similar goods that are now relatively more expensive States that successive units of a given product yield less and less extra satisfaction. Therefore, consumers will only buy more of a good if its price is reduced

Demand is demonstrated by demand schedule and demand curve

Demand Schedule A table that lists at various prices of products and the number of items demanded at each price Price per Widget ($) Quantity Demanded of Widget per day $5 2 $4 4 $3 6 $2 8 $1 10

Demand Schedule The demand schedule below shows the relationship between price and quantity P QD Complete the table in your notes with the information below Price Quantity of coffee beans demanded (billions of pounds) 2.00 6.5 1.75 7.5 1.50 8.1 1.25 8.9 1.00 10 .75 12.5 .50 15

Demand Curve Demand Curve – the graphic representation of demand Graphing a Demand Schedule: The lower left quadrant is “0” The vertical axis is price The horizontal axis is quantity

Demand Curve for Coffee Beans Now complete the demand curve using the information in the table

We buy products for their utility- the pleasure, usefulness, or satisfaction they give us. What is your utility for the following products? (Measure your utility by the maximum amount you would be willing to pay for this product) Do we have the same utility for these goods?

Change in Quantity Demanded vs. Change in Demand Caused by change in own price of good Movement along the curve Change in Demand: Caused by Change in determinant of demand Shift to new demand curve

Demand Determinants Income Normal Good - a good for which demand increases as consumer incomes rise (milk) Inferior Good - A good for which demand decreases as consumer incomes rise (ground chuck, bus rides) As income rises consumers tend to switch from consuming these inferior goods to consuming normal goods (ex. steak, car/plane)

Determinants con’t Preference/Taste Consumer Expectations Likes and dislikes in consumption Consumer Expectations Change in future price of goods Change in future income Population Change As the number of consumers in a market changes the demand will change

Determinants con’t Consumer Expectations Change in future price of goods Change in future income

Determinants con’t Population Change As the number of consumers in a market changes the demand will change

Determinants con’t Prices of Related Goods Substitutes: Goods that are related in such a way that an increase in the price of one leads to an increase in the demand for the other [goods that can be consumed in place of one another] When the price of one goes down demand for the other goes down

Determinants con’t Prices of Related Goods Compliments: Goods that are related in such a way that an increase in the price of one leads to a decrease in the demand for the other [goods that are normally consumed together] (hamburgers and french fries)

So how does this look in the real world…

What Makes A Producer Provide the Quantity of Goods & Services? Law of Supply What Makes A Producer Provide the Quantity of Goods & Services?

What is Supply? Supply indicates how much a good producers are willing and able to offer for sale per period at each possible price, other things constant.

Law of Supply As a good’s price increases (decreases), the quantity suppliers are willing and able to supply increases (decreases) The quantity supplied is usually directly related to its price P QS

Supply Schedule & Curves A Supply Schedule displays the quantity of a product supplied at each price Price Bottles Supplied 2.00 11.6 1.75 11.5 1.50 11.2 1.25 10.7 1.00 10 .75 9.1 .50 8

A Supply Curve shows a graphic representation of the quantities of a good supplied at various prices Graph the Supply curves using the Supply Schedule

Opportunity Cost of Supplying a Good Supplier costs are opportunity costs Suppliers choose among alternatives based on expected benefit/cost Producers must pay to use resources Resource price reflects its next-best alternative $-value of a resources’ foregone opportunities is the cost of supplying good

Changes in Supply vs. Change in Quantity Supplied Change in a good’s own price causes change in quantity supplied Movement along the supply curve Change in supply caused by change in determinant of supply Shifts supply curve

Determinants of Supply Technology If more efficient technology is discovered production costs will fall So suppliers will be more willing and able to supply more of the good at each price Price of Relevant Resources Those resources employed in the production of a good.

Determinants con’t Prices of Alternative Goods Producer Expectations Price of good that use some of the same resources as used to produce the good in question Producer Expectations Shift production according to future prices Number of Producers # of Prod. Increases # of supply Government Restrictions Taxes, quotas, licenses, etc.

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