Demand and Supply

Notes - Demand

How does Demand Affect Prices? What is Demand? Obj: Explain the law of demand

Introduction to Demand Demand = desire, willingness & ability to buy good/service Changes over time Sometimes people are willing to buy more of a product or service at a particular price At other times, they are less willing to do so

Individual Demand Schedule Table listing quantities of good/service that people are willing to buy at diff. prices

Individual Demand Curve Graph showing amt. of good/service that would be bought at all possible prices in the market

Law of Demand States that quantity demanded and price move in opposite directions. All other variables remaining the same, the higher the price, the less the quantity demanded.

Market Demand Companies have to take into account the total demand of ALL consumers for their product or service

Utility Pleasure, usefulness, or satisfaction you get from using a product

Marginal Utility Extra benefits gained from purchase of a good/service Diminishing marginal utility – extra satisfaction decreases as more of product is consumed Seen in downward slope of Demand Curve

Describe the factors that can cause changes in demand

What Causes Demand to Change?

When Does Demand Change, Cont’d. 1) When the # of consumers changes

Changes in Demand, Cont’d. 2) When consumers’ incomes change

Changes in Demand, Cont’d. 3) When consumers’ tastes change

Changes in Demand, Cont’d. 4) When consumers’ expectations change

Changes in Demand, Cont’d. 5) When there are changes in the price or quality of substitutes (related products) If the price of butter goes sky high, but the price of margarine does not, some people may choose to buy margarine instead of butter When the price of butter goes up, the demand for margarine does too. 50 cents a pound $5 a pound

When Demand Goes Up. . . People are willing to buy more of an item at any price Demand Curve moves to the right

When Demand Goes Down. . . People are willing to buy fewer items at all possible prices The Demand Curve moves to the left

Demand Elasticity The law of demand says that when price goes up, the quantity demanded goes down But the decrease is not the same for all products when price goes up Extent to which price changes cause a change in the quantity demanded

Elastic Demand If demand for something is elastic, even a small change in price causes an even bigger change in demand When car makers make small price cuts on their cars, the number of cars sold goes up greatly When car makers raise the price of their cars just a little, the number of cars sold decreases a great deal

Demand Elasticity, Cont’d. If there are good substitutes for something, demand tends to be elastic Also, demand is usually elastic when buying the thing can be put off until later – consumers put off buying it in the hope that the price will go down 60 GB for $600 this Christmas

Inelastic Demand Demand is inelastic for some goods and services Even when price goes up drastically, the quantity demanded remains the same Ex: Heart medication, insulin, turkey at Thanksgiving

Elastic or Inelastic?

Supply What is Supply? Obj: Explain how supply works.

What is Supply? Supply = Sellers are willing to offer diff. quantities of a product depending on the price people are willing to pay for it

Law of Supply When people are willing to pay higher prices for a product, producers will supply more of the product When people are not willing to pay a higher price for a product, producers will supply (make) less of it

Law of Supply, Cont’d. Why is this? The higher the price of the good, the greater the incentive the producer has to make more Higher price = Higher profit for the producer

Supply Schedule Similar to the demand schedule At $5 per stuffed animal, the toy maker is not willing to supply any At $50 per animal, the toy maker is willing to produce 900

Profit Motive of Businesses Businesses have to make at least enough money on their products to cover the costs of making them Any money they make above those costs is profit Profit is the main motivating factor for businesses in a free market system

Market Supply Total number of products supplied by all the business that supply that particular product Example: The video game market

Factors Affecting Supply Obj: Identify how supply increases and decreases

Factors Causing Changes in Supply For change in supply to happen, producers must decide to supply a certain quantity of units at each possible price in the market This can happen for a number of different reasons

Changes in Supply = Changes in Supply Curve When supply decreases, the supply curve moves to the left When it increases, the supply curve moves to the right Sellers are willing to supply more goods and services at higher prices

Causes of Changes in Supply 1) Change in the cost of resources When the cost of resources used to make a product decrease, sellers will produce more of it because it’s cheaper to make When resource prices rise, sellers are less able to produce and sell the same quantities of the good or service

2) Changes in Productivity When productivity falls, costs to make same amount of goods and services increases Supply curve shifts to the left When resources used to make something are more efficient, a company’s costs go down The company will produce more goods at every price Supply curve shifts to the right

3) Technology New technology can cut the costs to produce goods and services Sellers will supply more at the same price

4) Changes in Government Policy New government regulations can increase the costs of producing goods and services Sellers will produce less of a product at every price in the market Example: New safety feature requirements for auto makers or increased minimum wage

5) Changes in Taxes and Subsidies Subsidy – government payment to an individual or business for certain actions If the govt. wants farmers to produce more corn, they may offer to pay them $2 a bushel Supply will increase because current corn farmers will stay in the market and new ones will enter the market

$9.4 billion in last year

Lower taxes decrease producers’ costs Supply will increase at each price in the market Higher taxes increase producers’ costs Supply will decrease

6) Expectations of Demand If producers think demand for an item will go up, they will produce more at all possible prices Example: stores order swimsuits from the factories before summer begins

7) Change in Number of Suppliers When more suppliers enter the market, supply will increase When suppliers leave the market, supply will decrease

Elasticity of Supply A measure of how the quantity supplied changes in response to changes in price Depends on how quickly a company can change the amount of a product it makes in response to price changes

Supply Elasticity, Cont’d. If the quantity supplied changes a great deal when prices go up or down, supply is elastic If the quantity changes very little when prices go up or down, supply is inelastic

Markets and Prices Obj: Analyze the relationship between supply and demand

Oil suppliers

Law of Diminishing Returns If one factor of production is increased while the others remain constant, the overall returns will relatively decrease after a certain point.

For Example If more and more farm workers are hired to harvest a wheat field, at some point each new worker will add relatively less output than his predecessor did, simply because he has less and less of the fixed amount of land to work with.

Markets and Prices Market – Place where buyers & sellers meet Supply and demand work together to set prices

Price Adjustment Process Market = All buyers and sellers of a product or service By putting the supply and demand curves together, you can see how prices are adjusted to suit both buyers and sellers

Surplus If sellers are willing to supply 225 surfboards at $400 each, but buyers are only willing to purchase 150 surfboards at $400 each, this leaves a surplus of 75 surfboards Quantity supplied is greater than the quantity demanded

Surplus on the Graph (Price Adjustment, Cont’d.) It’s the distance between the supply curve and the demand curve Signals the producer that the price is too high

Surplus (Price Adjustment Process, Cont’d.) Sellers will lower their prices to sell their goods

Shortage (Price Adjustment Process, Cont’d.) Quantity demanded is greater than the quantity supplied It’s the horizontal distance between the supply curve and the demand curve at any price BELOW where the two curves meet.

Shortage, Cont’d. A shortage signals the seller that the price is too low They will raise the price, and the shortage will not last The flu vaccine shortage will leave millions of Americans vulnerable to influenza this season. Historian John M. Barry hopes it will serve as a wake-up call for government officials

Market Forces A surplus forces the price of a product down A shortage forces the price of a product up The point where supply and demand meet is the Equilibrium Price (EP)

Equilibrium Price, Cont’d. EP = No shortage & no surplus. There is exactly enough of the product at exactly the right price. Buyers and sellers are in balance on quantity and price E.P. will stay the same until demand or supply changes. When that happens, there will be a temporary shortage or surplus until a new equilibrium price is reached.

Govt. Price Controls Price Floor – Minimum price that can be charged for goods and services Ex: Minimum wage Dashed line represents a price floor set below the free-market price. In this case, the floor has no practical effect. The government has mandated a minimum price, but the market already bears a higher price. In contrast, the solid green line is a price floor set above the free-market price. In this case, the price floor has a measurable impact on the market.

Govt. Price Controls, Cont’d. Price Ceiling – Maximum price that can be charged for something. Govt. sets the price Ex: Local govt. that sets price ceiling on how much landlords can charge for rent Often intended to protect consumers from certain conditions that could make necessities unattainable.

What Prices Do. . . They are signals of What to produce How to produce For whom to produce

Keynesian Theory of Economics British Economist Promoted a mixed economy Both the govt. & people and businesses play important roles Said govt. could fight deflation and unemployment by: Reducing interest rates Govt. investment in infrastructure John Maynard Keynes