Supply, Demand and Price Unit 1 – Topic 1.2

Supply, Demand and Price: Review The quantity (amount) of a good or service that producers can provide determined by the costs of producing it and by the price people are willing to pay for it Demand The quantity of a good or service that consumers are able and willing to buy

Supply, Demand and Price:Review Law of Demand Law of Supply The economic principle that demand goes up when prices goes down; and, conversely, comes down when prices go up The economic principle that supply goes up when prices goes up; and, conversely, comes down when prices come down

Supply, Demand and Price:Review Relating Price to supply and demand If demand is high while supply is low, prices tend to be high If demand is low while supply is high, prices tend to be low When the quantity of goods that a producer is willing to supply at a certain price matches the quantity of goods that consumers are willing to buy at that price, then the equilibrium price has been met Why would there be a shortage and surplus as indicated in the diag diagram?

Law of Demand Law of Demand says that as the price of an item decreases, the quantity demanded will increase; and, as the price of an item increases, the quantity demanded will decrease The quantity demanded varies inversely with the price

Demand Curve Demand Curve is a line graph that shows the amount of a product that will be purchased at each price; it shows an inverse relationship and is always downsloping D Qd

Remember: A change along the curve indicates a change in price and a change in quantity demanded A change of the curve (right or left) indicates an across the board change in demand

Supply Supply is a schedule which shows the amounts of a good or service a producer is willing and able to make available at each price during a specified time period Law of Supply states that the quantity of a commodity supplied varies directly with its price: the number of goods and services offered for sale increases as the price increases.

Supply Curve Supply Curve will always be upsloping. S

Remember……….. A change along the curve indicates a change in price and a change in quantity supplied A change of the curve (right or left) indicates an across the board change in supply

Equilibrium Price Equilibrium Price (also called the Market price) is the price at which goods and services may actually be bought and sold. Equilibrium Price is where quantity demanded is equal to the quantity supplied

Equilibrium Price S E P D

Supply and Demand Graphs Develop both a demand and supply graph using the information provided on your handout

Supply, Demand and Price Okay, now it may get a wee bit confusing…

Supply, Demand and Price Elasticity: How sensitive consumers are to a change in price How much less will they buy if prices are raised? How much more will they buy if prices are lowered?

Supply, Demand and Price Consider the following situation: - Medication for high Blood Pressure - You need 30 pills per month - Will the price have any effect on what you will purchase? - Let’s see!

Supply, Demand and Price Consider the following situation: - You have an unhealthy habit of eating 30 Twix bars per month - Will the price have any effect on what you will purchase? - Let’s see!

Supply, Demand and Price Elastic vs Inelastic Elastic - A good or service is elastic if a slight change in price leads to a drastic change in the quantity demanded or supplied E.g. Going to the movies, vacations, soda pop, tvs, luxury goods Rule of thumb - We can do without if price rises *Quantity = amount

Supply, Demand and Price Elastic vs Inelastic Inelastic - inelastic good or service is one in which changes in price experience only small changes in the quantity demanded or supplied E.g. Gas, life saving surgery, medications, drugs, cigarettes, necessity goods Rule of thumb – Will be purchased regardless of price changes *Quantity = amount

Supply, Demand and Price Inelastic goods/services may be characterized by: Less flexible – not as many options No good substitutes Lack of choices Necessity Cultural Cannot live without Inexpensive Elastic goods/services may be characterized by: Flexible – If prices of plasma TVs increase, you may still purchase an LED TV Perceived substitutes Many choices Can learn to live without

Supply, Demand and Price Are the following goods or services elastic or inelastic? Designer shoes? Game consoles? Computers? Earrings? Engagement rings?

Supply, Demand and Price The more inelastic: Small changes in supply impact price a lot (Hurricane in Gulf of Mexico may stunt oil supply temporarily – gas can shoot up in price) The more prices change (there is little consequence, it will still be bought) Remember Law of Demand: if prices go up, demand goes down. However, if prices go up and demand goes down only a little bit – this is what we call an inelastic demand E.g. We’re still buying lots of gas! This is why you can see extra taxes on these products Link

Supply, Demand and Price Inelastic: Price and Revenue Inelastic demand – There is a positive relationship between price and total revenue An increase in price increases total revenue A decrease in price decreases total revenue

Supply, Demand and Price Elastic: Price and Revenue Elastic demand – There is a negative relationship between price and total revenue An increase in price decreases total revenue A decrease in price increases total revenue

How can consumers respond to price increases for goods and services? Purchase less. Use a cheaper substitute. Delay the purchase. Do not purchase.

Competition – when two or more businesses try to sell the same type of product or service to the same customer. Direct Competition – is between similar products.

Indirect Competition – is between goods or services that are not directly related to each other.

What happens when competition enters the marketplace? Gives consumers more choice. May reduce prices. Forces businesses to be more efficient. Improves customer service. May force businesses out of the marketplace.