DEMAND & SUPPLY

A Market Interaction between buyers and sellers Buyers demand goods Sellers supply goods Assumptions Standardized good Competitive market 3-2

I. Demand and the Price Effect Quantity of good or service people are WILLING and ABLE to buy at any given price Law of Demand Consumers will buy more of G &S at lower prices, and less at higher prices

3 ‘Patterns’ or reasons for the Law of Demand, aka The Price Effect Substitution Effect Consumers react to price changes due to availability of substitutes Income Effect Change in consumption due to the effect spending has on real income 3. Law of Diminishing Marginal Utility

C. Individual D versus Market D what you are willing and able to pay Market: what a community/society/group is willing and able to pay

Looking at Curves Graph that shows all the price/quantity combinations Curve slopes down and to the right Demand is an entire curve – NOT just one point on a curve!

The WHOLE Line! All points! $60 P NOT a Single Point! $10 D 1 Q 6

II. Change in Demand Demand Curves will ‘shift’ up or down depending on the following factors: Change in income Income rises, people can spend more money and vice-versa Normal versus Inferior

Change in Expectations Change in weather/season Future Predictions Change in the number of buyers Population changes effects demand Change in styles, tastes or habits Fads and fashion

Change in Price of Related Goods: Price and availability of substitutes Change in one thing effects its substitutes Price/availability of Complementary goods Things used together effect each other

Change in Quantity Demanded Ncrcrease P 6 5 4 3 2 1 Change in Demand P Qd $5 4 3 2 1 10 20 35 55 80 Change in Quantity Demanded Price (per bushel) D2 Decrease in Demand D1 D3 Q 2 4 6 8 10 12 14 16 18 Quantity Demanded (bushels per week) 3-11

III. Price Elasticity Elasticity of Demand Measurement of the impact of the price effect Shows buyer’s eagerness to buy a product

If effect is large, the demand is elastic If effect is small, the demand is inelastic In other words… Some products people will stop buying even when there is a small change in the price effect (elastic) The reverse is inelastic…

Elasticity is different for various goods because Availability of Substitutes (more available, more elastic) Percentage of budget (higher % of budget, the more elastic) Time (the longer people have to adjust, the more elastic) Luxury vs. Necessity

Elastic Products… Coca Cola

Inelastic Products… Energy Sources… Medical Services

Elastic Graph $60 P $10 1 Q 6

Inelastic Graph $60 P $10 1 Q 6

Mathematical Calculations Two Methods: Mid-Point method Total revenue Test We will cover this later…