Honors Civics and Economics Supply and Demand Honors Civics and Economics

Objectives Explain the Law of Supply and how supply can be represented graphically. Understand the factors that cause supply to shift and how they can affect the price of a good or service. 2

Supply Predict What happens to the quantity supplied as price goes UP? What happens to the quantity supplied as the price goes DOWN? 3

Law of Supply As price increases, quantity supplied increases. This is because producers would rather sell goods at a higher price Quantity 4

Supply Schedule Supply: measures how much producers are willing to make at various prices Ex. Pizza Supply Schedule. How many pizzas are supplied at $1.00? As the price of pizza increased what happened to supply? What do you think prevents a producer from selling goods at the high prices? Price Quantity $.50 1 2 $1.00 5 $1.50 $2.00 7 $2.50 8 5

Law of Supply “The UP UP DOWN DOWN” As price goes up quantity goes up As price goes down quantity goes down Producers make more goods/services at higher prices than they do at lower prices. 6

Illustration of Supply Shift Increase in Supply = curve shifts to the right Decrease in Supply = curve shifts to the left. S2 S1 Price S1 Price S2 Quantity Quantity 7

Why does supply shift? Supply can increase (move right) and Decrease (move left) depending on certain conditions in the market. STOP and Think…if it reduces the cost of production (cheaper to produce), then supply of that good went ____. 8

Supply Factors Number of suppliers: more suppliers = more supply Example: A new shopping plaza opened on SR 501 in Bahama. Did the # of suppliers increase or decrease? Did supply increase or decrease?

Supply Factors 2. Input costs: if the costs of inputs increases, the supply decreases (and vice versa). Example: if the price of cocoa powder increases, the supply of chocolate cupcakes decreases. (Technology may also decrease costs, increasing supply.)

Supply Factors 3. Government Regulations: tighter government regulation of production makes it more expensive to supply goods→ decrease in supply Example: Congress raised the minimum wage from $6.55 an hour to $7.25. What is the impact for fast food restaurants? Did the supply of fast food increase or decrease?

Supply Factors 4. Taxes: Higher taxes raises business costs (supply decrease), lower taxes reduces them (supply increase) Example: Congress cut taxes on US corporations to try and boost production in the United States. Did costs for corporations go up or down? Did supply increase or decrease?

Supply Factors 5. Subsidies: gov’t payment to an individual, business, or group to reduce the cost of production. Example: Congress gave all corn producers a subsidy for each bushel of corn they produce. Did the cost of corn production go up or down? Did the supply of corn increase or decrease? Use of corn today?

Supply Factors 6. Producer Expectations: If producers think that consumer demand will drop, then they reduce supply. If they think demand will increase then they increase supply. Example: The week after Halloween stores expect consumers will want want Christmas themed candy instead. Which supply will increase? Decrease?

Fun with Supply Shifts! 1. Scenario Supply Factor Increase or Decrease? Graph Congress just voted to raise taxes on corporations to pay for entitlement programs 15

Fun with Supply Shifts! 2. Scenario Supply Factor Price 2. Scenario Supply Factor Increase or Decrease? Graph Congress just passed a bill giving all cotton producers $2 for every bushel of cotton produced

Fun with Supply Shifts! 3. Scenario Supply Factor Increase or Decrease? Graph Congress requires all businesses to give male employees 1 month of paternity leave

Fun with Supply Shifts! 4. Scenario Supply Factor Increase or Decrease? Graph A new industrial park was built in Durham County.

Fun with Supply Shifts! 5. Scenario Supply Factor Increase or Decrease? Graph Producers think that demand is going to drop for Regular TVs when all TVs go to Hi-Def.

Demand Predict What happens to the quantity demanded as price goes UP? What happens to the quantity demanded as the price goes DOWN?

Demand Curve

Demand Schedules

Individual vs. Market Demand Demand Schedules Individual Demand Schedule Price of a slice of pizza Quantity demanded per day Market Demand Schedule Price of a slice of pizza Quantity demanded per day $.50 $1.00 $1.50 $2.00 $2.50 $3.00 5 4 3 2 1 $.50 $1.00 $1.50 $2.00 $2.50 $3.00 300 250 200 150 100 50

Law of Demand “The UP and Down” As price goes up quantity goes down As price goes down quantity goes up People buy less goods/services at higher prices than they do at lower prices. If there was an increase in demand for DVDs what would that mean? If there was an decrease in demand for DVDs what would that mean?

Law of Demand Why does demand work this way? Substitution Effect: consumers react to an increase in a good’s price by consuming less of that good and more of other goods Income effect: a change in consumption caused by a change in ‘real’ income ie. prices changes lead to budget reevaluation Diminishing Marginal Utility: each additional unit provides less utility to consumer

Law of Demand: Why does demand work this way? changes in quantity demanded = change in demand? Demand schedules assume that all other economic factors are held constant

Law of Demand: Why does demand work this way? changes in quantity demanded = change in demand? Demand schedules assume that all other economic factors are held constant price is the only variable that changes, if other variables were to change then the curve would move

Changes in Demand What causes the demand curve to shift? 5 variables > Income: Normal vs. Inferior Goods > Number of Consumers > Consumer Expectations > Consumer Tastes > Related Goods: Compliments and Substitutes

Changes in Demand What causes the demand curve to shift? 5 variables > Income: Normal vs. Inferior Goods > Number of Consumers - more ppl = more demand > Consumer Expectations - anticipated changes > Consumer Tastes - peoples preferences > Related Goods: Compliments and Substitutes

Elasticity of Demand a measure of how drastically consumers react to a change in price > Inelastic Demand: describes demand that is not very sensitive to a change in price > Elastic Demand: describes that is very sensitive to changes in price

Elasticity of Demand a measure of how drastically consumers react to a change in price > Inelastic Demand: describes demand that is not very sensitive to a change in price = slope is very steep > Elastic Demand: describes that is very sensitive to changes in price = slope is not very steep ie. not steep at all

Elasticity of Demand Unitary Elastic: If elasticity is exactly equal to 1, demand is called unitary elastic ie. one more pizza slice will be demanded for each additional dollar price increases

Factors affecting Elasticity •Several different factors can affect the elasticity of demand for a certain good. 1. Availability of Substitutes If there are few substitutes for a good, the demand will not likely decrease as price increases (inelastic), the opposite (lots of substitutes) is also usually true (elastic) Ex. Electricity has no substitutes- inelastic McDonalds has many (Burger King, etc)- elastic

Factors affecting Elasticity 2. Relative Importance Another factor determining elasticity of demand is how much of your budget you spend on the good. Ex. Mortgage payment must be paid (inelastic) Entertainment expenses (movies, etc.) are elastic

Factors affecting Elasticity 3. Necessities vs. Luxuries Whether a person considers a good to be a necessity or luxury has a great impact on the good’s elasticity of demand for that person. Ex. Food (inelastic) Jewelry (elastic)