Supply and Demand

Knowledge of Terms Consumer = person who uses a good or services or buys a good or services Producer = provides goods and services We are all consumers and producers You do not have to profit to be a producer….you are a producer if you wash dishes at home. However, in economics the producers are most often seeking a profit. Medium of Exchange = what is accepted as payment – in the U.S. our medium of exchange is MONEY

What is Demand? DEMAND = the desire to have a good or service, AND the ability to pay for it. Demand DOES not mean simply wanting something. The Law of Demand - As Price Goes , Quantity Demanded Goes As Price Goes , Quantity Demanded Goes Meaning that if the price is lower, then consumers will DEMAND more : ) But when the price go higher, consumers will DEMAND less

Why does this happen Two reasons effect our purchasing Substitution Effect = When prices of one item rise, you are more likely to substitute another good/service in its place. Example –You usually buy Coke product, but Coke has now started charging 3.50 for a 20oz drink instead of a 1.00, but another soda brand still charges a 1.00 for a 20oz drink – most people would forgo buying coke and substitute the other brand or you would CUT DOWN on how many Cokes you bought.

Why does this happen The other reason is known as Income effect = As prices increase, but your income does not, you’re forced to make cutbacks . This results in less quantity demanded – The opposite can also occur, if prices fall, you feel wealthier and are more likely to purchase more ECONOMISTS MEASURE consumption by how much you bought, not how much you spent

Understanding Demand Just because you WANT a good/service, doesn’t mean you demand it. Demand relates to what you are actually willing and able to purchase at a given price – you may want a car, but in reality you cannot afford it, therefore there is no demand for the car A DEMAND SCHEDULE = a table that lists the quantity of a good a person is willing to purchase at each price in the market

Demand Schedule Individual Demand for Coke Price of One 20oz Coke Quantity Demanded per day $0.75 6 $ 1.00 5 $ 1. 25 4 $1. 75 3 $ 2. 25 2 $2. 50 1 $ 3.00

Demand Curve Demand Curves ALWAYS slope Down and to the right ( D & R) Demand Curves are a result of plotting the Demand Schedule – Label these curves as D for Demand – Price is always Vertical and Quantity is always horizontal

Reading the Curve ONE KEY POINT TO NOTE – the curves DO NOT include any other facts other than Price and Quantity Demanded – so we assume that all other factors remain constant – like income and substitution Also, keep in mind business are more concerned with the market as a whole and not just the individuals demand – they would use a Market Demand Curve/Schedule

Supply Supply = The amount of goods available LAW OF SUPPLY = how the producers decide how much the will supply Law of Supply says As price goes ,Quantity Supplied goes As price goes , Quantity Supplied goes Meaning producers will produce more if the profit motive is higher and less if the profit motive is lower

Why does this happen Profit motive / incentive As profit decreases, producers may decide to stop producing all together, leading to an overall decrease in supply for the product IF the producer lowers price, his profits decrease and he may decide to substitute other products

Supply Schedule Show the relationship between price and quantity supplied Supply schedules are very difficult to do for just one person – so they are typically shown for the Market or firm as a whole Teddy Bear Company Price for a two foot teddy bear Quantity Supplied $5 20 $10 40 $20 100 $30 150 $ 50 300

Supply Curve Supply Curve ALWAYS slopes Up and to the right ( s UP ply has UP ) Supply Curves are a result of the Supply Schedule – label curve as S for supply – Price is vertical and quantity supplied is horizontal

Demand Curves v. Shifting A demand curve represents change in QUANTITY Demanded based off of price change alone – ceteris paribus = all other things remain constant But what happens if there is a change in outside factors – like a report that states chewing gum makes you live longer – this would lead to a change in overall DEMAND at all the given prices – this causes the entire curve to move An increase in demand (not QD) causes the entire curve to actually shift RIGHT – creating new sets of data/#’s A decrease in demand (not QD) causes the entire curve to actually shift LEFT – creating new sets of data/#’s IRDL!!!!!!!

Demand schedule for change in overall Demand (not QD) Original Demand Price of 1 pack of Chewing Gum Quantity Demanded in a week New Demand after report . 25 20 35 . 50 17 28 . 75 12 23 1.00 10 1.25 8 1.50 5 1.75 2

Why the shifts occur Any given number of factors influence our overall demand – change in income, consumer expectations, advertising, preferences, population change, popularity, etc – all these factors can cause the overall demand for a good to increase or decrease Demand curves can shift based off other goods as well Compliments – goods that are bought together or necessary for another good If the demand for the compliment changes , then so would the demand for the good Substitutions – a good that can be used in place of another – if there is a better substitute, then your overall demand for the original good would shift

Supply Curve v. Shifting A supply curve represents change in QUANTITY supplied based off of price change alone – ceteris paribus = all other things remain constant But what would happen if the gov’t passed stronger regulations – the cost is too high for the company to continue current production – so they have to cutback at all prices An increase in supply causes the curve to shift Right A decrease in supply cause the curve to shift LEFT

Why do the shifts occur Any number of reasons – increase costs of production, new technology, government influence, subsidies (gov’t support $), taxes, regulations

Finding the Equilibrium Equilibrium – point of balance between price and quantity This is the point where supply and demand come together and create a stable market price

Disequilibrium If the market price or quantity supplied is anywhere other than at the equilibrium, then a disequilibrium occurs. This leads to EITHER excess demand or excess supply EXCESS DEMAND – the quantity demanded is higher than the quantity supplied – this occurs when the price is BELOW the equilibrium We also call this a SHORTAGE If there is excess demand, sellers will raise the price bc they know consumers want more, but if they raise it too high, this can lead to excess supply

Disequilibrium EXCESS SUPPLY – when there is more quantity supplied than there is quantity demanded Excess supply happens when the price goes above the equilibrium Buyers are no longer willing to buy as much for the higher price Also called a SURPLUS

Government Intervention The government sometimes has to step in to protect consumers and workers they can set Price Ceilings and Price Floors Price Ceilings – a MAXIMUM price that can legally be charge for a good or service Price Ceilings ALWAYS fall below the equilibrium Price Floors – a MINIMUM price that can legally be charge for a good or service Price Floors ALWAYS fall above the equilibrium Kind of Backwards??????