How Do Demand and Price Interact? What are we willing and able to buy at various prices? (This defines what?)

DEMAND Willingness and ability are two conditions that buyers must meet in order for there to be DEMAND.

Law of Demand As price increases , the quantity demanded decreases .

What Can Cause Demand to Change? CHANGE IN INCOME As income increases, people have more money and will increase their demand for goods and services. 

2. Changes in number of Consumers As the number of consumers increases, more people will buy goods and services and demand will increase. 

3. Changing Consumer Tastes and Preferences. As consumer tastes and preferences for a particular good or service increases, demand for that good or service will increase. 

4. Changes in Consumer Expectations. If consumers expect a future increase in the price of a good or service, current demand for that good or service will increase. 

5. Changes in Price of Substitute Goods As the price of a particular good or service increases, demand for that good will decrease. But demand for its substitute will increase, as it will be cheaper in comparison. 

6. Changes in Price of Complementary goods. As the price of a particular good or service increases, demand for that good will decrease. Since people tend to buy complementary goods together, demand for any complementary good will also decrease.  Have students define Complementary Goods

Supply: How do supply and price interact? SUPPLY: willingness and ability are the two conditions that must be met for there to be a supply of products.

Law of Supply The higher the price, the more quantity is produced (increase supply)

What can cause supply to change? SUPPLY SHIFTERS: 1) Changes in the costs of inputs Any change in the cost of the factors of production will result in a change in market supply Lower costs = more supply Higher costs = less supply

Supply Shifters cont… 2) Changes in the number of producers # of producers affect the amount of supply More producers, more supply 3) Changes in conditions due to natural disasters or international events Weather and other events (war, etc.) can influence the amount of supply available

Supply Shifters cont… 4) Changes in technology: better technology can reduce factors of production, making goods cheaper to produce (ex. robot) 5) Changes in producer expectations: Producers make decisions based on the expectation that prices will rise or fall (wheat, cattle industry, etc.)

Supply Shifters cont… 6) Changes in government policy Governments affect in two ways: subsidy (cash payment aimed at helping a producer to continue to operate), and excise tax (tax on the manufacture or sale of a good).

Elasticity Elasticity: refers to the degree to which a quantity demanded or supplied changes in response to a change in price Think of the stretchiness of a rubber band—the more it stretches the more elastic the supply or demand

Demand Elasticity Elasticity of Demand: is a measure of how sensitive consumers are to a change in price Inelastic: demand responds only slightly to a change in price (goods that usually have inelastic demands are gas, soap, etc.) Elastic: demand responds actively to a change in price (bag of chips, pops, etc.)

Demand Elasticity The equation for demand elasticity is… Demand elasticity= % change in quantity demanded divided by % change in price For an example, lets look at page 89 of our book

Total Revenue Test Total Revenue Test: used by producers to guage the impact prices will have on their revenue Revenue Table: lists the possible prices and the corresponding amount demanded at each price Total Revenue: (price)x(quantity sold)=total revenue Let’s take a look at the example on page 90

Elasticity of Supply Elasticity of Supply: a measure of producers’ sensitivity to a change in price It’s how much more a producer will make in response to higher prices, or vice versa Calculation: supply elasticity = (% change in quantity) / (% change in price)

Elasticity of Supply Several things affect the elasticity of supply Availability of inputs Mobility of inputs Storage capacity Time needed to adjust

Exit Work What factors play into a shifting supply? What factors play into a shifting demand? What is considered when looking at a totoal revenue test? Describe elasticity in economic terms. Include supply elasticity and demand elasticity.