WarmUp How would you describe supply and demand? How would you describe supply and demand?

Unit II: How Markets Work Part I – Supply and Demand

Demand The desire, willingness and ability to buy a good or service The desire, willingness and ability to buy a good or service

Affective Demand Must want to buy Must want to buy Must be willing to buy Must be willing to buy Must have the resources to buy Must have the resources to buy

What is market demand? The total amount of demand created by all consumers for a product The total amount of demand created by all consumers for a product

Demand Schedule A table that lists the various quantities of a product that will be bought at different prices A table that lists the various quantities of a product that will be bought at different prices

$50 $40 $30 $20 $10 $5

Demand Curve A graph that shows the amount of a product that will be bought at all possible prices A graph that shows the amount of a product that will be bought at all possible prices

Direction of the Demand Curve Downward Slope Downward Slope

What does the law of demand state? As price goes UP demand goes DOWN and visa versa As price goes UP demand goes DOWN and visa versa

What does utility refer to? Satisfaction Satisfaction

Diminishing Marginal Utility Principle that additional satisfaction goes down as we consume more of a product Principle that additional satisfaction goes down as we consume more of a product

Determinants of Demand changes in: B uyers (#of) – changes in population B uyers (#of) – changes in population I ncome – people earn more they spend more I ncome – people earn more they spend more T astes – change in popularity or fads T astes – change in popularity or fads E xpectations – feelings of the future E xpectations – feelings of the future R elated goods R elated goods Substitutes – goods that can replace others Substitutes – goods that can replace others Compliments – goods that go along with another Compliments – goods that go along with another

Decrease in demand at every price will produce a Left shift in demand curve

An increase in demand at every price will produce a right shift in demand curve

Demand Elasticity How much demand for a product is affected by a change in price How much demand for a product is affected by a change in price

Factors affecting elasticity Percentage of Income Percentage of Income Availability of substitutes Availability of substitutes Necessity or Luxury Necessity or Luxury Length of time Length of time

Warmup What is the law of demand? What is the law of demand?

What is supply? The various amounts of a good or service that producers will supply at different prices The various amounts of a good or service that producers will supply at different prices

The Law of Supply Suppliers will generally offer more for sale at higher prices and less at lower prices. Suppliers will generally offer more for sale at higher prices and less at lower prices.

What does a Supply Schedule illustrate? What does a Supply Schedule illustrate? How much will be supplied at different prices How much will be supplied at different prices

Supply Schedule for Video Games Price Per Video Game Quantity Supplied $50200 $40190 $30170 $20130 $10100 $0510

What does a supply curve illustrate? The amount of a good or service that will be supplied at different prices The amount of a good or service that will be supplied at different prices

In what direction does the supply curve slope reading from left to right? Upward Upward

What can cause a shift in supply at every price?

The Cost of Resources The materials used to produce The materials used to produce

Productivity How efficient the work force is How efficient the work force is

Technology The methods used to make goods and services The methods used to make goods and services Then…. …..and Now

Government Policies Gov regulations increase costs of production Gov regulations increase costs of production

Taxes Higher taxes = higher costs Higher taxes = higher costs Lower taxes = lower costs Lower taxes = lower costs

Subsidies Government payment to help do something (decreases costs) Government payment to help do something (decreases costs)

Expectations What owners believe demand will be What owners believe demand will be

Number of Suppliers More suppliers = more supply More suppliers = more supply Less suppliers = less supply Less suppliers = less supply

Shift in Supply Price of Video Games Original Q Supplied Change in Q Supplied $ $ $ $ $ $

When market supply increases at every price the supply curve shifts to the Right Right

Now suppose the government increases taxes on the industry. It will decrease It will decrease Label this on the graph assuming that 100 less will supplied label it S3 Label this on the graph assuming that 100 less will supplied label it S3

What does supply elasticity mean? How much supply is affected by a change in price How much supply is affected by a change in price Elastic Supply – quantity changes a great deal when price changes Elastic Supply – quantity changes a great deal when price changes Inelastic Supply – quantity changes little when price changes Inelastic Supply – quantity changes little when price changes

What affects the elasticity of supply? How quickly a company can change how much it produces How quickly a company can change how much it produces

Equilibrium Price The price at which the amount demanded is equal to the amount supplied The price at which the amount demanded is equal to the amount supplied PePe QeQe

What is the equilibrium price of video games in our market? $25 $25

What is a surplus? When there is more supply than demand When there is more supply than demand

What is a shortage? When there is greater demand than supply When there is greater demand than supply

If price was set at $40 in our video game market what would exist? Surplus Surplus

What about $10? Shortage Shortage

What impact will a shortage have on price? Prices will go up Prices will go up

Surplus? Prices go down Prices go down

What are price controls? When the government sets the price of goods and services because they feel forces of supply and demand are unfair When the government sets the price of goods and services because they feel forces of supply and demand are unfair

Price Ceiling Maximum price that can be charged set by government Maximum price that can be charged set by government Example = Rent Control Example = Rent Control

Price Floor Government set minimum price Government set minimum price Example = minimum wage Example = minimum wage

Price as Signals Determine What to produce by telling producers what they can make a profit off of Determine What to produce by telling producers what they can make a profit off of Determine How to produce – least costly means more profit Determine How to produce – least costly means more profit Determines Who gets what Determines Who gets what

Advantages of Price Prices are Neutral – they do not favor producer or consumer Prices are Neutral – they do not favor producer or consumer Prices are Flexible – they can adjust to changes in the market quickly Prices are Flexible – they can adjust to changes in the market quickly Prices provide Freedom of Choice – a variety of products at different prices allows consumers to choose Prices provide Freedom of Choice – a variety of products at different prices allows consumers to choose Prices are Familiar – they are easily understood Prices are Familiar – they are easily understood