Supply and Demand Chapter 4 and 5

Supply and demand are the two words that economists use most often. Supply and demand are the forces that make market economies work. Modern microeconomics is about supply, demand, and market equilibrium.

The terms supply and demand refer to the behavior of people... as they interact with one another in markets.

Buyers/Consumers determine demand Sellers/Producers determine supply

Supply and Demand Curve

P- Price Q - Quantity

Demand Consumer Expensive – consumers do not want to purchase the good or service Cheap – the demand for the good or service is greater

Supply Producer Higher Price – the producers wants to make as many as possible Lower Price – the producers wants to limit the supply

Surplus – quantity supply is greater than the demand –Found on the top part of the curve Shortage – demand is greater than the supply –Found on the bottom part of the curve

Quantity Demand When there is a change in price, causes a quantity demand –Price goes up – Quantity goes down –Price goes down – Quantity goes up

Changes/Shifts in Demand Things that affect the curve other than price –If the curve moves to the right – increase in demand –If the curve moves to the left – decrease in demand

Shifts in Demand D D1 D2 Decrease in Demand Increase in Demand

Factors - Demand T aste I ncome – More is normal, less = inferior N umbers of consumers – population D emographics of consumer – ie age E xpectations R elated Goods –Substitute – in place of another good –Compliment – along with another good

Example: When Michael Jordan began endorsing the products, demand for Nike & Gatorade increased

Example: When Billy got laid off from his job, his demand for gourmet steak dinners decreased

Example: Demand for girl scout patches increases when more girls join girl scouts

Example: Demand for gas changes throughout the week

Substitute – Related Goods

Compliment – Related Goods Example: Demand for buns changes when hotdog prices fluctuate

Substitute OR Complementary? Cars and Tires Corn and Beans DVD Players and DVD’s Natural Gas and Electricity Cereal and Milk Toast and Jam Sweatshirts and Sweaters

Factors - Supply L abor Productivity T echnology P roducer Expectation – up or down price I nput Cost – cost of resources N umber of Producers – Competition G overnment Action –Taxes decrease supply –Subsidies opposite, regulations

Labor Productivity

As technology advances, production becomes more efficient and supply increases (shifts to the right).

Producer Expectations Example: If Farmer Joe hears that the price of corn is going to increase next month, he’s going to wait to sell his corn (therefore decreasing the immediate supply of corn).

Resources - Input Cost Example: Don’s landlord increases his rent, which increases Don’s costs of production. Since it’s more expensive to make a donut, the profit per unit earned decreases and supply of Don’s Donuts falls

Government Involvement Example: If the import tax on Toyota Corollas increases, the profit per unit decreases, and American manufacturers will not be able to afford to offer as many for sale.

Example: When the government decided to subsidize dairy farming, dairy farmers’ profits increased, therefore increasing supply of dairy cattle.

Elasticity of Demand – how people react to price changes Elastic – large change in demand Inelastic – little change in demand

Elasticity of Supply – how producers react to price changes Elastic – increase the quantity supplied Inelastic – there is only so much supply can be produced