Chapter 21 Law of Supply and Demand

Demand Demand- The desire, willingness, and the ability to buy a product Demand Schedule- A table that lists the various quantities of a product or service someone is willing to buy over a range of prices Demand Curve- A graph that shows the amount of the product that would be bought at all possible prices on the market

DEMANDDEMAND

Demand Law of Demand- As price increases, demand decreases or as price decreases, demand increases Utility- The pleasure, usefulness, or satisfaction from a product Diminishing Utility- Additional utility decreases the more we get

Factors Affecting Demand 1)When there is a change in the number of consumers…  More consumers increases demand  Less consumers means less demand  Affected by birthrate, disease, war, migration, and immigration

Factors Affecting Demand 2)Changes in consumers’ income…  Increases in income leads to an increase in demand  Less income means less demand

Factors Affecting Demand 3)Changes in consumers’ taste…  More popular a product the more demand  The “must buy” of a season  Advertising is the key

Factors Affecting Demand 4)Changes in consumers’ expectations…  If afraid the economy will decline, demand decreases  If the economy is good, people buy more  Demand is affected when people wait for new technology  If people expect shortages, they stock up increasing demand  Weather issues can affect demand

Factors Affecting Demand 5)Changes in Substitutes…  A substitute is a competing product  If price for the competition drops, demand for that product will also drop  Newer or better competition will also lower demand

Factors Affecting Demand 6)Changes in complements…  A complement is a product that is used with another product  Ex: game systems and games, peanut butter and jelly  If the demand for one increases, the demand for the other also increases

Demand Elasticity Demand Elasticity-The extent to which a change in the price of a product causes a change in the demand Elastic Demand-A change in price causes a large change in the demand  Ex: a sale on a car will cause a large change in demand  Happens when there is an attractive substitute  Expensive items  When the purchase can be put off till later

Demand Elasticity Inelastic Demand-A change in price has little effect on demand  Demand for turkey at Thanksgiving  Occurs when there are few substitutes ex: medicine  Inexpensive item also have inelastic demand

Supply Supply-The various quantities of a good or service that producers are willing to sell at all possible prices. This is the opposite of demand. Supply Schedule-A table that lists all the various quantities supplied by producers at all given prices Supply Curve-A graph that shows the amount of a product that would be supplied at all available prices

SUPPLYSUPPLY

Supply Law of Supply-As the price increases, the amount that a producer is willing to supply will also increase

Profit Motive Profit Motive-The driving force that encourages individuals and organizations to increase the material well being  Businesses invest time, $, and capital in order to make even more $  To cover costs they must charge more for the product that it cost them to make it.  Always are trying to make a profit-the $ left over after all expenses are paid  May use profits to increase worker salaries or hire new workers  May invest in new equipment or supplies  May simply keep it for themselves

Factors Affecting Supply 1)Changes in the cost of raw materials  As prices for raw materials increases, the amount supplied will decrease  As the prices of raw materials drop, more will be supplied, probably at the same price

2)Changes in taxes  An increase in taxes will decrease the supply as it will increase the production cost of that item  A decrease in taxes in taxes will increase the supply Factors Affecting Supply

3)Productivity  The more efficient the production process is, the more that will be supplied  If production costs increase, then less will be supplied Factors Affecting Supply

4)Changes in technology -the methods or processes used to make goods and services  Technology can speed up the production process increasing the supply  Can also cut production costs which also increase supply  EX: Scanners at store, quicker check outs plus they can track inventory more accurately Factors Affecting Supply

5)Changes in government policies  Stricter government regulations increase production costs and lower supply  Looser government regulations decrease production costs and increase supply  Laws that increase wages also increase production costs and lead to a decrease in supply or to a workers being laid off Factors Affecting Supply

6)Changes in government subsidies -a payment to an individual or group for certain actions  Ex: Government pays farmers $2 for every bushel of corn they produce, this lowers production costs, encourages farmers to stay in the market, and also encourages new farmers to enter the market, thus increasing the supply  If subsidies are repealed, production costs go up and supply goes down  Government may also pay producers not to produce a product, thus lowering the supply Factors Affecting Supply

Supply Elasticity Supply Elasticity-The measure of how the quantity supplied of a good or service changes in response to changes in price  Big changes in supply are said to have elastic supply  If changes in price have little affect on supply, supply is inelastic  All depends on how quickly a producer can adjust their production process  Ex: Oil production is inelastic because it can’t be changed quickly to adjust to the market (they can’t find a new site, dig a new well, or build a new refinery)  Ex: Candy is elastic since they production process can quickly be changed to meet an increase in demand (put on another shift, hire more workers, start a second production line)

Supply and Demand at Work

Surplus Surplus-The amount by which quantity supplied is higher than the quantity demanded  Means that the price is too high  People are unwilling or unable to pay in enough numbers to make producers happy  Sellers must lower their price or find incentives to increase sales

Shortage Shortage-the amount by which the quantity demanded is higher than the quantity supplied  The price is too low  Price must rise to maximize profit

Equilibrium Price Equilibrium Price-When the quantity demanded and the quantity supplied are equal  This is where maximum profits are found  Will stay there until some factor changes

Price Controls Price Controls-When the government sets the price of a product to ensure a fair price (a price that does not favor producers or consumers)  May be a price ceiling-a max that producers may charge. EX: A landlord may charge only up to a certain price for rent  May set a price floor-a minimum price that can be charged. EX: minimum wage for workers

Advantages of Prices as a way to answer the basic economic questions 1)Prices are neutral  Favor neither the producer or consumer  Competition forces both sides to compromise on a fair market value 2)Prices are flexible  Allows us to react quickly to unforeseen events  Can quickly get back to normal after unexpected price “shocks”

Advantages of Prices as a way to answer the basic economic questions 3)Prices are familiar  We use them everyday, we understand them  We can compare unrelated goods 4)Prices give us freedom of choice  Allows producers to make a wide range of products at various prices  Gives all opportunities to get involved in the economy