Demand and Supply

What is a Market? –The process of freely exchanging goods and services between buyers and sellers. Where does the market exist? –Local Market –National Market –International Market

Demand and Supply Voluntary Exchange –A transaction in which a buyer and a seller exercise their economic freedom by working out their own terms of exchange.

Demand and Supply Demand –The amount of a good or service that consumers are able and willing to buy at various prices during a specified time period. Quantity Demanded –The amount of a good or service that a consumer is willing and able to purchase at a specific price.

Demand and Supply Law of Demand –Economic rule stating that the quantity demanded and price move in opposite directions. Price Quantity demanded

Demand and Supply Real Income Effect –Economic rule stating that individuals cannot keep buying the same quantity of a product if its price rises while their income stays the same.

Demand and Supply Substitution Effect –Economic rule stating that if two items satisfy the same need and the price of one rises, people will buy the other.

Demand and Supply Utility –The ability of any good or service to satisfy consumer wants. Marginal Utility –An additional amount of satisfaction.

Demand and Supply Law of Diminishing Marginal Utility –Rule stating that the additional satisfaction a consumer gets from purchasing one more unit of a product will lessen with each additional unit purchased.

Law of Diminishing Marginal Utility Episodes of HouseSatisfaction

Law of Diminishing Marginal Utility Double Cheeseburgers w/ ketchup and pickle only Satisfaction

Demand and Supply Demand Schedule –Table showing quantities demanded at different possible prices. Demand Curve –Downward sloping line that shows in graph form the quantities demanded at each possible price.

Demand Schedule PriceQuantity Demanded $510 $420 $330 $240 $150

Demand Curve Price Quantity

Demand and Supply A change in quantity demanded is caused by a change in price and is shown as movement along the demand curve.

Demand Curve Price Quantity Change in quantity demanded

Demand and Supply A change in demand is caused by something other than price and is shown as a shift of the entire demand curve.

Demand Shift Price Quantity A Change in demand

Determinants of Demand Changes in Population Changes in Income Changes in Tastes and Preferences Substitutes Complementary Goods

Demand and Supply Complementary Good –A product often used with another product Camera and Memory Cards Peanut Butter and Jelly Golf Balls and Golf Clubs

Demand and Supply Elasticity –Consumers’ responsiveness to an increase or decrease in price of a product. Price elasticity of demand –Economic concept that deals with how much demand varies according to changes in price.

We can determine price elasticity of demand with the following formula: Price elasticity of demand = (Q2 – Q1) / [ (Q1 + Q2) / 2] (P2 – P1) / [ (P1 + P2 ) / 2] If the answer is less than one it is said to be inelastic, and if it is greater than one it is elastic. Demand and Supply

Examples: Insulin Q1 = 12 injections per week Q2 = 14 injections per week P1 = $20.00 per injection P2 = $10.00 per injection Orange Juice Q1 = 1 quart per week Q2 = 3 quarts per week P1 = $2.50 per quart P2 = $2.25 per quart Demand and Supply

Elastic Demand –Situation in which the rise or fall in a product’s price greatly affect the amount that people are willing to buy.

Elastic Demand

Demand and Supply Inelastic Demand –Situation in which a product’s price change has little impact on the quantity demanded by consumers.

Create a demand schedule and demand curve for the following data. The demand for corn: –Price range per bushel is $1 - $5 –Quantity demanded per bushel is 10, 20, 35, 55, 80

Quantity Demanded (bushels per week) Price (per bushel) PQdQd $ P Q D The Demand Curve LO1 The Demand Curve 3-29

Demand is a consumer based analogy of how market interactions take place. Supply, on the other hand, is a producer based analogy of market interacitons.

Demand and Supply Supply –The amount of a good or service that producers are able and willing to sell at various prices during a specified time period. Quantity Supplied –The amount of a good or service that a producer is willing and able to supply at a specific price.

Demand and Supply Law of Supply –Economic rule stating that price and quantity supplied move in the same direction. Price Quantity supplied

Demand and Supply Supply Schedule –Table showing quantities supplied at different possible prices. Supply Curve –Upward-sloping line that shows in graph form the quantities supplied at each possible price.

Supply Schedule PriceQuantity Supplied $110 $220 $330 $440 $550

Price Quantity Supply Curve

Demand and Supply A change in quantity supplied is caused by a change in price and is shown as movement along the supply curve.

Price Quantity Supply Curve

Demand and Supply A change in supply is caused by something other than price and is shown as a shift of the entire supply curve.

Price Quantity Supply Curve

Determinants of Supply Price of Inputs Number of Firms in the Industry Taxes Technology

Law of Diminishing Returns Economic rule that says as more units of a factor of production are added to other factors of production, after some point total output continues to increase but at a diminishing rate.

WorkersTotal output Change in Output

Demand and Supply In the real world, demand and supply operate together. As the price of a good goes down, the quantity demanded rises and the quantity supplied falls. As the price goes up, the quantity demanded falls and the quantity supplied rises.

Demand and Supply Equilibrium price –The price at which the amount producers are willing to supply is equal to the amount consumers are willing to buy.

Quantity DemandedPriceQuantity Supplied 10$550 20$440 30$330 40$220 50$110

Price Quantity

Price Quantity

Demand and Supply Shortage –Situation in which the quantity demanded is greater than the quantity supplied at the current price. Surplus –Situation in which the quantity supplied is greater than the quantity demanded at the current price.

Price Quantity Surplus Shortage

Demand and Supply Price ceiling –A legal maximum price that may be charged for a particular good or service.

Government Set Prices LO5 S P Q D P0P0 PCPC Q0Q0 Shortage QdQd QsQs ceiling $1,

Demand and Supply Price floor –A legal minimum price below which a good or service may not be sold.

Government Set Prices LO5 S P Q D P0P0 PfPf Q0Q0 Surplus QsQs QdQd floor 5.00 $

Demand and Supply Rationing –The distribution of goods and services based on something other than price. Black market –“underground” or illegal market in which goods are traded at prices above their legal maximum prices or in which illegal goods are sold.