Supply and Demand Chapter 5

You’re Deman(d), David Cook! How does winning American Idol effect supply and demand? Ticket prices, appearances, t-shirts, etc.

How Do Demand and Price Interact? Would you buy it for: –399.99? –299.99? –199.99? What are we WILLING and ABLE to buy? –Buying one Nintendo Wii at is your quantity demanded »You were WILLING and ABLE to buy it at as opposed to (Perhaps you were willing but not able)

What About Competition? What if a different store sells the Wii for ? Selling 10 units at = quantity demanded What will happen to the store that sold one unit for ? –Demand: »What happens to price after many units have been sold?

The Usage of a Demand Schedule Demand Schedule: Visual of what one person will buy at various prices (ceteris paribus) Demand Curve: Shows the relationship between price and the quantity buyers are WILLING and ABLE to buy –i.e. the cheaper a something is, the more consumers are going to buy of it

Why 

Market Demand M.D. - Medical Doctor Market Demand: sum of all individual quantities demanded in a market When refer to demand, generally it is market demand; how often do we care about ONE guy buying tacos?!?! »Usually there is a clear relationship between price and demand. »Exceptions to the rule?

The Law of Demand This is the strongest of economic relationships: Price goes up / Demand goes down Price goes down / Demand goes up INVERSE RELATIONSHIP Why do they move in opposite directions? –Well, I’m glad you asked…

The Reasons 1. The law of diminishing marginal utility »Consuming just one more… »The Dave Matthews Band 2. The income effect »People only have so much money 3. The substitution effect »People will substitute cheaper goods Only a change in price causes a change in quantity demanded –Ahhh…but what about the tipping point?

What Can Cause Demand To Change? 3 Scenarios For a Hot Dog Stand – –A Carnival –A Blizzard –Hot Dogs Cause Cancer

Graphing Changes in Demand When quantities demanded increase or decrease at EVERY PRICE… –Shift to the right… –Shift to the left… What does this show?? There are 6 DEMAND SHIFTERS…

Demand Shifters 1. Changes in income… –With more money, we buy more things »Conservative v. Liberal outlook 2. Changes in the number of consumers… –Summer resort towns »What other examples are there? 3. Changes in taste and preference… –We do not buy the same products year after year »Sushi

Demand Shifters 4. Changes in Consumer Expectations –Expectations of price changes »It’s going to go on sale next week… (NFM) 5. Changes in the Price of Substitutes –Substitute goods may cost less »DVD’s / Movie Tickets 6. Changes in the Price of Complimentary Goods –Consumed with other goods »Video game systems and games

How Do Supply and Price Interact The lower the price, the fewer goods the producer is willing to sell –Quantity Supplied: the amount of a good or service producers are willing and able to offer for sale at a given price Supply is usually expressed in a time period (such as weeks or months)

Supply Schedule As price increases, so does the amount of (x) someone is willing to sell From a supply schedule, you can create a supply curve »Supply curves are the inverse of demand curves Market Supply:

The Law of Supply Direct Relationship Why do they move in the same direction? 1. Production decisions by existing producers »“strike while the iron is hot” (revenue) 2. Market entries and exits »Producers will react in predictable ways »Changes in quantity supplied

What Can Cause Supply to Change? Changes in the cost of inputs Cost of factors of production Profit is the key to success (duh) Changes in the number of producers Producers enter a market when they think there is a profit to be made »Personal music devices Changes in conditions due to natural disasters or international events »A cold snap in Florida »Civil War in African countries

Supply Shifters Con’t Changes in Technology This would probably cause a reduction in production cost »Robots building cars Changes in Producer Expectations Make decisions based on the rise and fall of price of certain goods »Farm prices Changes in Government Policy Subsidy / Excise Tax