Supply & Demand: Market Competition
Demand: the desire, ability, and willingness to buy a product
Demand Schedule iTunes Downloads PriceQuantity Demanded $5 $
Law of Demand The quantity demanded of a good or service varies inversely with its price. P QD P QD
Think of your favorite food…
Law of diminishing marginal utility
Change in quantity demanded v. change in demand
Change in quantity demanded
What causes a change in quantity demanded? PRICE
Change in Demand People/consumers are now willing to buy different amounts of a product at the same price.
What makes this happen? Consumer Income Consumer taste Price of related goods Substitute goods Complementary goods Expectations Number of consumers
1) Consumer Income When your income increases you can afford to buy more goods at the same price. When your income decreases you can afford to buy less at the same price.
2) Consumer Tastes Marketing Popularity Fashion trends News reports Introduction of new products Changes in season
3) Substitute Goods A change in the price of a related product can cause a change in demand Butter/Margarine example Seinfeld Substitute Goods Seinfeld Substitute Goods netflix
4) Complementary Goods If the quantity demanded for one good increases, then the demand will increase for complementary goods (and vice versa)
5) Change in expectations Expectations in technological advancements Expectation of shortages
6) Number of Consumers An increase or decrease in the number of consumers of a given good changes demand
Analyze the relationship b/w price and quantity demanded Study the two graphs attached. What information can we gain from the graphs? What trends do you notice? What do we know about the relationship between price and quantity demanded? Do you notice any discrepancies between the Law of Demand and the information about US gas consumption and price? What are they? What do you think might explain this inconsistency?
Elasticity The extent to which a change in price causes a change in the quantity demanded. In other words…if the price of a good increases, how much will the quantity demanded decrease?
Elastic Demand A change in price creates a generally larger change in quantity demanded Inelastic Demand A change in price does not create substantial change in quantity demanded
Elastic or Inelastic?
How did you decide? Can the purchase be delayed? Are there adequate substitutes available? Does the purchase use a large portion of income?
The other half of the equation…Supply.
Supply: the amount of a product that would be offered for sale at all possible prices. The Law of Supply The principle that suppliers will normally offer more for sale at high prices and less at low prices PQS PQS
Change in quantity supplied vs. change in supply
Change in Quantity Supplied A change in the amount offered for sale in response to a change in price
Change in Supply A situation where suppliers offer different amounts of products for sale at all possible prices in the market
What makes this happen? Cost of Inputs Productivity Technology Taxes and Subsidies Expectations Government regulations Number of sellers
Cost of Inputs Labor, packaging, shipping, energy costs, etc…
Productivity Unmotivated, untrained, unhappy employees decreases productivity and vice versa Google Productivity
Technology Introduction of a new machine, chemical, or industrial process.
Taxes and Subsidies Taxes increase cost of production Subsidies decrease cost of production
Expectations Expectations about the future price of a product can change supply…if sellers think that the price of their product will go up, they will withhold some of the supply
Government Regulations Increased government regulations restrict supply Relaxed regulations increase supply
Number of Sellers As more businesses and firms enter the economy the number of sellers increases as does supply
Supply Elasticity Measures the way in which quantity supplied responds to price Do these goods have elastic or inelastic supply?