2. Make sure you know, understand, and use the terminology. Learn to speak the language of Economics.

3. Individual Markets: Demand and Supply Examining the interaction between buyers and sellers Learning Objectives Students should be able to thoroughly and completely explain: 1.The law of demand - including the detailed aspects. 2.The law of supply – including the detailed aspects. 3.The market clearing equilibrium. 4.Price floors and price ceilings.

4. Market An institution or mechanism that brings together buyers (demanders) and sellers (suppliers) of particular goods, services, or resources.

5. Markets Focus on markets consisting of large numbers of independently acting buyers and sellers of standardized products. (The purely competitive market) Examples of different markets Highly competitive But beware: Markets do not respect the sustainable yield thresholds of natural systems!

6. Demand Definition: A schedule or curve that shows the various amounts of a product that consumers are willing and able to purchase at each of a series of possible prices during a specified period of time.

7. Law of Demand Inverse relationship between price and quantity demanded. All else equal, as price falls, the quantity demanded rises, and as price rises the quantity demanded falls. What factors support this inverse relationship between price and quantity demanded?

8. The 3 Factors Factors supporting the inverse relationship between price and quantity demanded 1.Diminishing Marginal Utility 2.Income Effect 3.Substitution Effect

9. Diminishing Marginal Utility 1.Consumption of successive units of a product yield less and less marginal utility. 2.People will buy more only if the price is reduced. Factors supporting the inverse relationship between price and quantity demanded

10. Diminishing Marginal Utility Factors supporting the inverse relationship between price and quantity demanded Income Effect – 1.a change in the quantity demanded that results from 2.the change in real income caused by 3.a change in the products price.

11. Diminishing Marginal Utility Factors supporting the inverse relationship between price and quantity demanded Income Effect Substitution Effect – at a lower price, buyers have the incentive to substitute what is less expensive for similar products that are relatively more expensive. Price of substitute (chicken) goes down, what happens to the demand for the other product (steak)?

12. Diminishing Marginal Utility Income Effect Substitution Effect Factors supporting the inverse relationship between price and quantity demanded These 3 factors support the law of demand

13. Converting Individual Demand to Market Demand Add the quantities demanded by all individual consumers at each of the various possible prices, to convert from individual demand to market demand.

14. Graphing Demand P Q o $5 4 3 2 1 PQDQD $5 4 3 2 1 10 20 35 55 80 Price of Corn Quantity of Corn CORN Plot the Points 10 20 30 40 50 60 70 80

15. 55 P Q o $5 4 3 2 1 PQDQD $5 4 3 2 1 10 20 35 55 80 Price of Corn Quantity of Corn CORN Plot the Points 10 20 30 40 50 60 70 80 Graphing Demand

16. 35 P Q o $5 4 3 2 1 PQDQD $5 4 3 2 1 10 20 35 55 80 Price of Corn Quantity of Corn CORN Plot the Points 10 20 30 40 50 60 70 80 Graphing Demand

17. P Q o $5 4 3 2 1 PQDQD $5 4 3 2 1 10 20 35 55 80 Price of Corn Quantity of Corn CORN Plot the Points 10 20 30 40 50 60 70 80 Graphing Demand

18. P Q o $5 4 3 2 1 PQDQD $5 4 3 2 1 10 20 35 55 80 Price of Corn Quantity of Corn CORN Plot the Points 10 20 30 40 50 60 70 80 Graphing Demand

19. P Q o $5 4 3 2 1 PQDQD $5 4 3 2 1 10 20 35 55 80 D Price of Corn Quantity of Corn CORN Connect the Points 10 20 30 40 50 60 70 80 Graphing Demand

20. P Q o $5 4 3 2 1 PQDQD $5 4 3 2 1 10 20 35 55 80 D Price of Corn Quantity of Corn CORN 10 20 30 40 50 60 70 80 What if Demand Increases? Graphing Demand

21. P Q o $5 4 3 2 1 PQDQD $5 4 3 2 1 D Price of Corn Quantity of Corn CORN 10 20 30 40 50 60 70 80 D’ Increase in Demand Increase in Quantity Demanded Caused by a price change. 10 20 35 55 80 30 40 60 80 + Graphing Demand

22. P Q o $5 4 3 2 1 PQDQD $5 4 3 2 1 10 20 35 55 80 D Price of Corn Quantity of Corn CORN 10 20 30 40 50 60 70 80 What if Demand Decreases? Graphing Demand

23. P Q o $5 4 3 2 1 PQDQD $5 4 3 2 1 10 20 35 55 80 D Price of Corn Quantity of Corn CORN 10 20 30 40 50 60 70 80 -- 10 20 40 60 D’ Decrease in Demand Decrease in Quantity Demanded caused by a price change Graphing Demand

24. 5 Determinants of Demand Demand curve shifters 1.Tastes – consumer tastes – A favorable change in consumer tastes (preferences) for a product means more of it will be demanded at each price. – Demand increases – Demand curve shifts to the right. 2. Number of Buyers – An increase in the number of buyers in a market increases demand. Improved communications systems expand markets Reduction of tariffs by foreigners expand our markets 3. Income: – income up and demand up – normal (Superior) good – Income up and demand down - Inferior Goods ( Rahman Noodles)

25. Determinants of Demand 4 Prices of Related Goods What kind of relationships are we talking about? – Substitutes (beef and chicken) When two products are substitutes, the price of one and the demand for the other move in the same direction – Compliments (flashlights and batteries) When two goods are compliments, the price of one good and the demand for the other good move in opposite directions. Tuition and textbooks – Unrelated Goods – price of one has no effect on demand for the other.

26. Determinants of Demand 5 Expectations – Changes in consumer expectations may shift demand. – Expectation of higher future prices may cause consumers to buy now to avoid expected higher prices. – Expectations about future product availability may affect current demand. – Expectation of a future shortage of a product may cause consumers to buy more right now.

27. Supply the provision of goods and services put on your business owner hat Definition: A schedule or curve showing the amounts of a product that producers are willing and able to make available for sale at each of a series of possible prices during a specific period of time.

28. Law of Supply As Price Rises… …Quantity Supplied Rises As Price Falls… …Quantity Supplied Falls A direct relationship exists between price and quantity supplied

29. Converting Individual Supply to Market Supply Horizontally adding the supply curves of the individual producers results in definition of market supply.

30. 5 P Q o $5 4 3 2 1 10 20 30 40 50 60 70 80 $5 4 3 2 1 60 50 35 20 5 PQSQS Price of Corn Quantity of Corn CORN Plot the Points Graphing Supply

31. P Q o $5 4 3 2 1 10 20 30 40 50 60 70 80 $5 4 3 2 1 60 50 35 20 5 PQSQS Price of Corn Quantity of Corn CORN Plot the Points Graphing Supply

32. 35 P Q o $5 4 3 2 1 10 20 30 40 50 60 70 80 $5 4 3 2 1 60 50 35 20 5 PQSQS Price of Corn Quantity of Corn CORN Plot the Points Graphing Supply

33. P Q o $5 4 3 2 1 10 20 30 40 50 60 70 80 $5 4 3 2 1 60 50 35 20 5 PQSQS Price of Corn Quantity of Corn CORN Plot the Points Graphing Supply

34. P Q o $5 4 3 2 1 10 20 30 40 50 60 70 80 $5 4 3 2 1 60 50 35 20 5 PQSQS Price of Corn Quantity of Corn CORN Plot the Points Graphing Supply

35. S P Q o $5 4 3 2 1 10 20 30 40 50 60 70 80 $5 4 3 2 1 60 50 35 20 5 PQSQS Price of Corn Quantity of Corn CORN Connect the Points Graphing Supply

36. S P Q o $5 4 3 2 1 10 20 30 40 50 60 70 80 $5 4 3 2 1 60 50 35 20 5 PQSQS Price of Corn Quantity of Corn CORN What if Supply Increases? Graphing Supply

37. S P Q o $5 4 3 2 1 10 20 30 40 50 60 70 80 Price of Corn Quantity of Corn $5 4 3 2 1 60 50 35 20 5 PQSQS CORN 80 70 60 45 30 S’ Increase in quantity supplied, caused by an increase in the price of the product Graphing Supply Increase in supply

38. S P Q o $5 4 3 2 1 10 20 30 40 50 60 70 80 $5 4 3 2 1 60 50 35 20 5 PQSQS Price of Corn Quantity of Corn CORN What if Supply Decreases? Graphing Supply

39. S P Q o $5 4 3 2 1 10 20 30 40 50 60 70 80 $5 4 3 2 1 60 50 35 20 5 PQSQS Price of Corn Quantity of Corn CORN S’ 45 30 20 0 -- Decrease in Supply Decrease in Quantity Supplied, caused by a fall In the price of the product. Graphing Supply

40. 6 Determinants of Supply Assume revenue is constant 1.Resource Prices – Higher resource prices, higher costs of production, lower profits, less incentive to produce output at each product price. 2. Technology – Improvements in technology (techniques of production) enable firms to produce units of output with fewer resources, lower production costs, higher output. 3.Taxes & Subsidies (raise or lower producer’s cost of production) – Taxes are costs, higher production costs, lower output. – Subsidies are “taxes in reverse”, (government gives money to firm) lower production costs, higher output.

41. Determinants of Supply 4 Prices of Other Goods Substitution in production – Assume your company produces Soccer balls and volleyballs – Higher price for volleyballs, incentive to switch production from soccer balls to volleyballs to increase profits. 5 Price Expectations (future product price) – Farmers expecting higher wheat prices in the future may withhold some of today’s wheat harvest from the market causing a decrease in current supply. – Manufacturers expecting higher prices in the future may be inclined to add an extra shift or add plant capacity to increase supply so that they can increase revenue. 6 Number of Sellers – More sellers leads to larger supply

42. 7 S P Q o $5 4 3 2 1 2 4 6 8 10 12 14 16 PQDQD $5 4 3 2 1 2,000 4,000 7,000 11,000 16,000 $5 4 3 2 1 12,000 10,000 7,000 4,000 1,000 D PQSQS Price of Corn Quantity of Corn CORN MARKET CORN MARKET Market Clearing Equilibrium What does this mean? Market Equilibrium

43. 7 S P Q o $5 4 3 2 1 2 4 6 8 10 12 14 16 PQDQD $5 4 3 2 1 2,000 4,000 7,000 11,000 16,000 $5 4 3 2 1 12,000 10,000 7,000 4,000 1,000 D PQSQS Price of Corn Quantity of Corn CORN MARKET CORN MARKET Surplus At a $4 price more is being supplied than demanded Market Equilibrium

44. 11 7 S P Q o $5 4 3 2 1 2 4 6 8 10 12 14 16 PQDQD $5 4 3 2 1 2,000 4,000 7,000 11,000 16,000 $5 4 3 2 1 12,000 10,000 7,000 4,000 1,000 D PQSQS Price of Corn Quantity of Corn CORN MARKET CORN MARKET At a $2 price more is being demanded than supplied Shortage Market Equilibrium

45. 11 7 S P Q o $5 4 3 2 1 2 4 6 8 10 12 14 16 PQDQD $5 4 3 2 1 2,000 4,000 7,000 11,000 16,000 $5 4 3 2 1 12,000 10,000 7,000 4,000 1,000 D PQSQS Price of Corn Quantity of Corn CORN MARKET CORN MARKET Shortage Market Equilibrium Surplus

46. Market Equilibrium Equilibrium Price & Quantity Rationing Function of Prices – the competitive forces of demand and supply – What does this mean? Note: Make sure you know the difference between: Changes in Demand Changes in Quantity Demanded Changes in Supply Changes in Quantity Supplied

47. Government Set Prices make sure you know what these things mean! Price Ceilings – Government setting the maximum legal price a seller can charge, below the equilibrium price level. Price ceiling on gas! – Price ceilings create shortages – Black Markets and Rent Controls Price Floors – Government setting the minimum price that can be charged, above the equilibrium price level. Farm products! – Price floors create surpluses

48. 11 7 S P Q o $5 4 3 2 1 2 4 6 8 10 12 14 16 PQDQD $5 4 3 2 1 2,000 4,000 7,000 11,000 16,000 $5 4 3 2 1 12,000 10,000 7,000 4,000 1,000 D PQSQS Price of Corn Quantity of Corn CORN MARKET CORN MARKET Price ceiling at $2 price more is being demanded than supplied Shortage Government set prices Graphics

49. 7 S P Q o $5 4 3 2 1 2 4 6 8 10 12 14 16 PQDQD $5 4 3 2 1 2,000 4,000 7,000 11,000 16,000 $5 4 3 2 1 12,000 10,000 7,000 4,000 1,000 D PQSQS Price of Corn Quantity of Corn CORN MARKET CORN MARKET Surplus Price floor at a $4 price, more is being supplied than demanded Government set prices graphics

50. Check your understanding of demand and supply 1.Please thoroughly and completely explain the law demand 2.Please thoroughly and completely explain the law of supply

51. Demand and Supply issues – Food Security Food Security - The ability of a country to adequately feed it’s people without importing food. Demand side issues – Population growth (79 million per year global growth) More buyers (not evenly distributed) – Increased consumption of grain-based animal protein. Changing tastes or preferences – (we eat more meat) – Massive use of grain to fuel cars – (ethanol). Prices of related goods (corn prices tied to oil prices)

52. Demand and Supply issues – Food Security Supply side issues – Environmental trends: Soil erosion, aquifer depletion, Crop-shrinking heat waves, Melting ice sheets and rising sea levels Melting of mountain glaciers that feed rivers and irrigation systems Resource availability issues – Resource trends: Loss of cropland to non-farm uses Diversion of irrigation water to cities The coming reduction in oil supplies

53. Use the following graphs to exercise your understanding of Demand and Supply

54. Lettuce Supply & Demand Q o D1D1 Quantity Price (per pound) S1S1 S2S2 P Q1Q1 Q2Q2 P1P1 P2P2 Crop Freezing Damage…

55. American Flags Q o D1D1 Quantity Price (per flag) S1S1 P Q1Q1 Q2Q2 P1P1 P2P2 D2D2 Patriotism Surge…

56. Pink Salmon Q o D2D2 Quantity Price (per fish) P Q1Q1 Q2Q2 P1P1 P2P2 D1D1 Increase in Supply& Decrease in Demand S2S2 S1S1

57. Gasoline Q o D1D1 Quantity Price (per gallon) P Q1Q1 Q2Q2 P2P2 P1P1 D2D2 Decrease in Supply& Increase in Demand S1S1 S2S2

58. Key Terms market demand demand schedule law of demand diminishing marginal utility income effect substitution effect demand curve determinants of demand normal goods inferior goods substitute good complementary good change in demand change in quantity demanded supply supply schedule law of supply supply curve determinants of supply change in supply change in quantity supplied surplus shortage equilibrium price equilibrium quantity rationing function of prices price ceiling and floor