1. Demand & Supply Unit 2 LEQ #1 & #2

2. Demand the amount of a good or service that consumers are able and willing to buy at various possible prices.

3. Law of Demand
The factors that explain this inverse relation between price and quantity demanded are:
Real Income Effect
Substitute Goods
Marginal Utility
Diminishing Marginal Utility

4. Real Income Effect- individuals cannot keep buying the same quantity of a product if its price rises while their income stays the same Substitute Goods- A product that satisfies the same basic want as another product. Substitute goods may be used in place of one another. Marginal Utility -the extra satisfaction or pleasure achieved from the increase of one additional unit of a good or service. Diminishing Marginal Utility-the additional satisfaction a consumer gets from purchasing one more unit of a product will lessen with each additional unit purchased

5. Demand Schedule

6. Demand Curve

7. Quantity Demand As price goes up quantity demanded goes down.
As price goes down, quantity demanded goes up.
The quantity demanded and price move in opposite directions. (Inverse)

8. What Can Cause Demand to Change?
Demand Shifters/Determinants
Factors other than price can shift demand.
Changes in income. Normal & Inferior goods
Changes in the number of consumers.
Changes in consumer tastes and preferences.
Changes in consumer expectations.
Changes in the price of substitute goods.
Changes in price of complementary goods.

9. Demand Curve with Shifters Decrease

10. Demand Curve with Shifters-Increase

11. Elasticity of Demand- A measure of consumer’s sensitivity to a change in price. Inelastic- a product’s price change has little impact on the quantity demanded by consumers.

12. Factors that influence Elasticity of Demand
Availability of Substitutes.
Price Relative to Income.
Necessities versus luxuries.
Time needed to adjust to a price change

14. Supply
The amount of good or service that producers are able and willing to supply at various prices.

15. Price and quantity supplied move in the same direction
Law of Supply
As the price rises for a good, the quantity supplied generally rises.
As the price falls, the quantity supplied also falls.
Price and quantity supplied move in the same direction

16. Supply Schedule

17. Supply Curve

18. What Can Cause Supply to Change?
Supply Shifters/Determinants
Changes in the cost of inputs
Changes in the number of producers.
Changes in conditions due to natural disasters or international events.
Changes in technology.
Changes in producer expectations.
Changes in government policy.
Taxes (decrease) Subsidies (increase)

19. Supply Curve with Shifters-Increase

20. Supply Curve with Shifters-Decrease

21. Elasticity of Supply
Supply Elasticity—is a measure of the way in which the quantity supplied responds to a change in price
Increase in price leads to large increase in output=elastic supply
Increase in price causes a smaller change in output supply is inelastic

22. Elasticity of Supply Factors that influence elasticity of supply
Time—longer it takes to make changes to production makes supply inelastic
EXAMPLE: Candy production easy to change just resources land, labor, or capital which means its elastic supply, but it takes longer for a power plant to add recourses needed to expand because of the amount of land, labor, capital it will take

23. Law of Diminishing Returns
As more units of a factor of production (such as labor) are added to other factors of production (such as equipment), after some point total output continues to increase but at a diminishing rate.
EXAMPLE: Workers with nothing to do

24. What Happens When Demand Meets Supply?
Equilibrium Price This is the price at which the amount producers are willing to supply is equal to the amount consumers are willing to buy.

25. Equilibrium Price

26. Prices Serve as Signals
What happens when the Price isn’t “Right?”
When the price is too low:
Shortages- quantity demanded is greater than the quantity supplied.
When the price is too high:
Surpluses- quantity supplied is greater than quantity demanded.

27. Price controls should make you think…. Wonderworks in Orlando

28. Price Controls
Price Ceiling- a legal (gov’t set) maximum price that may be charged for a particular good or service. example: what landlords can charge for rent, the price of gasoline.
Effective price ceilings–and resulting shortages–often lead to nonmarket ways of distributing goods and services.
The government may resort to:
Rationing- or limiting, items that are in short supply.
Black Market- illegally high prices are charged for items in short supply.

29. Modeling a Price Ceiling
Shortage at Pc = Qd - Qs
If the Pc=$2, Qd =5.75 and Qs = 4 so there is a shortage of almost 2 tacos.
Is this so bad? Aren’t consumers helped by this lower price? Yes, if you are among the lucky 4 who get tacos!

30. Price Controls-Continued
Price Floor- government set minimum price that can be charged for goods and services.
Price floors prevent prices from dropping too low. Example- minimum wage, supporting agricultural prices.

31. Modeling a Price Floor . Surplus at Pf
Price floors lead to excess supply; the quantity supplied is greater than quantity demanded.