1. Supply and Demand and Markets
Pages

2. What is a Market?
Any network that brings buyers and sellers into contact with one another so they can exchange goods and services.
It is through markets that our economy answers the three major questions.

3. What is a Market?
Some are physical (face-to-face contact)

4. What is a Market?
but they do not have to be… (face-to-face contact unnecessary)
This is how we might shop…

5. What is a Market?
Or places like the Winnipeg Grain Exchange where just the knowledge of the kind and quantity of something is the only thing known.
A market exists wherever the forces of supply and demand meet to effect and exchange

6. What is a Market?
In any given market, the total number of sellers constitute the supply and the total number of buyers constitute the demand.
Supply and demand interact to determine the price and quantity of goods and services supplied and demanded.

7. Demand
The QUANTITIES of a good or service that buyers are willing and able to buy at various prices in a particular period of time.
The amount of a particular thing that you will buy at different prices is a “demand schedule” see page 114.

8. Demand
Another way that you can display the information in a demand schedule is in a demand curve.
The inverse relationship between price and quantity demanded holds true for nearly all goods and services.
As price decreases demand increases* = the “law of downward-sloping demand”
*and there are no other changes

9. Graphing Demand Curves
Row
Price (in dollars)
Quantity A
100 1 B 80 3 C 70 11 D 50 20 E 30 36 F 47 G 10 60

10. Demand and Utility
The “law of diminishing marginal utility” states that each additional unit of a good consumed at any given time yields less satisfaction than the one previously consumed.

11. Demand and Utility
Question: How might the law of diminishing marginal utility help to explain why the demand curve slopes down and to the right?

12. Demand and Utility
Answer: Since the marginal utility of a good diminishes as more is consumed, people would only be willing to buy more if the prices were reduced.

13. Elasticity of Demand
The responsiveness of the quantity demanded to a change in price.
Elastic demand = quantity demanded changes as price changes.
Inelastic demand = when a price change has no effect on the demand of a good or service.

14. Elasticity of Demand
Unitary elasticity of demand = a change in price brings about an exactly proportionate change in quantity demanded.

15. Factors Determining Elasticity
Essential items – tend to be inelastic because consumers cannot readily avoid using (buying) them.
Ex. Electricity
Products that have a lot of substitutes – tend to have elastic demand because consumers can avoid buying them
Ex. McDonald’s hamburgers.

16. Factors Determining Elasticity
Item price in a budget – small priced items tend to be inelastic; larger priced items tend to be elastic.
Ex. A 5% increase in the price of pepper vs. a 5% increase in the price of a car.

17. Factors Determining Elasticity
Time – items can become more elastic over time.
Ex. Demand for gasoline is inelastic over a short period of time (essential with few substitutes), but over time people can make changes (fuel efficient vehicle) which makes the demand more elastic.

18. Factors Determining Elasticity
Look at our chart again. Should we make any changes?

19. Supply
The quantities of a good or service that sellers are willing and able to sell at various prices in a particular period of time.
The amount of a particular thing that producers are willing and able to supply at different prices is a “supply schedule”

20. Supply
Another way that you can display the information in a supply schedule is in a supply curve.
A supply curve slopes up and to the right, illustrating that as price increases supply increases (a direct relationship).

21. Supply
Question: Why might this “direct relationship” between price and supply exist?

22. Supply
Answer: As prices of X increases more and more suppliers see the chance to make profits and the switch to making (or making more of) X.
Ex. One clothing company makes “skinny jeans” and they catch on. Next thing you know you can buy them everywhere.

23. Buyers and Sellers
Buyers and sellers look at high and low prices differently. How is this so?

24. Buyers and Sellers
Buyers are discouraged by high prices (buy less or look for substitutes), while sellers are encouraged by high prices (seek to produce more and sell more).
Lower prices have the opposite effect.

25. Fill in the blanks
As price falls ________ are demanded and _________ supplied.
As price rises _________ are demanded and _________ supplied.

26. Fill in the blanks
As price falls more are demanded and fewer are supplied
As price rises fewer are demanded and more are supplied.

27. Questions
Do questions 2 & 3 on pages 134 & 135.

28. Equilibrium
The price at which the quantity supplied and the quantity demanded are equal.
See page 123
When the quantity of melons coming into the market (by suppliers) is equal to the quantity of melons taken off the market (by buyers).

29. Equilibrium When there is no shortage or surplus.
Equilibrium price is the market clearing price.
Look at how figure 6.12 illustrates this as a schedule and how figure 6.14 illustrates this as a graph.

30. Surplus and Shortage
Surplus when more is supplied than what is demanded.
Shortage when more is demanded than is supplied.
Figure 6.19 illustrates this (70 & 40 cents)

31. Shifts in Demand and Supply

32. Shifts in Demand
Occur when there is a change in the quantity of a product demanded for reasons other than a price change.
The demand curve shifts to the right with an increase in demand
The demand curve shifts to the left with a decrease in demand

33. Causes of Shifts in Demand
Change in market size
Change in income
Change in cost of substitutes
Change in tastes
Change in price of “complementary products” can cause a shift in demand
Ex. Price of gas and demand for large vehicles

34. Shifts in Supply Decreases in supply can be caused by:
Adverse whether conditions (ex. Crop failure)
Increase in the prices of resources used in production (ex. Machinery, fertilizers)
Increases in supply can be caused by:
Favorable weather conditions.
Decrease in the prices of resources.
Improvements in technology used in production.

35. Elasticity of Supply
The responsiveness to producers to price changes in their products.
i.e. adjustments to supply that producers make in response to price change.

36. Elasticity of Supply
Goods that can be stored easily and inexpensively, and for a long period of time will be more elastic.
Goods that spoil easily and are difficult to store will be more inelastic
Time is a big determining factor

37. Tomato Example
If the price of tomatoes at the farmers market decreased suddenly, there is not much producers could do about it.
Over time though, they could readjust the amount of land devoted to growing tomatoes.