1. Supply and Demand

2. Economic definitions for DEMAND
Demand: the total amount consumers are willing and able to buy at all prices.

3. Demand curve: the graphical representation of what consumers are willing and able to buy.

6. Law of Demand: As price increases/decreases, quantity demanded decreases/increases.
P Q P Q

7. Hunter’s Clothing Store is trying to set a price for a new pair of jeans. How do we determine the “best” price where the customers and Hunter will be happy?
Selling Price
Number Demanded
$10.00 60
$20.00 50
$30.00 40
$40.00 30
$50.00 20

8. Factors that cause demand to change or shift
Tastes and fads
Income
Number of buyers
Future price expectations
Price and availability of:
Substitutes
compliments

9. IRDL
“IRDL” will help you!
INCREASE = RIGHT
DECREASE = LEFT

10. Inelastic Demand: Price still moves up and down but Demand stays the same

12. Economic definition for SUPPLY
Supply: the total amount of a good or service producers are able to make at all prices.

13. Supply curve: the graphical representation of a good or service producers are able to make at all prices.

15. Law of Supply: as price increases/decreases, quantity supplied increases/decreases
P Q P Q

16. Hunter’s Clothing Store is trying to set a price for a new pair of jeans. How do we determine the “best” price where the customers and Hunter will be happy?
Selling Price
Number Supplied
$10.00 20
$20.00 30
$30.00 40
$40.00 50
$50.00 60

17. Factors that cause a change in supply:
Price and availability of land, labor or capital
Technology
Number of other sellers
Price of other goods I could produce
Tax policy

18. Equilibrium Point: the point at which the quantity & the price are equal

19. Economic Equilibrium
Equilibrium is the market clearing price and involves the most efficient choice
Producers and consumers make the most of their limited resources at the least cost
Therefore, producers and consumers act in their own economic self-interest when moving towards equilibrium
At this point the number demanded equals the number supplied

20. At what price should Hunter’s sell their jeans?
$60
$50
$40
Price
$30
$20
$10
100
200
300
400
500
Units
supply
equilibrium
demand

21. Shortage and Surplus
Shortage occurs when a good or service is priced below the market clearing price
Supply < Demand
Surplus occurs when a good or service is priced above the market clearing price
Supply > Demand

22. Shortage and Surplus Both surplus and shortage are inefficient
Both involve missed profit

23. P2
Surplus
Shortage P3

24. Not all markets are ones in which price is allowed to move freely
Not all markets are ones in which price is allowed to move freely. Governments may decide to set prices for various reasons. These government set prices may be different than the market clearing price.

25. Price Ceiling Legally established maximum price.
Gov’t fears prices might be higher than they want it to be
Example: Rent Control
Problems – creates a shortage and encourages an illegal market

26. Price Floor Legally established minimum price
Gov’t fears price will be lower than they want it to be
Creates a surplus
Example: minimum wage (my hire worker for less hours)

27. Elasticity of Demand
Way of measuring how much quantity demanded will change in response to a change in price.
Inelastic Demand refers to a relatively small response of quantity demanded to change in price
Elastic demand – a large response