1. Unit 2: Microeconomics
Supply and Demand

2. Demand
Why do consumers buy more of a good or service when the price goes down, but less of that product when the price goes up?

3. Economics Chapter 3
In this chapter we will learn about consumer demand for certain products and discuss the nature of demand and the law of demand.
We, as consumers have a great deal of power. What we want (or demand) influences what goods and services are available to us.

4. Demand vs. Quantity Demanded
Demand- the amount of a good or service that a consumer is willing and able to buy at various possible prices during a given time period.
Quantity Demanded- the amount of a good or service that a consumer is willing and able to buy at each given price during a given time period.

5. Demand Schedule for Stereos
Price per Car Stereo
$500
$400
$300
$200
$100
Quantity Demanded
500
1,000
1,500
2,500
5,000

6. Demand Curve
Price
500
400
300
200
100
1000
1500
2500
5000
Quantity Demanded D

7. You see, any point on the curve is the DEMAND for stereos.
But each point on the curve represents the QUANTITY DEMANDED for that particular price.
The law of demand – “an INCREASE in a good’s price causes a DECREASE in the quantity demanded, and a DECREASE in a goods price causes an INCREASE in the quantity demanded.

8. Things to consider when discussing a product’s demand
The Income Effect – Any increase or decrease in consumers’ PURCHASING POWER caused by a change in price.
For example, if a store lowers the price of its smartphones from $150 to $100, a consumer can buy more phones with the same amount of income. A person spending $300 can buy 3 phones at the new price of $100, but could have only purchased 2 phones at the earlier price of $150.
Of course, the two words “WILLING” and “ABLE” still apply to make the income effect work.

9. The Substitution Effect
The Substitution Effect – Consumers’ tendency to SUBSTITUTE a similar, lower-priced product for another product that is relatively MORE EXPENSIVE.
For example, when the price of steak INCREASES, many consumers reduce the quantity of beef demanded and buy more CHICKEN (a lower priced substitute.

10. Diminishing Marginal Utility
The marginal utility of each unit consumed diminishes with each unit.
Diminishing= LESSEN
Marginal= ADDITIONAL STEP (means a difference of 1)
Utility= USEFULNESS

11. Diminishing Marginal Utility
The ADDITIONAL USEFULNESS of each unit consumed LESSENS with each unit.
EX. 1st slice of pizza is well worth the $2 you paid.
2nd slice= $2
3rd slice=$1.50
4th slice=$.75
5th slice=$0

12. Diminishing Marginal Utility helps explain why demand for a product is not LIMITLESS.
At some point, consumers cannot use any more of a product. There is a limit to a product’s UTILITY to consumers and thus a limit to consumers’ DEMAND.

13. Up until now, we saw that the only thing that affected the quantity demanded for a product was PRICE.
But some factors can cause the entire demand for a product to change. This is called a SHIFT in demand.

14. CHANGES in Demand
INCREASE in Demand
DECREASE in Demand

15. What can cause a demand curve to shift to the right or left. Price. NO
What can cause a demand curve to shift to the right or left? Price? NO. A change in price just causes a change in the Quantity Demanded. The curve doesn’t move.
To make the curve move (change demand), other things must change:
Income of consumers
Number of consumers
Complementary goods’ price
Expectations of consumers
Substitute goods’ price
Tastes and preferences

16. Price Elasticity of Demand
Elastic demand exists when a SMALL change in a good’s price causes a major, OPPOSITE change in the QUANTITY DEMANDED.
Ex. Car stereos, movie tickets
Usually wants

17. Price Elasticity of Demand
Inelastic demand exists when a change in a good’s price has LITTLE IMPACT on the quantity demanded.
Ex. Soap, milk, medications
Usually needs

18. SUPPLY
The Law of Supply and changes in quantity supplied vs. changes in supply

19. Chapter 5 Supply
The actions of suppliers are based on one simple motivation: PROFIT
PROFIT = when revenues are greater than cost of production
Examples of cost of production include: wages, salaries, rent, bills, interest on loans, etc.

20. Like “demand” there are two important different definitions to understand:
Supply – The quantity of goods and services that producers are willing to offer at various possible prices during a given time period.
Quantity Supplied – The amount of a good or service that a producer is willing to sell at each particular price.

21. Supply Schedule Price per Car Stereo $500 $400 $300 $200 $100
Quantity Supplied
4000
3750
3500
2500

22. Supply Curve
Price
500
400
300
200
100
1000
2000
3000
4000
5000
Quantity Supplied

23. Law of Supply – producers supply more goods and services when they can sell them at higher prices and fewer goods and services when they can sell them at lower prices.

24. When the entire supply of a product increases or decreases, the supply has shifted.
Increase in Supply
Decrease in Supply

25. What would cause a product’s supply to shift? (Changes in…)
Resource Prices
Expectations of producers
Number of producers
Technology (new technology or back to Stone Age…)
Government actions (taxes, regulations, subsidies)
Other (related) goods prices

26. Price Elasticity of Supply
Elastic Supply exists when a SMALL change in price causes a MAJOR change in the quantity supplied.
Usually products with elastic supplies can be made QUICKLY, inexpensively, and using FEW resources.
An example would be T-shirts of a WINNING sports team.

27. Inelastic supply exists when a change in a good’s price has LITTLE IMPACT on the quantity supplied (usually because it will take too much time, money, and resources).
Relatively VERTICAL
What would cause a supply curve to be “perfectly inelastic?” THEY CAN”T INCREASE SUPPLY EX. GOLD
How would the curve look? COMPLETELY VERTICAL

28. Combining Supply and Demand

29. Two Powerful Laws Law of Demand: As Price goes up people want less
Explains wide variety: why people will sit in the upper deck of a stadium

30. Two Powerful Laws
Law of Supply: The higher the price of a good, the greater the quantity suppliers will produce
Explains why parking places at the beach are more expensive in the summer months, why people are paid overtime at a premium wage

31. Equilibrium The point where demand and supply curves intersect
This is where both producers and consumers are satisfied
Quantity demanded equals quantity supplied
Only happens at one point

32. Disequilibrium
If the price is anywhere but equilibrium, quantity supplied does not equal quantity demanded
Leads to excess supply or excess demand

33. Excess Demand
When the quantity demanded is greater than the quantity supplied
Price is below market equilibrium
Low price encourages buyers but not sellers
When there is excess demand suppliers will raise their price

34. Excess Supplied When quantity supplied exceeds quantity demanded
High price encourages sellers but not consumers
Price is above equilibrium
Suppliers will lower prices to sell excess supply

35. Effects of Excess
When the market is in disequilibrium and prices are able to change, the market will naturally correct itself
Suppliers may get tired of throwing away extra product if there is excess supply
Suppliers may raises prices to increase profit when there is excess demand

36. The Role of Prices In a Market Economy
Ch. 6 Section 3

37. Prices in the Free Market
Aid in moving the factors of production to producers
Aid in moving finished products to consumers

38. The Advantages of Prices
Price as an incentive
Buyers and Sellers look at prices to retrieve information on a product’s demand and supply
Law of supply and law of demand show prices as a signal that tell producers and consumers how to adjust

39. The Advantages of Prices
Prices as Signals
Think of prices as a traffic light . . .
Producers: if consumers buying at higher prices, producers produce more (GREEN LIGHT); low prices cause producers to produce less (RED LIGHT).
Consumers: At low prices, consumers buy more (GREEN LIGHT); at high prices, consumers think carefully before buying (RED LIGHT).

40. The Advantages of Prices
Flexibility
When shifts occur in the supply or demand curve that change equilibrium, price can easily change to solve the problem of excess supply or excess demand

41. The Advantages of Prices
Price System is “Free”
It does not cost the government anything to regulate prices, the market regulates the prices (unlike a command economy)

42. Government Intervention
What happens in markets when government gets involved?

43. Public Goods
Public Good: a shared good or service for which it would be inefficient or impractical
To make consumers pay individually and
To exclude nonpayers
I.E. Dams, Roads, Bridges, etc.

44. Price Ceilings A maximum price that can be charged for a good
Set by law on goods considered essential and might become to expensive
Rent control is the most famous example
Symbolized on a curve by drawing a straight line across at the price ceiling

45. Price Ceilings Reduce quantity supplied and the price charged
Means lower total revenue
Lower revenue means no incentives to improve the product
Excess demand is created

46. Consequences of a Price Ceiling
Excess demand means some non-price factor will develop to determine who gets and who does not
Wait list, discrimination, bribery, luck

47. Price Ceiling

48. Price Floors A minimum price that must be paid for a good or service
Governments wants sellers to receive some reward for their efforts

49. Minimum Wage Most well known price floor
Employers must pay at least a certain rate per hour

50. Minimum Wage
If set above market equilibrium it will decrease the quantity of labor supplied
Results in excess supply – more people looking for work at the wage than employers will hire

51. Price Floor