1. Demand and Supply

2. Notes - Demand

3. How does Demand Affect Prices?
What is Demand?
Obj: Explain the law of demand

4. Introduction to Demand
Demand = desire, willingness & ability to buy good/service
Changes over time
Sometimes people are willing to buy more of a product or service at a particular price
At other times, they are less willing to do so

5. Individual Demand Schedule
Table listing quantities of good/service that people are willing to buy at diff. prices

6. Individual Demand Curve
Graph showing amt. of good/service that would be bought at all possible prices in the market

7. Law of Demand
States that quantity demanded and price move in opposite directions.
All other variables remaining the same, the higher the price, the less the quantity demanded.

8. Market Demand
Companies have to take into account the total demand of ALL consumers for their product or service

9. Utility
Pleasure, usefulness, or satisfaction you get from using a product

10. Marginal Utility Extra benefits gained from purchase of a good/service
Diminishing marginal utility – extra satisfaction decreases as more of product is consumed
Seen in downward slope of Demand Curve

12. Describe the factors that can cause changes in demand

13. What Causes Demand to Change?

14. When Does Demand Change, Cont’d.
1) When the # of consumers changes

15. Changes in Demand, Cont’d.
2) When consumers’ incomes change

16. Changes in Demand, Cont’d.
3) When consumers’ tastes change

17. Changes in Demand, Cont’d.
4) When consumers’ expectations change

18. Changes in Demand, Cont’d.
5) When there are changes in the price or quality of substitutes (related products)
If the price of butter goes sky high, but the price of margarine does not, some people may choose to buy margarine instead of butter
When the price of butter goes up, the demand for margarine does too.
50 cents a pound
$5 a pound

19. When Demand Goes Up. . .
People are willing to buy more of an item at any price
Demand Curve moves to the right

20. When Demand Goes Down. . .
People are willing to buy fewer items at all possible prices
The Demand Curve moves to the left

21. Demand Elasticity
The law of demand says that when price goes up, the quantity demanded goes down
But the decrease is not the same for all products when price goes up
Extent to which price changes cause a change in the quantity demanded

22. Elastic Demand
If demand for something is elastic, even a small change in price causes an even bigger change in demand
When car makers make small price cuts on their cars, the number of cars sold goes up greatly
When car makers raise the price of their cars just a little, the number of cars sold decreases a great deal

23. Demand Elasticity, Cont’d.
If there are good substitutes for something, demand tends to be elastic
Also, demand is usually elastic when buying the thing can be put off until later – consumers put off buying it in the hope that the price will go down
60 GB for $600 this Christmas

24. Inelastic Demand Demand is inelastic for some goods and services
Even when price goes up drastically, the quantity demanded remains the same
Ex: Heart medication, insulin, turkey at Thanksgiving

25. Elastic or Inelastic?

26. Supply
What is Supply?
Obj: Explain how supply works.

27. What is Supply?
Supply = Sellers are willing to offer diff. quantities of a product depending on the price people are willing to pay for it

28. Law of Supply
When people are willing to pay higher prices for a product, producers will supply more of the product
When people are not willing to pay a higher price for a product, producers will supply (make) less of it

29. Law of Supply, Cont’d. Why is this?
The higher the price of the good, the greater the incentive the producer has to make more
Higher price = Higher profit for the producer

30. Supply Schedule Similar to the demand schedule
At $5 per stuffed animal, the toy maker is not willing to supply any
At $50 per animal, the toy maker is willing to produce 900

31. Profit Motive of Businesses
Businesses have to make at least enough money on their products to cover the costs of making them
Any money they make above those costs is profit
Profit is the main motivating factor for businesses in a free market system

32. Market Supply
Total number of products supplied by all the business that supply that particular product
Example: The video game market

33. Factors Affecting Supply
Obj: Identify how supply increases and decreases

34. Factors Causing Changes in Supply
For change in supply to happen, producers must decide to supply a certain quantity of units at each possible price in the market
This can happen for a number of different reasons

35. Changes in Supply = Changes in Supply Curve
When supply decreases, the supply curve moves to the left
When it increases, the supply curve moves to the right
Sellers are willing to supply more goods and services at higher prices

36. Causes of Changes in Supply
1) Change in the cost of resources
When the cost of resources used to make a product decrease, sellers will produce more of it because it’s cheaper to make
When resource prices rise, sellers are less able to produce and sell the same quantities of the good or service

37. 2) Changes in Productivity
When productivity falls, costs to make same amount of goods and services increases
Supply curve shifts to the left
When resources used to make something are more efficient, a company’s costs go down
The company will produce more goods at every price
Supply curve shifts to the right

38. 3) Technology
New technology can cut the costs to produce goods and services
Sellers will supply more at the same price

39. 4) Changes in Government Policy
New government regulations can increase the costs of producing goods and services
Sellers will produce less of a product at every price in the market
Example: New safety feature requirements for auto makers or increased minimum wage

40. 5) Changes in Taxes and Subsidies
Subsidy – government payment to an individual or business for certain actions
If the govt. wants farmers to produce more corn, they may offer to pay them $2 a bushel
Supply will increase because current corn farmers will stay in the market and new ones will enter the market

41. $9.4 billion in last year

42. Lower taxes decrease producers’ costs
Supply will increase at each price in the market
Higher taxes increase producers’ costs
Supply will decrease

43. 6) Expectations of Demand
If producers think demand for an item will go up, they will produce more at all possible prices
Example: stores order swimsuits from the factories before summer begins

44. 7) Change in Number of Suppliers
When more suppliers enter the market, supply will increase
When suppliers leave the market, supply will decrease

45. Elasticity of Supply
A measure of how the quantity supplied changes in response to changes in price
Depends on how quickly a company can change the amount of a product it makes in response to price changes

46. Supply Elasticity, Cont’d.
If the quantity supplied changes a great deal when prices go up or down, supply is elastic
If the quantity changes very little when prices go up or down, supply is inelastic

47. Markets and Prices
Obj: Analyze the relationship between supply and demand

48. Oil suppliers

49. Law of Diminishing Returns
If one factor of production is increased while the others remain constant, the overall returns will relatively decrease after a certain point.

50. For Example
If more and more farm workers are hired to harvest a wheat field, at some point each new worker will add relatively less output than his predecessor did, simply because he has less and less of the fixed amount of land to work with.

51. Markets and Prices Market – Place where buyers & sellers meet
Supply and demand work together to set prices

52. Price Adjustment Process
Market = All buyers and sellers of a product or service
By putting the supply and demand curves together, you can see how prices are adjusted to suit both buyers and sellers

53. Surplus
If sellers are willing to supply 225 surfboards at $400 each, but buyers are only willing to purchase 150 surfboards at $400 each, this leaves a surplus of 75 surfboards
Quantity supplied is greater than the quantity demanded

54. Surplus on the Graph (Price Adjustment, Cont’d.)
It’s the distance between the supply curve and the demand curve
Signals the producer that the price is too high

55. Surplus (Price Adjustment Process, Cont’d.)
Sellers will lower their prices to sell their goods

56. Shortage (Price Adjustment Process, Cont’d.)
Quantity demanded is greater than the quantity supplied
It’s the horizontal distance between the supply curve and the demand curve at any price BELOW where the two curves meet.

57. Shortage, Cont’d.
A shortage signals the seller that the price is too low
They will raise the price, and the shortage will not last
The flu vaccine shortage will leave millions of Americans vulnerable to influenza this season. Historian John M. Barry hopes it will serve as a wake-up call for government officials

58. Market Forces A surplus forces the price of a product down
A shortage forces the price of a product up
The point where supply and demand meet is the Equilibrium Price (EP)

59. Equilibrium Price, Cont’d.
EP = No shortage & no surplus. There is exactly enough of the product at exactly the right price.
Buyers and sellers are in balance on quantity and price
E.P. will stay the same until demand or supply changes.
When that happens, there will be a temporary shortage or surplus until a new equilibrium price is reached.

60. Govt. Price Controls
Price Floor – Minimum price that can be charged for goods and services
Ex: Minimum wage
Dashed line represents a price floor set below the free-market price. In this case, the floor has no practical effect. The government has mandated a minimum price, but the market already bears a higher price.
In contrast, the solid green line is a price floor set above the free-market price. In this case, the price floor has a measurable impact on the market.

61. Govt. Price Controls, Cont’d.
Price Ceiling – Maximum price that can be charged for something. Govt. sets the price
Ex: Local govt. that sets price ceiling on how much landlords can charge for rent
Often intended to protect consumers from certain conditions that could make necessities unattainable.

62. What Prices Do. . . They are signals of What to produce How to produce
For whom to produce

63. Keynesian Theory of Economics
British Economist
Promoted a mixed economy
Both the govt. & people and businesses play important roles
Said govt. could fight deflation and unemployment by:
Reducing interest rates
Govt. investment in infrastructure
John Maynard Keynes