1. AIM: What is the Law of Supply? What is the Law of Demand?
DO NOW: Interpret the image below.

2. What is Demand?
Buyers have to be willing and able to purchase a product at a particular price
The Law of Demand: as prices fall, the quantity demanded increases. As prices rise, the quantity demanded decreases.
P  D 
P  D 
Ex: Porsche
How many of you would like a Porsche [or like vehicle]?
How many of you are able?
What’s the difference between willing and able?
Idea of time and place – at this time, you may be willing to buy a Porsche, but are not able, therefore you do not have a “DEMAND” for a Porsche

3. Demand Curve

4. Change in Quantity Demanded vs. Change in Demand
Caused by change in price of good
Displayed as movement along curve
Caused by change in determinant of demand
Results in a shift to a new demand curve
Income
Preference/Taste
Consumer Expectations
Population Change
Prices of Related Goods

5. What is Supply?
Indicates how much of a good producers are willing and able to offer for sale per period at each possible price.
Law of Supply: as a good’s price increases (decreases), the quantity suppliers are willing and able to supply increases (decreases).
P  QS 
P  QS 

6. Supply Curve

7. Opportunity Cost
Suppliers will choose among alternatives based on their expected benefit/cost

8. Change in Quantity Supplied vs. Change in Supply
Caused by a change in a good’s own price
Displayed as movement along curve
Caused by change in determinant of supply
Results in a shift to a new demand curve
Technology
Price of Relevant Resources
Price of Alternative Goods
Producer Expectations
Number of Producers
Government Restrictions

9. Elasticity Measures responsiveness to change in price
Allows us to compare across markets & other goods
Elastic = small P-change, large Q-Demanded change
E (d) > 1
Inelastic = large P-change, small Q-Demanded change
E (d) < 1

10. Coefficient of Price Elasticity
To determine how elastic a product is or how demand for that product will be effected by a change in price, use following equation:
E(d) = ( Δ QD/QD) / ( Δ P/P)
Perfectly inelastic – QD is unresponsive to P-change
Perfectly Elastic – QD is totally
responsive to P-change
(Buyers buy all they want)

11. Elasticity Demands Number of close substitutes
Proportion of income spent on a good
Time
The lack of importance
Luxury X Necessity
Elastic Inelastic

12. Why should a business care about the elasticity of demand?
One reason is that the elasticity determines what happens to revenue when price changes.
Revenue = Price x Quantity
When facing a inelastic demand, to bring in more revenue while selling fewer units, raise the price of the good.

13. What is Equilibrium? Is where the consumer and producer meet
Occurs in market because it’s mutually beneficial
Transaction costs in markets = the costs of time and information required for exchange
The point at which quantity demanded equals quantity supplied

14. When the demand curve shifts to the right (left), the equilibrium price rises (falls) and the equilibrium quantity rises (falls).

15. When the Supply Curve shifts to the left (right), the equilibrium price rises (falls) and the equilibrium quantity falls (rises).

16. Surplus and Shortage= Happens when markets won’t compromise
Surplus – when quantity supplied exceeds the quantity demanded
Shortage – when there is an excess of quantity demanded compared to quantity supplied
Thus, a surplus creates downward pressure on the price, and a shortage creates upward pressure on the price
Price tends toward equilibrium

17. Price Floors & Price Ceilings Happens when the gov’t gets involved
Price Floors = a legal minimum that can be charges for a good (results in a surplus)
Ex: minimum wage, milk, sugar
Price Ceilings = a legal maximum that can be charges for a good (results in shortage)
Ex: rent controls, credit card interest rates, oil

18. But Ms. Rappoccio, so how does this apply to my life?
Supply and Demand in YOUR Life