1. Introduction to Economics Johnstown High School Mr. Cox
Supply and Demand
Introduction to Economics
Johnstown High School
Mr. Cox

2. Adam Smith’s “Invisible Hand”
The most famous term in the Wealth of Nations is "invisible hand."
"...[B]y directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was not part of it.“
Def: a natural phenomenon that guides free markets and capitalism through competition for scarce resources.
When the cost of an activity is raised people do less of the activity;
When the benefit of an activity is reduced people do less of the activity.

3. The Law of Demand
As the price gets higher, people want less of a particular product
Quantity
Price
$40
$30
$20
$10

4. Economic Topics in Law of Demand
Purchasing Power
Amount of money people have to spend on goods/services
Income effect is the change in Purchasing Power that occurs when income changes
Substitution Effect
Tendency of consumers to substitute lower cost options for higher cost ones
(i.e. Generic vs. Name Brand Products)
Diminishing Marginal Utility
Loss of usefulness/satisfaction when too much of a product is sold

5. The Supply Curve
As the price gets higher, suppliers are willing to supply more of a product
Price
Quantity
$40
$30
$20
$10

6. This represents what the price is at the moment in the marketplace.
Equilibrium
Price
Quantity
$40
$30
$20
$10
Supply
Demand
This represents what the price is at the moment in the marketplace.

7. Examples of Supply and Demand
Housing
Gasoline
Orange juice after a freeze in Florida
Import quotas (affecting supply)

8. Elasticity of Supply and Demand
Supply and Demand Curves, and equilibriums, are not set in stone
Many can change due to a variety of factors
Cost of labor/goods needed for production
Change in consumers values
Government taxes/subsidies
Elasticity is a measure how people respond to change

9. Shift in Demand Curve Represents a change in demand for a product
Demand curve may shift to the left (decrease)
Not willing to pay as much
Thus price drops
Due to drop in income
Demand curve may shift to the right (increase)
willing to pay more for product
Increased income
Changes in taste
Shifts: right is an increase, left is a decrease

10. Shift in Supply Curve
If it becomes easier or more difficult to produce a product, supply curve will shift
More/less farmland
Fertilizer availability
Water availability
Technology available
Shifts: right is an increase, left is a decrease

11. Price Elasticity
Elasticity: the ability of supply/demand curves to respond to changes in the market
Demand
Substitutability
Complementary Goods
Proportion of Income
Luxuries versus Necessities
Supply
Increased/decreased production
Strikes
Wage increases
New technologies
Diminishing resources

12. Inelasticity When Supply/Demand are not responsive to change
Goods with inelastic supply?
Crops
Custom items (Baseball Cards, etc)
Goods with inelastic demand?
Tap water
Gasoline
Tobacco…people still smoke in NY despite some of the nation’s highest tax rates

13. Prices provide a language for buyers and sellers.
1. Prices as an Incentive
Prices communicate to both buyers and sellers whether goods or services are scarce or easily available. Prices can encourage or discourage production.
2. Signals
Think of prices as a traffic light. A relatively high price is a green light telling producers to make more. A relatively low price is a red light telling producers to make less.
3. Flexibility
In many markets, prices are much more flexible than production levels. They can be easily increased or decreased to solve problems of excess supply or excess demand.
4. Price System is "Free"
Unlike central planning, a distribution system based on prices costs nothing to administer.

14. Price Ceilings and Floors
A price ceiling is a maximum price that can be legally charged for a good.
rent control - a situation where a government sets a maximum amount that can be charged for rent in an area.
A price floor is a minimum price, set by the government, that must be paid for a good or service.
minimum wage - sets a minimum price that an employer can pay a worker for an hour of labor.