1. DEMAND & SUPPLY

2. A Market Interaction between buyers and sellers Buyers demand goods
Sellers supply goods
Assumptions
Standardized good
Competitive market
3-2

3. I. Demand and the Price Effect
Quantity of good or service people are WILLING and ABLE to buy at any given price
Law of Demand
Consumers will buy more of G &S at lower prices, and less at higher prices

4. 3 ‘Patterns’ or reasons for the Law of Demand, aka The Price Effect
Substitution Effect
Consumers react to price changes due to availability of substitutes
Income Effect
Change in consumption due to the effect spending has on real income
3. Law of Diminishing Marginal Utility

5. C. Individual D versus Market D
what you are willing and able to pay
Market:
what a community/society/group is willing and able to pay

6. Looking at Curves Graph that shows all the price/quantity combinations
Curve slopes down and to the right
Demand is an entire curve – NOT just one point on a curve!

7. The WHOLE
Line! All points!
$60 P
NOT a
Single
Point!
$10 D 1 Q 6

8. II. Change in Demand
Demand Curves will ‘shift’ up or down depending on the following factors:
Change in income
Income rises, people can spend more money and vice-versa
Normal versus Inferior

9. Change in Expectations
Change in weather/season
Future Predictions
Change in the number of buyers
Population changes effects demand
Change in styles, tastes or habits
Fads and fashion

10. Change in Price of Related Goods:
Price and availability of substitutes
Change in one thing effects its substitutes
Price/availability of Complementary goods
Things used together effect each other

11. Change in Quantity Demanded
Ncrcrease P 6 5 4 3 2 1
Change in Demand P Qd $5 4 3 2 1 10 20 35 55 80
Change in Quantity Demanded
Price (per bushel) D2
Decrease in Demand D1 D3 Q
Quantity Demanded (bushels per week)
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13. III. Price Elasticity Elasticity of Demand
Measurement of the impact of the price effect
Shows buyer’s eagerness to buy a product

14. If effect is large, the demand is elastic
If effect is small, the demand is inelastic
In other words…
Some products people will stop buying even when there is a small change in the price effect (elastic)
The reverse is inelastic…

15. Elasticity is different for various goods because
Availability of Substitutes (more available, more elastic)
Percentage of budget (higher % of budget, the more elastic)
Time (the longer people have to adjust, the more elastic)
Luxury vs. Necessity

16. Elastic Products…
Coca Cola

17. Inelastic Products…
Energy Sources…
Medical Services

18. Elastic Graph
$60 P
$10 1 Q 6

19. Inelastic Graph
$60 P
$10 1 Q 6

20. Mathematical Calculations
Two Methods:
Mid-Point method
Total revenue Test
We will cover this later…