1. 4/1/2017
SUPPLY & DEMAND

2. Non Sequitur by Wiley Miller
4/1/2017
Non Sequitur by Wiley Miller

3. MARKETS Institution that brings together buyers (DEMAND)
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MARKETS
Institution that brings together
buyers (DEMAND)
and sellers (SUPPLY) of resources, goods and services

4. 4/1/2017
DEMAND is
Amount of a good or service consumers are willing and able to buy
Major determinant of demand is PRICE
Amount of demand at each price is quantity
Quantity of demand at each price is shown in a “Demand Schedule”

5. DEMAND SCHEDULE (buyers)
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DEMAND SCHEDULE (buyers)
PRICE
QTY DEMANDED
$ 1.75 3
$ 1.50 5
$ 1.25 7
$ 1.00 10
$ 0.75 15
$ 0.50 20
$ 0.25 25

6. 4/1/2017
DEMAND CURVE
PRICE
DEMAND
QUANTITY

7. DEMAND CURVE P is the vertical axis Qty of D is the horizontal axis
4/1/2017
DEMAND CURVE
P is the vertical axis
Qty of D is the horizontal axis
Demand Curve is downward sloping because:
Common sense (lower price = buy more)
Diminishing marginal utility (the more consumers buy, the less satisfaction they receive)
Income & Substitution Effects

8. 4/1/2017
INCOME & SUBSTITUTION
Income Effect – the lower price increases the purchasing power of consumer’s
Substitution Effect – lower price gives incentive to “substitute” this item for those that are relatively more expensive

9. Diminishing marginal utility :
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Diminishing marginal utility :
Consuming successive units of a particular product yields less and less extra satisfaction – consumers will only buy additional units if the price is lowered. ( the more consumers buy, the less satisfaction they receive)

10. LAW OF DEMAND Demand varies inversely with price
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LAW OF DEMAND
Demand varies inversely with price
If Price goes up – Demand goes down
Ex: luxury cars
If Price goes down – Demand goes up
- Ex: clearance sale

11. NON-PRICE DETERMINANTS
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NON-PRICE DETERMINANTS
PREFERENCES – based on popularity or trends by consumers
INCOME EFFECT – how much money consumers have available to spend
POPULATION CHANGES – how many consumers are in this market
EXPECTATIONS OF CONSUMERS – what consumers think will happen in the future that affects their actions NOW!!
CONSUMERS TASTES & PREFERENCES: OUR TASTES & PREFERENCES AS CONSUMERS ARE ALWAYS CHANGING WITH THE TIMES & EACH NEW GENERATION GIVE ME AN EXAMPLE OF A NAME BRAND? TOMMY HILFIGER
THE DEMAND IS HIGH NOW - ALTHOUGH DEMAND MIGHT CHANGE LATER (GOES W/FADS) EX. HULA HOOPS IN 50’S, PET ROCKS OF 60’S, BELLBOTTOMS OF 70’S, CABBAGE PATCH DOLLS OF 80’S, POWER RANGERS OF 90’S, ETC.
POPULATION CHANGES: BABY BOOMERS (BIGGEST AGE GENERATION) WHY ARE THEY CALLED BABY BOOMERS? TIME OF PROSPERITY, WAR WAS OVER, PEOPLE STARTED HAVING BIG FAMILIES. SOON THESE BOOMERS ARE GETTING TO RETIREMENT AGE & STARTING TO RETIRE - WHAT’S GOING TO HAPPEN? HIGH DEMAND IN ROGAINE, NURSING HOMES, MEDICINE, RETIREMENT HOMES, GERITOL, INCONTINENCE, ETC. (AARP = 1 OF LARGEST ORGANIZED GROUP IN AMERICA)GERIATRICS WILL BE IN HIGH DEMAND FOR THIS HUGE POPULATION - MIGHT BE A CAREER OPTION.
DIMINISHING MARGINAL UTILITY: SATISFACTION WILL DECREASE WITH EACH ADDITIONAL UNIT PURCHASED/CONSUMED. (E.G. MOWING YARDS & GLASS OF WATER) (PIZZA) REGARDLESS OF HOW SATISFYING THE FIRST TASTE IS, SATISFACTION DECLINES WITH ADDITIONAL CONSUMPTION.
CONSUMER EXPECTATIONS: AS A CONSUMER - I MIGHT GO TO DILLARD’S OR FOLEY’S & FIND AN OUTFIT I LOVE - BUT I MIGHT KNOW HOW THE STORE WORKS & IT WILL PROBABLY GO ON SALE NEXT WEEK (RED APPLE) IF I AM EXPECTATING IT TO GO ON SALE, THEN WHAT WILL MY DEMAND BE NOW? DEMAND WILL BE DOWN NOW - IT HAS BEEN POSTPONED. WHAT HAPPENS IF I HEAR THE PRICE OF SOMETHING WILL GO UP SOON? IT WILL BE IN HIGH DEMAND NOW. (GAS PRICES)

12. NON-PRICE DETERMINANTS con’t.
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NON-PRICE DETERMINANTS con’t.
Elasticity of demand – how much demand changes to respond to changes in price
More elastic when goods are luxuries
Ex: steak, diamonds, SUV
More inelastic when good is needed
Ex: medicine (insulin), soap, milk

13. NON-PRICE DETERMINANTS con’t.
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NON-PRICE DETERMINANTS con’t.
Related Goods
SUBSTITUTION EFFECT
As price increases for a good, demand for its substitute (chicken for beef; generic) goes up
COMPLEMENTARY GOODS
As price goes down for one good, demand for that good & its complement both go up
DVD player on sale but DVD bought for regular price
INCOME EFFECT: CHANGES IN INCOME WILL AFFECT
DEMAND. IF YOU ARE FIRED OR LAID OFF FROM YOUR JOB, WHAT WILL HAPPEN TO DEMAND…IT WILL GO DOWN. HOWEVER, IF YOU WIN THE LOTTERY, WHAT WILL HAPPEN TO YOUR DEMAND…IT WILL GO UP.
SUBSTITUTION EFFECT: WHAT IF I WAS THE MOTHER OF 10 CHILDREN ALL UNDER THE AGE OF 5? (THINK MULTIPLE BIRTHS) WHAT ARE ALL THESE CHILDREN GOING TO NEED ? AMONG OTHER THINGS, MILK WHAT IS THE PRICE PER GALLON RIGHT NOW? $2.79 WHAT IF THE PRICE PER GALLON GOES UP TO $ MY KIDS NEED CALCIUM FROM THE MILK - DO I HAVE ALTERNATIVES?
-POWDERED MILK, VITAMINS, CANNED MILK
DEMAND WILL LOOK TO SUBSTITUTES, GENERICS
COMPLEMENTARY GOODS: ITEMS USED TOGETHER. A CHANGE IN PRICE ON 1 GOOD CAN HAVE AN AFFECT ON THE DEMAND FOR BOTH GOODS. (HOTDOGS & BUNS, COFFEE & FILTERS

14. NON-PRICE DETERMINANTS
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NON-PRICE DETERMINANTS
REMINDER: “P I P E E R”
Preference of consumers (popularity)
Income of consumers ($$ to spend)
Population (# of consumers)
Expectations for future (what to do NOW?)
Elasticity (effect of price)
Related Goods
substitute available?
price of complementary good changes- demand for both changes?

15. A little more on consumer expectations
4/1/2017
A little more on consumer expectations
1. Expect P to go up in the future = D>now
2. Expect P to down in the future = D< now
3. Expect income to > in near future = D > now
4. Expect income to < in near future = D < now
Example: The news announces that the P of
CD players will < next week. What does D do?

16. Substitutes (+ relationship)
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Substitutes (+ relationship)
If the P of steak >, then the d for chick >
If the P of steak <, then the d for chick <
Pepsi for Coke…………………..

17. Complementary goods: inverse relationship
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Complementary goods: inverse relationship
If the price of flashlights goes up, then the Demand of batteries goes down.
If the price of flashlights decreases, then the D for batteries_______?

18. Be wary of independent goods. They have no effect on one another
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Be wary of independent goods. They have no effect on one another
Like Chinese food and chocolate puddin

19. Hurry Lads – to the white boards!
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Hurry Lads – to the white boards!

20. 4/1/2017
Change in QD – caused by a CH in the P of the product under consideration now. 1. shown by moving from one point to another along a stable/fixed demand curve Caused by a change in the P of the product 3. The P of T-shirts >, :. QD <

21. 4/1/2017
Change in D
Caused by a CH in one or more of the non-price determinants of D
(whats the acronym?)…………….
1. The P of the product does not change now.
2. Shown by shifting the Dcurve.
D> shift to the right
D< shift to the left

22. Draw a DC based on the D schedule below these stupid words.
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Draw a DC based on the D schedule below these stupid words.
20oz Red Bull
Cans of 20oz Red Bull
$ 1.75 3
$ 1.50 5
$ 1.25 7
$ 1.00 10
$ 0.75 15
$ 0.50 20
$ 0.25 25

23. What do you do with D if the price moves from $.50 to $1.50?
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What do you do with D if the price moves from $.50 to $1.50?

24. 4/1/2017
A news report has just surfaced that energy drinks will make you smarter, better looking and smell like sunshine.

25. 4/1/2017
Three 4 year old kids drank Red Bull last night and tweeked so hard that they brains froze up like the laptops at Guyer.

26. 20 oz Red Bull is selling for $2.00 per can.
4/1/2017
20 oz Red Bull is selling for $2.00 per can.
The price of Monster just dropped to 1.00 per 20oz can.

27. 4/1/2017
SUPPLY is
Amount of a good or service producers are willing and able to sell
Major determinant of supply is PRICE
Amount of supply at each price is quantity
Amount of supply at each price is shown in a “Supply Schedule”

28. SUPPLY SCHEDULE PRICE QTY SUPPLIED $ 1.75 25 $ 1.50 20 $ 1.25 17
4/1/2017
SUPPLY SCHEDULE
PRICE
QTY SUPPLIED
$ 1.75 25
$ 1.50 20
$ 1.25 17
$ 1.00 15
$ 0.75 10
$ 0.50 7
$ 0.25 5

29. 4/1/2017
SUPPLY CURVE
PRICE
SUPPLY
QUANTITY

30. SUPPLY CURVE Price is the vertical axis
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SUPPLY CURVE
Price is the vertical axis
Qty of supply is the horizontal axis
Supply Curve is upward sloping because:
Price and quantity supplied have a direct relation
Price is an incentive to the producer as they receive more revenue when more is sold

31. LAW OF SUPPLY Supply varies directly with price
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LAW OF SUPPLY
Supply varies directly with price
If Price goes up – Supply goes up
If Price goes down – Supply goes down

32. NON-PRICE DETERMINANTS
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NON-PRICE DETERMINANTS
Cost of Production
Cost of producing goods & services
Ex: minimum wage for labor goes up
Ex: Natural disasters make costs go up
Expectations of producers
Predictions on how consumers will act
Resources that can be used to produce different goods
Corn instead of wheat
COST OF PRODUCTION (PRICE OF INPUTS): IF THE COST OF YOUR RESOURCES CHANGES, IT MIGHT HAVE AN AFFECT ON YOUR SUPPLY.
IF MINIMUM WAGE GOES UP ANOTHER $1.00 AN HOUR, THEN I HAVE TO PAY MY WORKERS MORE, WHAT IS GOING TO HAPPEN? I WON’T BE ABLE TO EMPLOY AS MANY WORKERS - MY PRODUCTION AMOUNT WON’T CHANGE, BUT MY COST OF PRODUCTION HAS INCREASED.
TECHNOLOGY: A TECHNOLOGICAL BREAKTHROUGH WILL HELP YOU PRODUCE MORE EFFICIENTLY (1 OF NATIONAL GOALS) WHAT WILL HAPPEN TO THE SUPPLY CURVE? IF THERE IS AN INCREASE IN ROBOTICS & I STARTED USING THEM IN MY PLANTS - MY SUPPLY WOULD INCREASE - BECAUSE I CAN MAKE A LOT MORE FOR ALMOST THE SAME AMOUNT OF MONEY. (LONG TERM EFFECT IT WILL SAVE YOU MONEY)
TAXES: TAXES CAN HAVE AN AFFECT ON HOW MUCH WE SUPPLY (TIME OF YEAR LIKE TAX SEASON) IF GOVERNMENT HAS DECIDED TO RAISE MY TAXES - WHAT WILL HAPPEN? MY MIGHT HAVE TO GO DOWN BECAUSE I HAVE TO TAKE MONEY FROM MY CASH FLOW & PAY OFF THE GOVERNMENT ( LIKE A COST OF PRODUCTION)
GOVERNMENT REGULATION: GOV’T. REGULATED BUSINESSES IN MANY WAYS. OSHA - HARD HATS. Who pays for those hard hats? Businesses Home Depot - back braces - safety precautions

33. NON-PRICE DETERMINANTS
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NON-PRICE DETERMINANTS
Technology
Improvements increase production
Taxes/Subsidies
Pay more tax which increases cost of production
Gov pays firm to produce
Suppliers (# of firms)
REMINDER: “C E R T T/S S”
NATURAL DISASTERS: THINGS LIKE HURRICANES, FLOODS, FOREST FIRES, TORANDOES
IF YOU WERE IN A BUSINESS FOR SUPPLYING LUMBER, WOULD YOUR SUPPLY GO UP OR DOWN?
GROCERY STORES, HOTELS, WATER
COMPETITION: THE NUMBER OF FIRMS IN COMPETITION WITH YOU MIGHT HAVE AN AFFECT ON YOUR SUPPLY.
PRODUCER EXPECTATIONS: BUSINESSES/PRODUCERS TRY TO PREDICT HOW CONSUMERS WILL ACT AND TRY TO ADJUST THEIR SUPPLY.
-RETAILERS EXPECTING A BIG SHOPPING SEASON AROUND CHRISTMAS WILL STOCK THEIR STORES WITH EXTRA MERCHANDISE.
PRICE OF OTHER GOODS: WHEN CORN GOES UP IN PRICE - SUPPLIERS WILL SUPPLY MORE OF IT RATHER THAN CHEAPER PRICED GOODS (REMEMBER, SUPPLIERS ARE LOOKING FOR A PROFIT.) (CORN & WHEAT)

34. Book Version – page 48 Resource prices Technology Taxes and subsidies
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Book Version – page 48
Resource prices
Technology
Taxes and subsidies
Prices of other goods
Price expectations
Number of sellers in the market

35. Shifts in Supply & Demand Curves
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Shifts in Supply & Demand Curves
Increase - shifts to the right
Decrease - shifts to the left
PRICE
PRICE
D 1
D 2
D 2
D 1
QUANTITY
QUANTITY

36. Shifts in Supply & Demand Curves
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Shifts in Supply & Demand Curves
Increase - shifts to the right
Decrease - shifts to the left S2 S S S2
PRICE
PRICE
QUANTITY CHANGES AT EVERY PRICE, WHICH RESULTS IN A SHIFT
REMEMBER: PRICE CHANGES QUANTITY DEMANDED AND QUANTITY SUPPLIED.
QUANTITY
QUANTITY

37. Effects of Changes in both S&D page 53 in the book
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Effects of Changes in both S&D page 53 in the book
S D Eq P Eq Q
> < < Indeterminate
< > > Ind
> > Ind >
< < Ind <

38. EQUILIBRIUM PRICE Point where buyers and sellers are equally satisfied
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EQUILIBRIUM PRICE
Point where buyers and sellers are equally satisfied
Point where D & S curves intersect
Adam Smith’s Invisible Hand Theory
Forces of S & D, competition & price make societies use resources efficiently

39. 4/1/2017
EQUILIBRIUM PRICE
PRICE
SUPPLY
E P
DEMAND
QUANTITY EQ

40. Equilibrium When supply = demand, there is equilibrium in the market
Equilibrium creates a single price and quantity for a good/service

41. Changes in equilibrium
When supply or demand changes, the equilibrium price and quantity change
If demand increases then price increases and quantity increases
If demand decreases then price decreases and quantity decreases
If supply increases then price decreases and quantity increases
If supply decreases then price increases and quantity decreases

42. Increase in Demand P S p1 p D1 D Q q q1
D  .: P ↑ & Q ↑

43. Decrease in Demand P S p p1 D D1 Q q1 q
D  .: P↓ & Q↓

44. Increase in Supply P S S1 p p1 D Q q q1
S  .: P ↓ & Q ↑

45. Decrease in Supply S1 P S p1 p D Q q1 q
S  .: P↑ & Q↓

46. Simultaneous Changes in Supply and Demand
If supply and demand both increase then price is indeterminate, but quantity definitely increases
If supply and demand both decrease then price is indeterminate, but quantity definitely decreases

47. Simultaneous Increase in Supply & DemandQ q q1 q2
S  & D  .: P ? & Q ↑

48. Simultaneous Decrease in Supply & DemandQ q2 q1 q
S  & D  .: P ? & Q↓

49. Simultaneous Changes in Supply and Demand
If supply decreases while demand increases, then price definitely increases while quantity is indeterminate
If supply increases while demand decreases, then price definitely decreases while quantity is indeterminate

50. Decrease in Supply w/ Simultaneous Increase in DemandQ q1 q
S  & D  .: P↑ & Q ?

51. Increase in Supply w/ Simultaneous Decrease in DemandQ q q1
S  & D  .: P↓ & Q?

52. Disequilibrium
If price occurs at some point where supply and demand are not =, then disequilibrium exists.
If the price is higher than the equilibrium price, then a surplus (Qs>QD) occurs
If the price is lower than the equilibrium price, then a shortage occurs (Qs<QD)

53. Market Disequilibrium (Price, px, above Equilibrium Price, pe)qd qe qs
If price is px, then qd < qs .: surplus exists (surplus = qs – qd)

54. Market Disequilibrium (Price, px, below Equilibrium Price, pe)qs qe qd Q
If price is px, then qs < qd .: shortage exists (shortage = qd – qs)

55. Causes of Disequilibrium
Price floor – a minimum price for a good/service or resource determined outside of the market
Ex. Minimum wage
Price ceiling – a maximum price for a good/service or resource determined outside of the market
Ex. Concert tickets sold by Ticket-master

56. (ex. Minimum wage in competitive unskilled labor market)
Effective Price Floor
(ex. Minimum wage in competitive unskilled labor market) P S
pmw pe D Q qd qe qs
If price floor is effective, then qd < qs .: surplus labor exists

57. Effective Price Ceiling
(ex. Single price for admission to a popular concert ) P S pe pt D qs qe qd Q
If price ceiling is effective then qs < qd .: ticket shortage exists

58. SURPLUS Supply is greater than demand at this price
4/1/2017
SURPLUS
Supply is greater than demand at this price
Must adjust by lowering price to reach equilibrium P
supply
SURPLUS
demand Q
D Qty
S Qty

59. Price Floors Government sets minimum price Price can’t go lower
4/1/2017
Price Floors
Government sets minimum price
Price can’t go lower
Causes surplus
Market can’t adjust
Ex: Minimum wage causes surplus of workers at set price

60. SHORTAGE Demand is greater than supply at this price
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SHORTAGE
Demand is greater than supply at this price
Must adjust by increasing the price S P
SHORTAGE D Q
S Qty
D Qty

61. Price Ceilings Government sets maximum price
4/1/2017
Price Ceilings
Government sets maximum price
Price can’t go higher
Causes shortage
Market can’t adjust
Ex: Rent controls, Price controls, Utility rates set by gov’t.

62. What else…………
Inferior goods - is a good that decreases in demand when consumer income rises
Superior goods - make up a larger proportion of consumption as income rises, and therefore are a type of normal good
Normal goods - are any goods for which demand increases when income increases and falls when income decreases but price remains constant
$ is not a productive resource – doesn’t produce
Ppc – the origin
Ppc – perfectly shiftable

63. Conclusion
Markets work best when supply and demand determine the price of goods/services or resources.
When forces other than supply and demand determine the price of goods/services or resources, surpluses and shortages result.
Over time, the forces of supply and demand undermine artificial price controls
Ex. Black markets, ticket scalping, undocumented workers

64. Supply and Demand Curves
4/1/2017
Supply and Demand Curves
TIME TO PRACTICE GRAPHS!
Use blue graph review sheets – put in graphs # 1-3 (CFC, PPC & S & D)