1. Demand
Chapter 20

2. What is Demand? Supply and demand are the backbone of a market economy
Demand is the desire, willingness and ability to buy a good or service
Consumer must want it
Consumer must be willing to buy it
Customer must have the resources to buy it

3. What is Demand?
Demand schedule is a table that lists various quantitates of a product or service that someone is willing to buy and the possible prices
Demand curve is a graph that shows amount of a product that would be purchased at all possible prices
Prices are on the vertical axis and quantity is on the horizontal axis
Demand curves usually slope downward because people are normally willing to buy less of a product as the price increases and more if the price is low
Law of demand quantity demanded and price move in opposite directions

4. What is Demand?
Companies are interested in market demand (total demand of all consumers for a product)
Almost everything we buy provides utility (pleasure, usefulness, satisfaction we receive from using a product)
Utility we get from consumption changes as we consume more of the product
Diminishing marginal utility - receive less additional satisfaction (marginal utility) from each unit consumed
Concept explains why the demand curve slopes downward

5. Factors Affecting Demand
Demand for a product changes over time
Graphed using a market demand curve
When demand goes down the demand curve shifts to the left
When demand increases, curve shifts to the right

6. Factors Affecting Demand
Several factors cause market demand to change
Changes in the number of consumers
More consumers, the higher the demand
Number of consumers changes for reasons like: higher birthrate, immigration, etc.
Changes in consumer income
Health of economy affects demand
Changes in consumer tastes
Popularity of product affects what price consumers will pay for a product
Changes in consumer expectations
Refers to the way people think about the future
If people expect a shortage the demand increases

7. Factors Affecting Demand
Changes in substitutes
Demand influenced by change in price or quality of related products
Competing products called substitutes
When two goods are substitutes a change in the price of one good causes the demand for the other good to move in the same direction
Customer can trade off one good for another if it is advantageous to do so
Changes in Complements
Some products are used together (computers and software)
Demand for one moves in the opposite direction as the price of the other

8. Factors Affecting Demand
Elasticity of Demand
All products affected differently by price changes
Demand elasticity is the extent to which a change in price causes a change in the quantity demanded
Some goods a price change can drastically affect the quantity demanded
When there are substitutes for goods and services demand tends to be elastic
Expensive items have elastic demand
Items that the purchase can be postponed have elastic
Inelastic Demand
Price changes have little effect on the quantity demanded
Demand for goods with few or no substitutes are likely to be inelastic

9. Supply
Chapter 21

10. What is Supply?
Supply is the various quantities of goods and services that producers are willing to sell
Opposite of demand
Suppliers offer differing quantities of a product depending on the price buyers are willing to pay
Law of supply- principle that suppliers will normally offer more for sale the higher the price is
Profit motive motivates producers in a free market economy
The higher the price the more incentive for the producer to produce more

11. What is Supply?
Supply curve is a graph that shows the amount of product that would be supplied at all possible prices in the market
Supply curve slopes upward
The total supply schedules of all businesses that supply the same good or service is called market supply
Price is the most significant influence on the quantity supplied of any product
Businesses set prices that allow them to recover costs of capital resources put into production of goods and services
Profit is the money a business receives for products over and above its costs
Producers use profits to increase wages, invest money back into the company, keeping money for themselves and investors
Profit is the driving force for business owners

12. Factors Affecting Supply
When supply goes DOWN the supply curve moves to the left
When it goes UP the supply curve is pushed to the right
When supply increases prices come down
What causes supply to change?
Changes in the cost of resources
When resource prices fall sellers are able to offer more of the good, because it is cheaper to do so
When resource prices go up the goods become more expensive and supply decreases
Productivity
This is the degree to which resources are used efficiently
Increases productive output
More products can be produced at every price

13. Factors Affecting Supply
Technology causes supply to increase
Can make production more efficient
Allows companies to track purchases and what goods to produce
Cut business costs
Changes in government policies
New regulations can affect the cost of production and cause changes in supply
Tighter government regulation restricts supply and increases the cost of production
Relaxed regulation increases supply by lowering the cost of production
Changes in taxes and subsidies
Higher taxes mean higher costs
Subsidies by the government can lower the cost of production and encourage new producers to enter the market
Expectations of producers
If business believe demand will be lower in the future they will decrease supply
Change in the Number of suppliers
Causes changes in the market supply

14. Factors Affecting Supply
Elasticity of Supply
Supply elasticity is how the quantity of a good or service changes in response to changes in price
Elasticity depends on how quickly a company can change the amount of a product it makes in response to price changes
Products that require a producer to invest large sums of money are considered inelastic
Products that can be made quickly without huge amounts of capital and skilled labor are elastic

15. Markets and Prices Markets bring buyers and sellers together
Forces of supply and demand work together with markets to establish prices
Prices form the basis for economic decisions
Surplus- amount by which the quantity supplies is higher than the quantity demanded
Surplus signals that the price is too high and sellers need to lower their price
Shortage amount by which the quantity demanded is higher than the quantity supplied
Shortage signals that the price is too low
Market economy eliminates shortages and surpluses
The point where supply and demand achieve balance is called the equilibrium price
It stays at this price until supply or demand changes

16. Markets and Prices
Price controls can be set by governments because they feel that supply and demand are unfair
Price ceiling is the maximum that can be charged for goods and services
Price floors are the minimum that can be charged for goods and services
Price floors are more common than price ceilings
They prevent prices from dropping too low
Minimum wage is an example of a price floor

17. Markets and Prices Prices help businesses and consumers make decisions
What to produce- purchases help producers decide what to sell at what price
How to produce- helps to utilize labor and supplies, so producers can meet the price consumers are willing to pay
Whom to produce – business aim goods at prices their customers are willing to pay

18. Markets and Prices Advantages of prices
Prices are neutral- in a free market economy they favor neither producers or consumers
Prices are the result of competition between buyers and sellers
Prices are flexible- unforeseen events affect supply and demand
Buyers and sellers adjust consumption and production
Ability of the price system to absorb these changes is an advantage of a free market economy
Price and freedom of choice- market economy provides a wide variety of choices at a variety of prices
No one forces a consumer to pay a certain price for a product in a competitive market economy
Prices are familiar- they are familiar and understood, allows people to make economic decisions quickly and efficiently