1. Topic 3: Demand, Supply, and Prices

2. Price
Price changes always affect the quantity demanded because people buy less of a good when it goes up in price.

3. Demand
Demand is the desire to own something and the ability to pay for it
Law of Demand is when a good’s price is lower, consumers will buy more of it
When the price is higher, consumers will buy less of it

4. Look at this demand curve
Look at this demand curve. What happens to quantity purchased as the price rises?

5. Why do we purchase more when items are on sale?

6. Two Behavior Patterns (Law of Demand)
Substitution effect takes place when a consumer reacts to a rise in the price of one good by consuming less of that good and more of a substituted good
Can also occur when price drops occur
Example: When the price of orange juice rises, consumers substitute cheaper apply juice for orange juice.
Income effect is the change in consumption that results when a price increase causes real income to decline
In other words, when prices rise, your money buys less.

8. Income Effect

9. Consumption
Remember: economists measure consumption in the amount of a good bought, not the amount of money spent to buy it
Example: When the price goes up, consumers spend more money on their pizza, but they may demand less of it
The income effect has led to a decrease in the quantity demanded
The income effect works the opposite way as well

10. Lower prices allow consumers to increase demand.
Lower prices increase consumers’
purchasing power.
E. Napp

11. The Demand Schedule
The law of demand, along with concepts such as the substitution effect and income effect, explains how the price of any item affects the quantity demand of that item

12. Demand Curve A graphic representation of a demand schedule
All demand graphs show that each pair of price and quantity demanded numbers on the demand schedule can be plotted on the graph.
The graph can only show the relationship between the price of the good and the quantity consumers are willing to purchase at that price
The demand curve slopes downward to the right
As price decreases, quantity demanded increases

13. Demand Curve

14. Demand Schedule and Demand Curve
Both demand schedule and demand curves reflect the law of demand which states that higher prices will always lead to lower quantities of demand
The market demand curve is only accurate for one very specific set of market conditions
Cannot predict changing market conditions

15. Section 2: Shifts in Demand

16. Ceteris Paribus
Ceteris Paribus is Latin for “all other things held constant”
The demand schedule only took into account changes in the price. The demand schedule does not consider the effects of news reports or any of thousands of other factors that change from day to day
A demand curve is only accurate as long as there are no changes other than the price that has influenced the consumers decisions
When we drop ceteris paribus and allow factors to change, we no longer move along the demand curve
The demand curve shifts

18. The Non-Price Determinants of Demand
Non-price determinants- they are factors that can lead to the shifting of demand up or down (but they are not linked to price)
These determinants include:
Income
Consumer expectations
Population demographics
Consumer tastes
Advertising

19. Non-Price Determinants: Income
A consumer’ income affects his or her demand for most goods
Normal goods- goods that consumers demand more of when their income increases
Shift to the right= increase in demand
Shift to the left= decrease in demand
Inferior goods- goods that you would buy in smaller quantities, or not at all, if your income were to rise and you could afford something better

20. Non-Price Determinants: Consumer Expectations
Our expectations about the future can affect our demand for certain goods today
If you expect the price to rise, your current demand will rise, which means you will buy the good sooner
If you expect the price to drop, your current demand will fall and you will wait for lower prices

21. Non-Price Determinants: Demographics
Demographics- the statistical characteristics of populations, such as age, race, gender, occupation, and income level
Businesses use demographics to identify potential customers

22. Non-Price Determinants: Change in Population Size
A growing population leads to more houses and people to feed
Rise in population will increase demand for houses, food, and many other goods and services

23. Non-Price Determinants: Consumer Taste
People buy what they find comfortable and useful
Advertisers must get buyers to feel confident and comfortable with their products
Businesses are constantly using new forms of advertisements to gain buyers attention

24. Section 3: Elasticity of Demand

25. Elasticity of Demand
Elasticity of demand is what economist use to describe the way consumers respond to price changes
Elasticity measures how drastically buyers will cut back or increase their demand for a good when the price rises or falls
The law of demand implies that the result will always be negative
An increase in the price of a good will always decrease the quantity demanded, and a decrease in the price of a good will always increase the quantity demanded

27. Factors Affecting Elasticity
Why is the demand for some goods so much less elastic than for other goods?
Several different factors impact elasticity including:
Non-price determinants
Availability of substitutes

28. Substitutes Substitutes are goods that can be used in place of another
If there are few substitutions for a good, then even when its prices rise greatly, people still buy it
Lack of substitutes can make a good inelastic

29. Elasticity and Change
When a price changes, consumers often need time to change their spending habits
Consumers do not always react quickly to a price increase because it takes time to find substitutes
Example: gasoline prices

30. Elasticity and Revenue
Total revenue- the amount of money the company receives by selling its goods.
2 factors:
1. The price of the goods
2. The quantity sold

31. Elasticity and Pricing
Businesses must know the demand for their products. This knowledge helps the business make pricing decisions that lead to the greatest revenue.
The elasticity of demand determines how a change in prices will affect a firm’s total revenue, or income.

32. Section 4: Fundamentals of Supply

33. Supply Supply is the amount of a good or service that is available
How do producers decide how much to supply?
Law of supply- producers offer more of a good or service as its price increases and less as its price falls

34. Production and Supply
Quantity supplied describes how much of a good or service a producer is willing and able to sell at a specific price
A producer may also be called a supplier, a company, or an owner- whoever supplies a produce to the market

35. The Law of Supply
The law of supply develops from the choices of both current and new products of a good or service
As prices rise, firms will produce more to earn additional revenues
As price increase is also an incentive for new firms to enter the market to earn their own profits
The price of a good or service falls, some firms will produce less and others might drop out of the market

37. The Effect of Price on Supply
If a business is already earning a profit by selling a good or service, then an increase in the price- ceteris paribus- will increase the businesses profits

38. Supply Schedule
Supply schedules show the relationship between price and quantity supplied for a specific good or service, or how much of a good or service a supplier will offer as various prices
Supply curve- a graphic representation of a supply schedule

40. Section 5: Costs of Production

41. Production of Goods
Producers think about the cost of making one more unit of a good when deciding how to maximize their profits
Operating costs- the cost of operating a facility
Change in production costs would make the entire curve shift to the right or to the left.
Ex: natural conditions, new technology, government policies, monopolies
Note: Difference in Change in Supply v. Change in Quantity Supplied
Equilibrium Price: QD = QS