1. Supply and Demand (rev. 7/11 © Robin Foster
Teach a parrot the terms "supply and demand" and you've got an economist.”-
Thomas Carlyle

2. Microeconomics
Looks at how individuals and small companies act and make decisions.

3. Demand
Demand is the different amounts people will purchase at all prices.
There are three elements needed in order for demand to take place:
A person must want to purchase the product.
A person must have the money or ability to purchase the product.
A person must be willing to spend money on the product.

4. Price
Number of drinks demanded
$.50
1,000
$.75
800
$1.00
600
$1.25
400
$1.50
200
Demand Schedule
Demand schedules show prices and quantities demanded at each price.

5. Demand Curves
Illustrates the information contained in the demand schedule.
Demand curves slope downward from left to right.
Demand curves show the quantity demanded for a certain product by an individual.
Market Demand curves show the quantity demanded for everyone interested in buying the product.

6. Law of Demand
An Economic principle that states as the price drops consumers purchase more, as the price rises, consumers purchase less.

7. Change in Quantity Demanded
A change in quantity demanded occurs when there is a change in price.
The demand curve does not move, the amount demanded moves along the demand curve.

8. Change in quantity demanded
There are two basic causes for a change in quantity demanded:
Income Effect-a change in price that alters real income. Example:
Substitution Effect-relative price of the product. Example:

9. Change in Demand
Sometimes something other than price causes demand as a whole to increase or decrease.
A change in demand results in a new demand curve shifted right or left.
shift to right demand increases
shift to left demand decreases
D D D2

10. Five factors affect product demand
1. Consumer income normal vs. inferior goods 2. Consumer tastes 3. Substitute /complimentary goods 4. Change in expectations 5. Number of consumers

11. Utility/marginal utility
When a person purchases a product, the person thinks about how much use or satisfaction (utility) he/she will get out of the product.
Marginal Utility-extra usefulness satisfaction one gets from one more unit of the good. Example:
Diminishing marginal Utility-the more units of a good one has, the less eager they are to buy more. Example:

12. Elasticity-The measure of how much a change in the price will affect how much a person will purchase.
Elastic Demand-a small change in price causes a large demand change.
Example:
Inelastic Demand-people want the same amount at higher or lower prices. .

13. Determinants of Demand Elasticity
Can the purchase be delayed? Is it necessary right now?
Are substitutes available?
Is a large portion of income used?

14. Exceptions to the Law of Demand
Paradoxical Demand Consumers demand more when its price rises, and lower in demand when the price falls. This applies to consumer who consider the good “essential.”
As its price increases, the consumers have to spend a greater portion of their income to maintain the same level of consumption. Since they cannot now afford the more expensive substitutes, they end up buying more of the same good. The opposite happens when its price falls

15. Exceptions to the Law of Demand
Personalization Fallacy—Someone will purchase the items even if you won’t.

16. Time Period Misunderstanding
Items were cheaper in 1970 than today. But, you must compare the percent of income spent on the item or convert to current dollars.
Cost of a new home: $26, Median Household Income: $8, Cost of a first-class stamp: $0.06 Adjusted for inflation-$.33 Cost of a gallon of regular gas: $0.36 Adjusted for inflation-$1.98 Cost of a dozen eggs: $0.62 Adjusted for inflation -$3.40 Cost of a gallon of Milk: 1.15 Adjusted for inflation-$3.41

17. Exceptions to the Law of Demand
Prestige purchases
Demand stays the same no matter what the price. These items are rarely if ever on sale.
Example: Rolex Watches

18. Say’s Law
Say's law states that supply creates its own demand and over-production is impossible.

19. Supply Supply is the amount of a product produced at all prices.
We are now shifting focus and looking at the producers or the supply side of the economy.

20. Law of Supply
A microeconomic law stating that, all other factors being equal, as the price of a good or service increases, the quantity of goods or services offered by suppliers increases and vice versa.
Producers supply more at a higher price because selling a higher quantity at a higher price increases revenue.
Time is a factor. So it is important to try and determine whether a price change that is caused by demand will be temporary or permanent.

21. Supply Schedule
A Supply Schedule is a list of different amounts of a product that the manufacturer supplies at all prices that are possible.
Price
Number of drinks supplied
$.50
200
$.75
400
$1.00
600
$1.25
800
$1.50
1000

22. Supply Curve A supply curve is a graphic representation of supply.
Supply curves slope upward from left to right.
Supply Curve S1

23. Change in Quantity Supplied
This occurs when a change in price brings a change in the quantity offered for sale.
The supply curve does not move, the price changes along the curve.

24. Change in supply
This occurs when the supply curve shifts left or right.
S S1 S2

25. Factors causing a change in supply
Cost of imputs(materials)-changes in cost of land, labor and capital.
Productivity of workers   --are workers happy or unhappy?
Technology-new technology increases production.
Number of sellers
More increase supply
Less decrease supply

26. Factors causing a change in supply
Taxes and subsidies-money is diverted to taxes can increase or decrease supply.
Expectations-companies stockpile goods, can increase prices. Sudden demand can decrease supply and cause shortages.
Government regulations-more regulations can decrease supply as time/money is diverted to meet regulatory requirements.
Unforseen or acts of nature-hurricanes, fire, flooding, war can impact supply. These are beyond the control of business.

27. Elasticity of Supply
Elasticity measures how quantity supplied responds to small price changes.
Elastic supply-producers can increase output without a rise in cost or a time delay
Inelastic-firms find it hard to change production in a given time period

28. Elasticity of Supply
Stocks in a warehouse – businesses with plentiful stocks can supply quickly and easily onto the market when demand changes
An empty restaurant – plenty of spare
capacity to meet any rise in demand!

29. Supply and Demand Price Number of drinks demanded
Number of drinks supplied
$.50
1,000
200
$.75
800
400
$1.00
600
$1.25
$1.50

30. Supply and Demand determine prices
Market Equilibrium is the situation where quantity demanded=quantity supplied.
Shortages occur when quantity supplied is less than quantity demanded.
Surpluses occur when quantity supplied is greater than quantity demanded.
The equilibrium or market clearing price reflects neither a surplus or shortage.
Market equilibrium

31. Theory of Production
Theory of production relates the factors of production to goods and services produced.
Short Run-brief production period.
Example: Easter Candy production
Long Run-long enough to adjust to resource availability.
Example: Imported raw materials for chocolate is more expensive for Hershey.

32. Business Costs
Fixed costs are what a business has to pay monthly, ususally the fluctuate very little monthly
Examples include rent.
Variable costs can change monthly.
Examples include utilities, raw materials, shipping costs.

33. Business Costs
Expansion costs change as the amount of locations increase.
Example- a factory expansion to another city.
Sunk costs are unrecoverable past expenditures.
Example-new computer software, new computers.

34. E-commerce
Doing business over the internet creates lower fixed costs for businesses.
This does not mean that all costs are cheaper.

35. Break even point Total revenue(TR)=total costs(TC)
The point above the break even point is when a business will start to show a profit.

36. Prices as signals
Price is the value of a product in money. Prices are flexible as they react to the market.
Rationing is an alternative to pricing. Persons receive coupons for a set amount of a good.
A rebate is a price reduction in the form of a coupon, refund of purchase price.

37. Pricing Price Ceiling is the maximum legal price.
Price Floor is the lowest legal price.
Loss Leader is an item priced below cost to attract customers.
Target price is a price floor for farm products.

38. Review--
Supply and demand
Shifting curves
Market equilibrium