Unit 2
Supply and Demand
4.1 What is Demand?
• Describe the concept of demand.
 Explain how demand and utility are
related.
Complete: pg 89
Characteristics of
Demand
Characteristics of
DEMAND
Desire
Ability
Willingness to buy
goods.
What is Demand?
• MICROECONOMICS!!!
• The area of economics that deals w/ behavior and
decision making by individuals and firms.
• Demand
• is the desire, ability, and willingness to buy a product.
• Individual demand curve
• illustrates now the quantity that a person will demand
varies depending on the price of a good or service.
Figure 4.1
Figure 4.1
The Demand for Compact Discs The Demand for Compact Discs
The Law of Demand
 The Law of Demand states that the
quantity demanded of a good or service
varies inversely with its price.
– When price goes up, the quantity demanded
goes down; when price goes down, the
quantity demanded goes up.
Demand and Marginal Utility
• UTILITY= USEFULNESS or SATISFACTION!
• Marginal utility
• is the extra usefulness or satisfaction a person
receives from getting or using one more unit
of a product.
• The principle of diminishing marginal
utility
• states that the satisfaction we gain from
buying a product lessens as we buy more of
the same product.
4/29
Review for
QUIZ
Quiz
 1) _____ is the desire, ability, and
willingness to buy a product.
 2) __________ states that the quantity
demanded of a good or service varies
inversely with its price.
 3) ____ is the usefulness or satisfaction
one gets from a product.
 4) _____ _____ is the extra usefulness!
 5) ______ _____ ____ is when
satisfaction decreases.
Project: Due 11/27
 In your groups: Write up a list of at least 15
questions to ask store managers about the
effect that sales prices have on consumer
demand.
 1 person conduct an interview using your
questions.
 Make sure you ID the store and manager
interviewed!!
Changes in Demand
 Explain what causes a change in quantity
demanded. 
 Describe the factors that could cause a
change in demand. 
What would happen?
 A disease destroys much of the coffee crop
in South America.
– How might this affect the price of coffee?
– The demand for substitute products?
– The demand for complementary products?
4.2 Change in Quantity Demanded
 The change in quantity demanded shows a
change in the amount of the product
purchased when there is a change in price.
 Income effect
– means that as prices drop, consumers are left
with extra real income.
Change in Demand
 A change in demand
– is when people buy different amounts of the
product at the same prices.
– can be caused by a change in income, tastes, a
price change in a related product (either
because it is a substitute or complement),
consumer expectations, and the number of
buyers.
Consumer Tastes
 Why do tastes change?
 The more popular a product is the more we
WANT!!
– EX> Touch screen phones, iPods, fuel
efficient cars
 However, if we get tired of it, we buy less.
Substitutes
• Substitution effect
• means that price can cause consumers to
substitute one product with another similar but
cheaper item.
 Prices for substitutes go up and down
together.
 NAME some substitute products!
Complements
 Goods that are related….. You one in order
to have the other.
 NAME some products that complement
each other!
Change in Consumer
Expectations
 If a new product comes out, we buy less of
the original product.
 EXAMPLES:
Assignment
 Complete Q’s 3,4,5 on pg 93
– Q’s 1-2 on page 94
– Q’s 3,4,5 on page 99
4.3 Demand Elasticity
– Understand the factors that determine
demand elasticity.
Change in Price
Effect
Effect
Effect
Change in Price
Effect:
Greater change in
demand
Effect:
Lesser change in
demand
Effect:
Proportional change in
demand
Demand Elasticity
Elasticity measures how sensitive
consumers are to price changes.
Demand is elastic when a change in price
causes a large change in demand.
Demand is inelastic when a change in price
causes a small change in demand.
Demand is unit elastic when a change in
price causes a proportional change in
demand.
The Total Expenditures Test
• Price X quantity demanded = total
expenditures.
• If the change in price and expenditures
move in opposite directions on the curve,
the demand is elastic, if they move in the
same direction, the demand is inelastic; if
there is no change in expenditures, demand
is unit elastic.
Determinants of Demand Elasticity
• Demand is elastic if the answer to the following
questions are “yes”.
– Can the purchase be delayed? Some purchases cannot
be delayed, regardless of price changes.
– Are adequate substitutes available? Price changes can
cause consumers to substitute on product for a similar
product.
– Does the purchase use a large portion of income?
Demand elasticity can increase when a product
commands a large portion of a consumer’s income.
Scenario
 You own a restaurant that is fully booked
on the weekends. In midweek, however,
you rarely have enough bookings to stay
open. To make more money during this
slow period, you decide to cut dinner
prices by 1/3. From $15 to $10 on
Wednesdays and Thursdays.
– Do you think this will increase your revenue?
Explain in detail!
Figure 4.6
Estimating the Elasticity of Demand
4/30
 Complete all questions on page 110
– TEST FINISHERS SEE ME!
ECO JEWELERY
 String= $.50
 Regular Round Beads = $1.00
 Elongated Beads= $2.00
 Shaped Beads = $3.00
 Cube Beads = $3.00
 Gold Beads = $4.00
5.1 Law of Supply
• Specify the reasons for a change in supply.
Demand/Supply
Difference 1
Difference 2
Difference 3
What is Supply?
 The amount of a product that would be
offered for sale at all possible prices.
 THE LAW: Suppliers will normally offer
more for sale at higher prices and less at
lower prices!
– Doing what is best for the seller!!
– MONEY!!!!
Change in Quantity Supplied
• A change in quantity supplied is the change in
amount offered for sale in
response to a change in price. 
• A change in supply is when suppliers offer
different amounts of products for sale at all
possible prices in the market.
– the cost of inputs; productivity levels; technology;
taxes or the level of subsidies; expectations; and
government regulations
Changes
 Cost of imputs can cause a change in
Supply
 Productivity: How much can be produced?
 Technology: New machines can increase
productivity.
 Gov’t: pays subsidies to increase or
decrease production.
Elasticity of Supply
 Supply is elastic when a small increase in
price leads to a larger increase in output—
and supply.
 Supply is inelastic when a small increase in
price cause little change in supply.
 Supply is unit elastic when in price causes
a proportional change in supply.
 Q: What is the difference between demand
elasticity and supply elasticity?
 A: Both measure the way quantity
(whether bought or produced) adjusts to a
change in price.
Quiz over 4.2,4.3, and 5.1
 1) Name 3 things that can change the quantity of
supply.
 2) What is the definition of supply?
 3) The _____ effect means that as prices drop,
consumers are left with extra real income.
• 4) The ______ effect means that price can cause
consumers to substitute one product with another
similar but cheaper item.
• BONUS: What is the title of Robert Downey Jr.’s
new movie?
6.0 Price
• Price
• the monetary value of a product as established by
supply and demand–is a signal that helps us make our
economic decisions.
• provide incentives to buyers and sellers.
• High prices are signals for producers to produce
more and for buyers to buy less. Low prices are
signals for producers to produce less and for
buyers to buy more.
Characteristics
 Prices are the result of competition
between buyer and seller
 Prices are flexible
 Prices are straight forward
 Prices are a system: Link all markets!
– EX> Gas goes up= SUV sales go down!
Price Adjust
• Price adjustments help a competitive
market reach market equilibrium, with
fairly equal supply and demand.
• Buyers want?
• Sellers want?
Figure 6.1a
Market Equlibrium
 Prices are stable and quantity supplied and
demanded are equal
Hmmm
 At the end of spring, the manager of a
clothing store notices that the stockroom is
stacked with sweaters that are $80. He
decides to mark the sweaters 45% off.
– HOW much are the sweaters now?
Figure 6.1b
Equilibrium
Figure 6.2a
Surplus: Q supplied is
greater than Q
demanded
Figure 6.2b
Shortage: Q supplied is less
than Q demanded.
Figure 6.2c
Equilibrium Price: Price that clears the market
w/ no shortages and no surpluses
Figure 6.2d
• A change in price is normally the result of
a change in supply, a change in demand, or
Figure 6.3a
both.
The Competitive Price Theory
 The Theory of Competitive Pricing
represents a set of ideal conditions and
outcomes; it is the MODEL
 Competition keeps costs low
quiz
1) _____ acts a signal for the buyer and
seller.
2) _______ is when the government decides
everyone’s “fair share.”
3) _____ _____ is when there neither a
shortage or surplus.
4) ____ is when Q>D.
5) ____ is when D>Q.
READ pages 150-154
 Await further instructions…
 ID People or firms who benefit or suffer
because of these policies. Pick a group
leader to discuss effects of each.
Up or Down
 Price ceiling vs. Price Floor
 PC= Maximum price that can be charged
• Rent
 PF=Lowest price that be paid for a good or
service.
• Minimum Wage
 Target Price= a price floor for farm products
 Talking Market:
– Markets “talk” when prices move up or down
dramatically.
7.1 Competition Structures
• Explain the characteristics of perfect
competition.
• Identify several types of monopolies.
Perfect Competition
 When a large number of buyers and sellers exchange
identical products under five conditions.
 Large number of buyers and sellers.
 Buyers and sellers should act independently.
 The products should be identical.
 Buyers and sellers should be will-informed.
 Buyers and sellers should be free to enter, conduct, or
get out of business.
Monopolistic Competition
• Meets all conditions of perfect competition
except for identical products.
• Use of advertising, giveaways, or other
promotional campaigns to differentiate
their products from similar products in the
market.
Oligopoly
 Market structure in which a few very large sellers
dominate the industry.
 Free Trade
 Price Wars
• 2 forms of collusion include:
• price-fixing
• dividing up the market for guaranteed sales.
Monopoly
 A market structure with only one seller of a
particular product.
 Natural monopoly
 Geographic monopoly
 Technological monopoly
 Government monopoly
7.2 Market Structure
 List the problems caused by inadequate
competition.
Inadequate Competition
 Mergers and acquisitions can lead to several
consequences:
 Inefficient resource allocation
 Reduced output
• Resource immobility occurs when land, capital,
labor, and entrepreneurs stay within a market
where returns are slow and sometimes remain
unemployed.
• Externalities are unintended side effects that either
benefit or harm a third party.
• Public goods are products everyone consumes.
Assignment
 Pg 171 Q’s 3-6
 Pg 176 Q’s 3-6
 Pg 183 Q’s 3-6
Chapter 7 Review:
 Pg 186: Reviewing Key Terms &
Reviewing Facts