SUPPLY & DEMAND
Ch. 21
Demand
• Desire, willingness, and
ability must all be
present in the
consumer for demand
to exist
• Demand Schedule: a
table that show the
various quantities of a
product or service that
someone is willing to
buy over a range of
possible prices
Demand
Schedule
Demand Schedule
Shown as a graph:
Demand cont.
• Each point represents how much
of a product a person will buy at a
certain price
• Demand Curve – formed by
connecting the points – always
slopes downward (Demand =
Down)
• Shows most people are willing to
buy less of a product at a higher
price and more at a low price
• Law of Demand
– Quantity demanded and price
move in opposite directions
– P
D
P
D
Market Demand
• Market Demand – total demand
of all consumers for a product or
service
– Example – Tobacco
• We buy products for their utility
(pleasure, usefulness or
satisfaction products give us) – it
is different for everyone
– Example –
• Diminishing Marginal Utility
– Our additional satisfaction
tends to go down as we
consume more units
– Therefore we are willing to
pay less for it as we use more
of it
– Example – Pizza, Roller
Coaster Rides
Demand can only occur when a
buyer is:
1. Limited by time
2. Buying complimentary
goods
3. Willing & able to buy
4. Determined to sell
Factors Affecting Market Demand
1.
Consumers entering or leaving
the market (population
changes)
•
2.
Why would population
change?
Incomes, tastes or
expectations change
•
Real Income Effect – as more
people have more money,
they spend it – contributes to
a healthy economy
• Normal Goods vs. Inferior Goods
•
•
Tastes – Demand for VCRs
declined as the taste for DVDs
rose
Expectations – if expected
price of item will go down
soon, Demand will go down
today
Class Question: What would
explain shift in the demand
curve to the left?
Factors Affecting Market Demand
cont.
3. Prices of related goods
change
•
•
Complements move in
the same direction
(Peanut Butter and Jelly)
= P(Price)1
QD(Quantity Demand)1
D(Demand)2
Substitutes move in
opposite directions (Pepsi
and Coke) P1
QD1
D2
Class Exercise: In your notes,
explain this graph using the
compliments peanut butter and
jelly and substitutes Pepsi and
Coke
What will happen in the wheat
market if buyers are expecting
higher prices in the near future?
1.
2.
3.
4.
The demand for rice will increase.
The demand for rice will decrease.
The demand for rice will be unaffected
The supply of rice will increase.
Shifts in Market Demand
• If Market
Demand rises,
the demand
curve will shift
to the right
• If Market
Demand drops,
the demand
curve will shift
to the left
(think less is
left)
Elasticity of Demand
• Extent of change in price causes a change in
demand
• Elastic products – demand changes by large
amounts when the price is only slightly changed
• Inelastic products – demand changes by small
amounts or does not change at all even if price
changes drastically
• Products with substitutes or luxury items are
more elastic
• Products with few or no substitutes are inelastic
Elasticity of Demand cont.
Elastic Demand Examples:
Perfectly Elastic
Demand Curve
Inelastic Demand Examples:
Perfectly Inelastic
Demand Curve
If two products are commonly used
together they are called:
1. Substitutes
2. Elastic
3. Inelastic
4. Complements
Show D shift in restaurants in
Mooresville after
local textile mill hires a 1000
new workers.
Show D shift in IPods when
the price of IPods goes up
(think about it).
Show D shift in Maxwell
coffee when Folgers's coffee
fields in Africa suffer a serious
drought.
Show D shift in car industry
when US starts going through
a recession.
Show D shift in Ramen
noodles after Mr. Cleland gets
a $5,000 raise from IredellStatesville Schools.
Show D shift in buns when
the price of beef goes up.
Show D shift in polyester suits
from the 1970s to today.
Show D shift in holiday gifts
this past Christmas due to the
instability of the economy.
Show D shift in coffee
creamer when Folgers's
coffee field workers leave
work because of violence in
the region.
Show D shift in land in the
North Carolina in the next 20
years.
Supply
• Can be 1 supplier or total
supply for a product
• Producers offer different
quantities of a product
depending on the price
consumers are willing to
pay
• Supply Schedule
– Quantities producers
are willing to supply at
various prices
• The supply schedule
graphed shows the supply
curve.
Supply Schedule
Supply Schedule
Shown as a graph:
Supply cont.
• Each point represents how much of
a product a company will produce
or supply at a certain price
• Supply Curve – formed by
connecting the points – always
slopes up (Up is in Supply)
• Shows most companies are willing
to supply more of a product at a
higher price and less at a lower
price
• Law of Supply
– As price rises, quantity supplied
rises
– As price falls, quantity supplied
falls
– Quantity demanded and price
move in same direction
– P
S
P
S
Which of the following is NOT a factor of
demand?
1. Law of Diminishing
Returns
2. Real Income
3. Diminishing Marginal
Utility
4. Substitution
Profit Motive
• Higher prices mean higher profits for suppliers
• Higher profits mean suppliers are willing to
produce more
• Price is the most significant influence on
quantity supplied
Market Supply
Worker 2 is
the highest
point of
marginal
product for
the company
then starts
diminishing
returns. By
how much?
Where does
producing another
item cost the
company money?
• Market Supply – total
supply for all providers
of a good or services
• Law of Diminishing
Return (Diminishing
Marginal Benefit in
book)
– as producers make more
of a item it becomes less
profitable till it hits a
point where the supplier
loses money.
– Example: Farmland and
assembly line work
Factors Affecting Market Supply
1.
Cost of Production Changes
•
•
•
2.
Government policies changes
•
•
•
•
3.
4.
5.
4 factors of production (natural
resources)
Includes productivity (labor)
Includes technology
(entrepreneurship)
Tighter government regulations
restrict supply
Relaxed regulations lower the cost
Higher taxes = higher cost
Subsidies lower cost
Producers expectations change (as
in expected price)
Price of other good produced by
the same company
Change in the number of
producers
According to the Law of Supply as price
increases:
1. Supply cannot be determined
2. Supply does not change
3. Supply increases
4. Supply decreases
Shifts in Market Supply
• If Market
Supply rises,
the supply
curve will
shift to the
right
• If Market
Supply drops,
the supply
curve will
shift to the
left (again
less is left)
Elasticity of Supply
• How quantity supplied changes in response to
changes in price
• Elastic product
– If quantity supplied changes a lot in response to a small
price change
– Products made quickly with less investment & unskilled
workers are elastic
• Inelastic product
– If quantity supplied changes little to price change
– Products that cannot be made quickly or are expensive
tend to be inelastic
– Example –
Elasticity of Supply cont.
Elastic Supply Examples:
Inelastic Supply Examples:
Apple will make a profit of
$200 more for IPod Touch in
2 months. Draw the Supply
Curve.
GM has just developed a
cheaper engine for it’s
compact cars.
Farmer Cleland found out
that the price of Soybeans
rose by $1 a bushel. Draw
the Supply Curve for Corn.
Barack Obama has just
placed a clean air tax on
West Virginia coal
companies.
Farmer Cleland found out
that the price of Soybeans
rose by $1 a bushel. Draw
the Supply Curve for
Soybeans.
AFL-CIO has just agreed on
a wage cut for it’s union
members.
North Carolina lowers its
gasoline tax.
The price of gasoline has
gone up in the past month.
The Government increases
the subsidy for companies
that make solar energy
panels.
There is a decline in the
amount of land used to grow
cotton.
The supply of restaurants
when In-N-Out Burger
comes to Mooresville.
Supply & Demand in the Market
• Markets bring buyers
(demand) & sellers
(supply) together
• These forces compete
to establish price
– QD = Q S
• Prices then affect
economic decisions
Equilibrium Point
• The point where supply and
demand meet in balance
• Neither a shortage nor
surplus exists
• In Market economies,
equilibrium points naturally
occur
• Once a price is at
equilibrium, it stays there
until market supply or
demand changes
Surplus & Shortages
• A surplus will be at the top of the curves
• A shortage will be at the bottom of the curves
At $6,
QD = 5
QS = 2
At $12,
QD = 2
QS = 4
The Surplus in this graph is
__________________
The Shortage in this graph
is ______________
• A surplus signals the price is too high
• A shortage signals the price is too low
Price Ceiling
• Government or
group imposed limit
on how high a price
can get for a product
Ineffective
– Examples: Rent prices
in NYC after WWII,
Gas Prices
• Must be below
Equilibrium Price to
be effective
Effective
– Why?
• Causes Shortages in
the Market
What is the Shortage in the graph?
Price Floor
• Government or Group imposed limit on how low the price
of an item can get
– Example: Minimum Wage, Agriculture
• Must be above Equilibrium Price to work
– Why?
• Causes Surplus in the Market
Class Question
150
375
What is the Surplus from the Price Floor?
Which of the following is characteristic
of an elastic product?
1. Consumers have no options
2. Occurs in a monopoly
3. Has many competing brands
4. Dominated by one seller
Changes in Supply and Demand TOGETHER
Demand Increases: Demand Decreases: Supply Increases:
Price Increases
Price Decreases
Price Decreases
Quantity Increases Quantity Decreases Quantity Increases
Supply Decreases:
Price Increases
Quantity Decreases
Changes in Supply and Demand
TOGETHER
• Supply Increases,
Demand Decreases
– Try to graph it first
• What happens to price
and quantity?
Price Decreases,
Quantity Indeterminate
Changes in Supply and Demand
TOGETHER
• Supply Decreases,
Demand Increases
– Try to graph it first
• What happens to price
and quantity?
Price Increases,
Quantity Indeterminate
Changes in Supply and Demand
TOGETHER
• Supply Increases,
Demand Increases
– Try to graph it first
• What happens to price
and quantity?
Quantity Increases,
Price Indeterminate
Changes in Supply and Demand
TOGETHER
• Supply Decreases,
Demand Decreases
– Try to graph it first
• What happens to price
and quantity?
Quantity Decreases,
Price Indeterminate
Practice Problem #1
• What happens to the
price and quantity of
IPods if Consumer
Income increases?
– What has changed?
– Will it affect S or D?
– Will S or D increase or
decrease?
• Try to graph the
situation
• Does it look like this
Practice Problem #2
• What happens to the price
and quantity of tobacco if
the government reduces
government subsidies?
– What has changed?
– Will it affect S or D?
– Will S or D increase or
decrease?
• Try to graph the situation
• Does it look like this
If quantity supplied is greater than
quantity demanded there is:
1.
2.
3.
4.
A shortage
A surplus
A bull market
A deficit
In a free market, who determines how much of
a good will be sold and the price at which it will
be sold?
1. Suppliers
2. Demanders
3. The government
4. Both suppliers and demanders