Ch. 21
Demand and Supply
Section 1
Demand
An Introduction to Demand

In the U.S., the forces of supply and demand work
together to set prices

Demand – the desire, willingness, and ability to buy a
good or service.

3 things must be in place if demand is to exist:
Consumer must want a good or service
Consumer must be willing to buy it
Consumer must have the resources to buy it
1.
2.
3.
Individual Demand Schedule

Demand schedule – table that lists the various
quantities of a product or service that someone is willing
to buy over a range of possible prices


Can be shown as points on a graph.
Prices = vertical axis
Quantities = horizontal axis


Each point shows how many units of a product an
individual will buy at a certain price

Demand Curve – the line that connects these points
Individual Demand Schedule

The demand curve will always slope downward

This shows that people are less willing to buy at a higher
price, and more willing to buy at a lower price.

This principle is known as the law of demand –
quantity demanded and price will always move in
opposite directions

Q
P
Market Demand

Market Demand – the total demand of all
consumers for a product or service.

Market demand can be shown as a demand
schedule (table) and demand curve (graph)
Marginal Utility

We buy products for their utility – the pleasure,
usefulness, or satisfaction they give us.

Utility of a good will be different for different
people
Some products may have no utility for some
people
 Ex. Pizza when you are hungry

Marginal Utility (cont.)

Diminishing Marginal Utility – states that our
additional satisfaction tends to go down as we consume
more and more units

When we make a purchase, we consider whether the
satisfaction we expect to gain is worth the money we
must give up.

If the marginal utility > marginal costs = we make the
purchase

If the marginal utility < marginal costs = we walk away
Marginal Utility (cont.)

Because marginal utility diminishes, we would be
willing to pay less for the second item than the
first.

We would also be willing to pay even less for the
third item

Diminishing Marginal Utility can best be
visualized in a downward sloping demand curve.
Section 2
Factors Affecting Demand

1.
2.
3.
4.
5.

Market Demand can change when:
More consumers enter the market
When incomes change
When tastes change
When expectations change
When prices of related goods change
A graph of a market demand curve can show
these changes
Factors Affecting Demand (cont.)

When demand goes down, people are willing to
buy fewer items at all possible prices.

The Demand Curve will shift to the left.

When demand goes up, people are willing to
buy more items at all possible prices.

The Demand Curve will shift to the right.
Change In the # of Consumers

Demand is related to the number of consumers
in the area

When more people move into an area, they buy
more goods and services from local businesses.

Demand Curve shifts to the right
Change In the # of Consumers
(cont.)

When many people move away from a region,
demands for goods and services in the area
decreases.

The Demand Curve shifts to the left

The number of consumers in an area can
change due to changes in
– Birthrates
-- death rates
– Immigration
-- migration
Change in Consumer Income

Income changes affect demand

When economy is healthy, people receive raises
or move to better paying jobs/positions

With more income, people are willing to buy
more of a product at any particular price

In hard times, people lose their jobs. With less
income, people buy less and demand goes down
Change in Consumer Taste

Consumer’s tastes change frequently

When a product is popular, the demand curve
shifts to the right

When a product becomes outdated and
obsolete, the popularity fades and demand
decreases shifting the demand curve to the
left
Change in Consumer Expectations

People’s expectations can have an affect on
demand

If people believe hard times are on the way,
they will buy less shifting the curve to the
left

If people expect shortages of something,
demand increases shifting the curve to the
right
Price Changes in Goods

Competing products are called substitutes because
consumers can use one in place of the other

Ex. JIF >>>> Peter Pan
Coca-Cola >>>> Pepsi
hamburgers >>>> hot dogs
orange juice >>>> ???

A change in the price of one good causes the demand
for its substitute to move in the same direction
Price Changes in Goods (cont.)

Compliments are products that are used
together.

Ex. JIF >>>> grape jelly
Captain Crunch >>>> milk
hot dogs >>>> buns
computers >>>> ???

The demand for one complimentary product
moves in the opposite direction as the price of
the other.
Price Changes in Goods (cont.)

Question:
If the price of DVD players increased,
what would you expect to happen to the
demand of DVD movies???
Demand would drop
Demand Elasticity

When prices rise, we know that quantity
demanded will go down, but we do not know by
how much

Demand Elasticity is the extent to which a
change in price causes a change in the quantity
demanded for a product

Ex. $1.00 >>>$1.25 is a 25% increase for an
ice cream cone but how much will the price
change affect the people’s demand for the
Demand Elasticity

For some goods and services, demand is elastic.

Each change in price causes a relatively larger
percentage change in quantity demanded
When the price of a product changes a
little, the quantity demanded changes a lot

Price change % < demand change % = elastic
Demand Elasticity (cont.)

Demand for a good or service tends to be elastic
if it has an attractive substitute.

Demand also tends to be elastic if the purchase
for the item can be postponed.
Demand Inelasticity

For some goods and services, demand tends to
be inelastic

Price changes have little effect on the quantity
demanded

Demand for goods with few or no substitutes
tend to be inelastic

Price change % > demand change % = inelastic
Demand Elasticity and Inelasticity

Question:
Suppose the price of electricity went up
25%. As a result, the quantity of
electricity demanded dropped by 2%.
Would you describe the demand for
electricity as elastic or inelastic???
electricity would be inelastic
Section 3
What is Supply?

Supply – the various quantities of a good or
service that producers are willing to sell at all
possible market prices.

Supply can refer to the output of one producer
or the output of all producers in the market.

Producers offer different quantities of a product
depending on the price that buyers are willing to
pay
What is Supply? (cont.)

Quantity supplied varies according to price, but
in the opposite direction

As price rises, quantity supplied rises, and
quantity demanded falls

P
S
D
What is Supply? (cont.)

Law of Supply dictates that sellers will
normally offer more for sale at higher prices and
less at lower prices

Higher prices mean higher profit

Higher profits are incentive to produce more.
Supply Schedule, Supply Curve

Supply Schedule – table that shows the quantities
producers are willing to supply at various prices

As a graph form it can show the supply curve

The supply curve is opposite to the demand curve in that
it normally slopes upward from left to right.

This reflects the fact that suppliers are generally willing
to offer more product at higher prices, less at lower
prices
Profit

Businesses provide goods and services to the
public with the hopes of earning a profit – the
money left over after a business covers it costs.

You try to sell at prices high enough to cover
your costs with something left over

It is the primary goal for business owners in our
economy
Profit (cont.)
Producers have a few options with what they
can do with the profit from their business
1. Increase wages or hire on more workers
2. Invest back into the business by
purchasing new space or equipment
3. Keep it all for themselves

Market Supply

Market Supply – total of the supply schedules
for all providers of the same good or service

Works just like individual supply schedule and
curve; just on a larger scale.

Price has the most influence on quantity
supplied

Ex. Car Washing/labor
Factors Affecting Supply

Keep in mind, when the market supply goes
down supply curve shifts to the left; when
the market supply goes up supply curve shifts
to the right.

Why would supply change in the whole market?

8 factors or reasons that would affect supply.
Factors Affecting Supply (cont.)
Changes in the Cost of Resources
When prices for resources fall, cost of production falls;
producers willing to offer more at all prices
2. Productivity
Efficiency is more output in same amount of time;
reduces production costs; more products at every price
3. Technology
Refers to methods or processes used to make goods or
services; new technology can speed up production
thus cutting costs
1.
Factors Affecting Supply (cont.)
4.
5.
6.
Change in government policy
Tighter vs. relaxed government regulations can affect
costs of production
Change in Taxes and Subsidies
Subsidy—gov’t payment to an individual or business
for certain actions; encourage producers to enter or
even stay in the market; taxes and subsidies change
production costs
Producer Expectations
Predictions on what demand might look like in the near
future
Factors Affecting Supply (cont.)
7.
Number of Suppliers
As more firms enter an industry, supply
increases; suppliers leave, market supply
decreases
Elasticity of Supply

Supply Elasticity– measures how quantity
supplied of a good/service changes in response
to a change in price
QS changes a lot compared to price =supply
elastic
 QS changes little compared to price =supply
inelastic

Elasticity of Supply (cont.)

Products that cannot be made quickly or are
expensive to produce tend to be inelastic

Products that can be made quickly without large
investments of money or skilled labor tend to be
supply elastic
Section 4
Markets and Prices

Forces of supply and demand work together in
markets to establish prices.

Prices form the basis of economic decision

Surplus – QS is higher than QD
signals that the price is too high; consumers will not buy
all of the product suppliers are willing to sell

Will not last long, price will be lowered to move product
Markets and Prices (cont.)

Shortage – QD is higher than QS
signals that the price is too low; suppliers will
not supply all of the product that consumers are
willing to buy.

Will not last long, sellers will raise their price
If left to itself, economy will fix itself.
 Surplus forces price down; Shortage forces price
up until balance is achieved

Markets and Prices (cont.)

Equilibrium Price – point at which supply and
demand are balanced; neither surplus or
shortage exist

Temporary changes may occur (Hurricane
Katrina or Gustov) but the market will adjust to
reach a new equilibrium price
Price Controls

Price Ceiling – Gov’t set maximum price that
can be charged for a good or service

Price Floor -- Gov’t set minimum price that can
be charged for a good or service
Price as Signals

Prices are signals that help businesses and
consumers make decisions

Prices help businesses and consumers answer
the 3 basic economic questions:
WHAT TO PRODUCE
HOW TO PRODUCE
FOR WHOM TO PRODUCE
Advantages of Prices
1.
Prices are Neutral
favor neither producer or consumer; merely a
compromise between the two
2.
Prices are Flexible
both react to unforeseen events by adjusting
production and consumption based on the new
prices
Advantages of Prices (cont.)

Prices and Freedom of Choice
Pricing system and market economy provides
consumers a variety of products and prices to
choose from unlike command economies

Prices are Familiar
This allows us to make buys quickly and
efficiently; no misunderstanding, we know
through prices the value of particular products