Warm Up
• I have one can of Coke that is up for grabs
– How are we going to decide who gets it?
– What will happen if I decide to auction it off?
– Will the soda go for the price you can buy it at the
store?
• How do economists decide “who” when there
are limited resources?
Going to a Concert?
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Popular concert
Sold out? Shortage of tickets?
How many would buy for $25
More?
Law of demand: consumers will demand more
of a product at lower prices
Introduction
• There are many reasons why people decide to
purchase or decide to sell
• One element is always present
– Price!
• If price is too low – sellers will not sell
• If price is too high – buyers will not buy
• Supply and demand work together to
establish “Market Price”
Demand
• Desire, willingness, and ability to purchase at
the specified price and time
• The quantity demanded varies with the price
of an item
• The lower the price, the greater number
people are willing to buy
Example: Demand Schedule
Pizza Slices
Price
Quantity Demanded
$2.75
1
2.50
2
2.25
6
2.00
12
1.75
23
1.50
45
Demand Curve
• Draw a line graph
illustrating the data in the
demand schedule
• Vertical Axis – Price
• Horizontal Axis –
Quantity
• Demand curve slopes
downward and to the
right
Law of Demand
• Buyers will purchase more of an item at a
lower price and less at a higher price
• Reasons
– More can afford it
– People buy more at lower prices
• Quantity demanded varies inversely with (in
the opposite direction to) changes in price
Example
• As the price of pizza was reduced, more
students demanded them
• Storekeepers lower their price when they
want to clear out merchandise
Movement ALONG the Demand Curve
• Change in Quantity Demanded is due to a
change in PRICE
Reasons for movement along the
Demand Curve
• INCOME EFFECT
– The income effect happens when a person changes his or
her consumption of goods and services as a result of a
change in real income
• SUBSTITUTION EFFECT
– The substitution effect occurs when consumers react to an
increase in a good’s price by consuming less of that good
and more of other goods.
Shift in Demand Curve
• Willingness to buy different amounts at the
same price.
• The Demand curve SHIFTS
– If the curve shifts to the RIGHT = INCREASE in
Demand
– If the curve shifts to the LEFT = DECREASE in
Demand
– Right =
Left =
What causes a shift in Demand
1. Income
– Changes in consumers incomes affect demand.
2. Consumer Expectations
Whether or not we expect a good to increase or decrease in price in the
future greatly affects our demand for that good today.
3. Population
Changes in the size of the population also affects the demand for most
products.
4. Consumer Tastes and Advertising
Advertising plays an important role in many trends and therefore
influences demand.
Prices of Related Goods
• The demand curve for one good can be
affected by a change in the demand for
another
• Compliments: 2 goods bought together
– Skis and ski boots
• Substitutes: 1 good bought in place of the
other
– Skis and snowboards
Let’s take a look!
• Demand Graphs
Marginal Utility
• Utility = usefulness or satisfaction
• Defined as EXTRA usefulness or satisfaction a
person gets from acquiring one more unit of a
product
Principle of Diminishing Marginal
Utility
• More units of a certain economic product a
person acquires, the less eager that person is
to buy more
• I’m looking for a volunteer!
Warm Up
1.
2.
3.
4.
5.
What is the definition of demand?
Explain the law of demand
Describe marginal utility and diminishing marginal utility
What causes a change along the demand curve line?
What causes a shift in the demand curve?
• Let’s practice: Demand Schedule/Graph
Elasticity of Demand
• The law of demand does NOT tell us by how
much the quantity demanded will increase or
decrease at different prices
• One way to measure the degree of demand is
through the concept of elasticity of demand
• The percentage change in demand that follows a
price change
• The more demand expands or contracts after a
price change, the great the elasticity of demand
Application of Elasticity
• Elastic: (Steak)
– When a drop in the price of an item causes an
even greater % increase in demand
– The demand has STRETCHED a great deal
– Rise in price results in a large drop in demand
• Inelastic: (Milk)
– When a drop in the price of an item causes a
decrease or small increase in demand
– Rise in price results in a small drop in demand
What Makes Demand Elastic/Inelastic
• Demand for a good that consumers will
continue to buy despite a price increase is ??
• Inelastic!
• Demand for a good that is very sensitive to
changes in price is elastic!
Significance of Demand Elasticity
• The elasticity of demand determines how a
change in prices will affect a firm’s total
revenue or income
• If a good has an elastic demand, raising prices
may actually decrease the firm’s total revenue
Quick Quiz: Elastic/Inelastic
• When a small change in price causes a large
change in quantity demanded
• Elastic
• There are very few substitutes for a good
• inelastic
• A change in price will cause a small change in
quantity demanded
• inelastic
• A big ticket item’s price increases
• Elastic
Activity
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With a partner
Make a list
Elastic/Inelastic goods/services
Why elastic?
Why inelastic?
Supply
• The amount of a product that is offered for sale
at all prices that could prevail in the market
• Law states suppliers will offer more for sale at
high prices and less at low prices
• Quantity supplied = how much of a good/service
is offered for sale at a given price
• Increased revenues when prices are high
encourage firms to produce more!
• Also draws in more competition!!
Supply Schedules
Price per slice of Pizza
Slices supplied per day
$.50
1,000
1.00
1,500
1.50
2,000
2.00
2,500
2.50
3,000
3.00
3,500
A change in QUANTITY SUPPLIED
• Is shown by movement ALONG the supply
curve
A SHIFT in Supply
• A change in the quantity that will be supplied
at all possible prices
• Increase in supply – shifts right
– Cost increase, supply will increase
– Workers trained, more productive, supply increase
• Decrease in supply – shifts left
– Cost increase, supply will decrease
– Temps, less productive, supply decreases
Factors that SHIFT Supply
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Productivity
Technology
Number of Sellers
Cost
Expectations
If positive – shifts to right
If negative – shifts to left
Government Influence
• By raising or lowering the cost of producing
goods, the government can encourage or
discourage an entrepreneur or industry
– Subsidies
– Taxes
– regulation
Forces that Affect Supply
Forces that INCREASE SUPPLY
Forces that DECREASE SUPPLY
DECREASE IN PRODUCTION COSTS
Increases in production costs
INCREASE IN TECHNOLOGY
Excise tax
GOVERNMENT SUBSIDIES
Government regulation
EXPECTATIONS OF A FUTURE PRICE
Expectations of a future price
MORE FIRMS ENTERING THE MARKET
Firms leaving the market
Supply Elasticity
• Elasticity of supply is a measure of the way
quantity supplied reacts to a change in price
• If supply is not very responsive – inelastic
• An elastic supply is very sensitive to changes
in price
Determinates of Supply Elasticity
• When companies find it difficult to increase
output because of huge capital and
technology – supply will be inelastic
• When companies can increase production
easily, without the need for more capital or
labor – supply will be elastic
• Typically in the short run, a firm cannot easily
change its output level, so supply is inelastic
Demand v. Supply Elasticity
• If quantities are being purchased – concept is
demand elasticity
• If quantities are being supplied – concept is
supply elasticity
• BOTH is a measure of responsiveness to
CHANGE IN PRICE
Equilibrium
• By combining the supply and demand curves on
the same graph, you can see how supply and
demand together determine how much of a
product will be produced and the equilibrium
price
• Equilibrium – price at which the quantity supplied
exactly equals the quantity demanded
• In other words, consumers are willing and able to
buy the same amount of the product as
producers are willing and able to supply
Draw in Equilibrium
Time to come to Equilibrium
• Will bread come to equilibrium before red
cars?
• Yes! Because it is perishable and no other
reason!
Market Disequilibrium
• If the market price or quantity supplied is
anywhere but equilibrium
• 2 causes
– Excess demand
– Excess supply
• Interactions between buyers and sellers will
always push the market back towards
equilibrium
Surplus
• Excess quantity supplied
• Eventually will force producers to lower the
price
• As price comes down, consumers will buy
more until it returns to equilibrium
Shortage
• Consumers are willing and able to buy a lot at
low prices
• They are willing to buy more than are
available for sale
• Producers will start raising the price again
until it reaches equilibrium
Role of Government in D&S
• Price ceilings
– Max price that can be legally charged for a good
– Rent control
• Price floors
– Minimum price set by the government that must
be paid for a good/service
– Minimum wage
• We need government when price is too high
or low?
Make a list of things that are too
expensive
Should the government get involved?
• Where are prices too low? Should we help
boost these prices with government
involvement?
Activity
• Prices are signals and provide incentives to
buyers and sellers. When supply or demand
changes, market prices adjust, affecting
incentives
– Identify products used in households that have
become more/less expensive compared to other
products as a result of changes in supply and
demand
– Explain how the price changes affected production
and consumption decisions in the household
Advantages of Prices
• As an incentive to buy or produce
• Signals – high price is giving sellers the green
light to produce more
• Flexibility – price more flexible than
production levels
Efficient Resource Allocation
• A market system, with its fully changing prices,
ensures that resources go to the uses that
consumers value most highly
• Market problems!
– Spillover costs (pollution) to consumers
– Misinformed consumers
Activity
• Describe what is likely to happen if the
government imposes a price ceiling on gas and
a price floor on milk
Using the Internet
• Employment data
– www.whitehouse.gov/fsbr/esbr/html
• Family income distribution
– www.census.gov/hhes/income/histinc/f02.htlm
Project
• PowerPoint OR Essay
• How does Demand and Supply impact me?
• BE convincing!