Unit 2 - Demand What is Demand? Demand Curve / Demand Schedule Law of Demand Change in Demand Change in Quantity Demanded Demand The amount of a good or service that consumers are able and willing to buy at various possible prices during a specified period of time. Since we have unlimited wants and limited resources we need to make economic choices to determine what demand will be. Demand for one person/family/business/government may not be the same for all. Quantity Demanded – the amount of a good or service that a consumer is willing and able to purchase at a specific price. What happens in a Market? Market – the process of freely exchanging goods and services between buyers and sellers. Our demand of goods will help to determine what products are bought and sold in the market. Voluntary Exchange – a transaction in which a buyer and a seller exercise their economic freedom by working out their own terms of exchange. The problem of what to charge and how much to pay work themselves out threw this system. Both sides agree on a price that they are willing to pay and receive for a product. Law of Demand Economic rule stating that quantity demanded and price move in opposite directions. Quantity Demanded – the amount of a good or service that a consumer is willing and able to purchase at a specific price. As price goes up…quantity demanded goes down!! We tend to buy less of a product when it is not on sale, or the price goes up Examples? As price goes down…quantity demanded goes up!! We always purchase more of a product when it is on sale or the price drops. (I get two when a product is marked down to buy one get one free) Examples? Effects of Changes in price on Demand Real income effect – economic rule stating that individuals cannot keep buying the same quantity of a product if its price rises while their income stays the same. What will the individual need to do to account for the change? Substitution effect – economic rule stating that if two items satisfy the same need and the price of one rises, people will buy more of the other. Utility – The ability of a good or service to satisfy consumer wants Marginal utility – additional amount of satisfaction Diminishing Marginal utility – rule stating that the additional satisfaction a consumer gets from purchasing one more unit of a product will lessen with each additional unit purchased. “Close you eyes and imagine you are walking through the dessert with no water…” Graphing Demand Demand Schedule – table showing quantities demanded at different possible prices. Price per DVD Quantity Demanded $20.00 100 $18.00 300 $16.00 500 $14.00 700 $12.00 900 $10.00 1,100 $8.00 1,300 Graphing Demand Demand Curve – downward sloping line that shows in graph form the quantities demanded at each possible price. Draw out the demand curve for the previous demand schedule Talk about the movement of the curve as price changes!! What determines demand? Changes in Population in need to buy and sell goods or services will also change. Changes in Income cause changes in the amount of money people are willing to spend, which directly relates to how much of a product they will purchase. Changes in Taste and Preferences have a huge influence on demand! If a product is not “in style” it will likely not be sold widely or at a very high price, but an extremely new or popular item would be. What Determined Demand? Substitutions Products that can be used in place of one another. Butter or Margarine Complementary goods Products that need to be, or often are, used with another product. DVD and DVD player Camera and memory cards Study the graphs on pg. 180-181 to see what happens to demand when these changes occur!! Elasticity of Demand Elasticity – economic concept that deals with consumers responsiveness to an increase or decrease in the price of a product. Generally speaking… when the price of a product goes up consumers purchase less of that product, and when the price goes down we purchase more. This is the case for many products, but can you think of any products that don’t have elasticity? When a price change occurs, it has little or no impact on the amount of that product that you would be willing or need to purchase. Inelastic V. Elastic Demand Inelastic demand – price change has little impact on the quantity demanded by consumers. Usually these are goods that have few or no substitutes or are necessities. Elastic demand – when a rise or fall in the price of a product’s price greatly impacts the amount of that product that people are willing to buy. Usually these are luxury items that have many substitutes. Inelastic V. Elastic Demand Items with Inelastic Demand Items with Elastic Demand Flour Snacks Sugar Entertainment Milk Clothing Eggs What else? Medicine Can a product be elastic for Gas Utilities What else? one person and inelastic for another? What do you think? What factors determine Elasticity? Existence of substitutes that can be used in place of that item if a change in price occurs. Percentage of a person’s budget that is devoted to purchasing that item. Large budget items tend to have more elasticity because they have a greater impact on your budget. The time that consumers are given to adjust to the change in price. The more time we have to adjust to price changes… the greater the elasticity of demand. We can adjust our behavior to change with prices over time Unit 3 - Supply Supply The amount of a good or service that producers are willing and able to sell at various prices during a specified period of time. Quantity Supplied – the amount of a good or service that a producer is willing and able to supply at a specific price. Law of Supply Economic rule stating that price and quantity supplied move in the same direction. As price goes up…quantity demanded goes up. As price goes down…quantity demanded goes down. This goes to the root of the profit incentive The higher the price of a good is, the more incentive producers have to make and sell that product. Higher prices; offer more revenue, and cover additional costs of producing more. Graphing Supply Supple Schedule – Table showing quantities supplied at different possible prices. Price Per DVD Quantity Supplied $10.00 100 $12.00 300 $14.00 500 $16.00 700 $18.00 900 $20.00 1,100 Graphing Supply Supply Curve – upward sloping line that shows in graph form the supplied at each possible price. Draw a supply curve from the information on the supply schedule. Talk about the movement of the supply schedule in relation to changes that may affect supply. Pg. 190 - 191 Determinants of Supply Price of Inputs needed to make a product plays a huge role in the price of the product, thus the amount of the product that will be produced for sale. Number of firms in an industry plays a large and obvious role in how much of a product is supplied at any given price. Firms are constantly entering and leaving industries. When taxes increase firms supply less of a product because the increase causes the price of production to increase, and vice versa Technology can easily change the price of production and the efficiency of production, thus increasing supply. Law of Diminishing Marginal Returns Economic Rule that states as more units of a factor of production are added to other factors of production, after some point total output continues to increase… but at a diminishing rate. -Why do you think diminishing marginal returns occurs? - Why is it important for businesses to understand this concept? Number of Workers at McDonalds Additional output produced 11 1,100 12 1,100 13 1,000 14 900 15 800 16 700 17 600 18 500 19 400 20 300 21 200 Equilibrium Price Equilibrium Price – price at which the amount producers are willing to supply is equal to the amount that consumers are willing to buy. Supply = Demand No Shortage – situation where quantity demanded is greater than quantity supplied at the current price. Not enough to go around Prices are raised to lessen demand and increase supply No Surplus – situation where quantity supplied is greater than quantity demanded at the current price. Too many to sell Prices drop to increase demand and decrease supply Review Demand Compare and contrast demand and quantity demanded. Explain the law of demand Difference between a demand schedule and curve Understand movement on the demand curve What factors determine demand? Explain elastic V. inelastic demand Review Supply Compare and contrast supply and quantity supplied Explain the law of supply Describe the relationship between supply and demand Understand the movement on a supply curve What factors determine supply? What is equilibrium price and why do we want to achieve it? What can we do to achieve equilibirum?