CHAPTER
20 AND 21
SUPPLY AND DEMAND
CHAPTER 20: DEMAND
Supply and Demand determines trade:
1. Buyers purchase goods and services with money
2. Sellers get money for selling goods and services
-
The price is relative to the amount buyers are willing to
trade and the amount sellers are willing to trade for both
groups to be happy.
-
Price is determined between an equilibrium between those
that demand and those that sell.
What is demand?
A Ferrari? A trip to Europe? Do you demand these?
DEMAND
Demand: desire, willingness, and ability to buy a good or
service at various prices.
For demand to exist:
1) Consumer must want to buy a product
2) Be willing to buy the product
3) Have the resources available to purchase the product
DEMAND SCHEDULE
Table that lists the various prices and quantities of a product or
service that someone is willing to buy over a range of possible
prices.
Price (per bushel)
Quantity Demanded for
Wheat (bushels per month)
90
45
85
65
80
85
75
105
70
125
Marginal Benefit of the 85th bushel is 80.
Total Revenue = price X quantity in a time period
DEMAND CURVE
DEMAND CURVE
Graph that shows the amount of a product that would be
bought at all possible prices in the market.
Price (vertical) and Quantity (Horizontal)
Law of demand: quantity demanded and price move in
opposite directions (people will buy less the more an item
costs and vice versa).
Market demand: the total demand of all consumers within
you market.
UTILITY
Utility: the pleasure, usefulness, or satisfaction one gets
from a good or service (varies for each person) => the
resulting feeling from using a product
Marginal utility: the additional satisfaction for each additional
unit consumed.
Diminishing marginal utility: the principle that our additional
satisfaction, or marginal utility, tends to weaken as more
units of a product are consumed.
- The lower the diminishing marginal utility, the better for the
seller or producer
SHIFTS IN DEMAND
CREATED BY A NON-PRICE DETERMINANT!!! The price remains the
same, but quantity would change.
-
More demand => shifts to the right
-
Less demand => shifts to the left
1. Change in Population (number of consumers): population
increase/decrease
2. Change in Consumer income
1. Normal good: I increase-D increase and I decrease- D decrease
2. Inferior good: I increase- D decrease and I decrease- D increase
3. Change in consumer’s taste: what is hot (tickle me elmo, zhu-zhu
pets)
4. Change in consumer’s expectations: tech innovation
5. Change in substitutes (a good or service which can be used in place
of another good or service): Coca-Cola and Pepsi and RC cola
6. Change in complements (an item used with another good): if price of
hot dogs increases too much than demand for hot dog buns
decreases)
SHIFTS IN DEMAND
ELASTICITY
When you change the price (increase), what percentage does
demand change (decrease).
-
The extent to which a change in price causes a change in
the quantity demanded.
When there are many substitutes, products are usually more
elastic.
Products with less substitutes are inelastic (price change has
little effect on demand).
CHAPTER 21: SUPPLY
Supply: refers to the maximum quantities of a good or
service producers are willing to sell at all possible market
prices.
Supply Schedule: Table that lists the various prices and
quantities of a product or service that someone is willing to
produce over a range of possible prices.
SUPPLY SCHEDULE
Price (per bushel)
Quantity supplied
(bushels/month)
90
115
85
100
80
85
75
70
70
55
What is the Law of Supply?
LAW OF SUPPLY
As prices for a good increase, so will the quantity the
producers are willing to supply. If prices fall, the quantity
producers are willing to supply will decrease.
Profit: the money or resources one receives for their goods
and services over and above the costs.
- Businesses want to supply enough of a product at a price
which will create the greatest profit.
SUPPLY CURVE
CHANGES IN SUPPLY
(SHIFTS)
Created by a non-price determinant!
1. Change in the cost of resources- P (decreases), suppliers
can supply more at the same price.
2.
Change in productivity- More efficient, suppliers can
supply more at the same price.
3. Change in technology- changes efficiency
4. Government regulations- increase regulations, suppliers
will supply less at the same price.
5. Taxes and subsidies- S increase, Q increase; T increase,
Q decrease.
SHIFTS IN SUPPLY
FINDING THE
EQUILIBRIUM PRICE
Price
Quantity
Demanded
Quantity
Supplied
State of the Market
Change in Price
90
45
115
Surplus=70 units
Decrease Price
85
65
100
Surplus=35 units
Decrease Price
80
85
85
EP
Stay
75
105
105
Shortage=35 units
Increase Price
70
125
55
Shortage=70 units
Increase Price
Surplus: the quantity supplied is greater than the quantity demanded (price is too
high).
Shortage: the amount demanded is greater than the quantity is supplied (price is too
low).
Equilibrium Price: the price when there is neither a surplus nor a shortage.
SUPPLY AND DEMAND
PRICE CONTROLS
Price Floor: a restriction imposed by the government that
prohibits the price from falling below a certain level.
Price Ceiling: a restriction imposed by the government that
prohibits a price from going above a certain level.
Good or bad? Why or why not?
PRICES
1) Neutral: favor neither the producer nor the supplier.
2) Flexible: change to meet societies needs
3) Freedom of choice: price is the result of economic
freedom of both suppliers and consumers.