Demand and Supply
Demand
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Consumers influence the price of goods in a
market economy.
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Demand: the amount of a good or service that
consumers are able and willing to buy at various
possible prices during a specified time period
Supply: the amount of a good or service that
producers are able and willing to sell at various
prices during a specified time period
A market represents actions between buyers
and sellers.
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The basis of activity in a market economy is the
principle of voluntary exchange.
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Voluntary Exchange: a transaction in which a buyer
and seller exercise their economic freedom by
working out their own terms of exchange
The seller sets the price and the buyer agrees to
the product and price through the act of
purchasing the product
Supply and demand analysis is a model of how
buyers and sellers behave in the marketplace.
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Demand is created only when the customer is
both willing and able to buy the product.
The law of demand states:
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As price goes up, quantity demanded goes down.
As price goes down, quantity demanded goes up.
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Real Income Effect
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People are limited by their income as to what they
can purchase.
Real income effect forces people to make trade-offs.
Substitution Effect
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People can replace one product with another if it
satisfies the same need.
Amazon Prime Music vs. iTunes
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Diminishing Marginal Utility
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People will purchase additional items until the
satisfaction from the last unit is equal to the price.
The lessening of this satisfaction with each
additional purchase is called diminishing marginal
utility.
Utility: the ability of any good or service to satisfy
consumer wants
The Demand Curve and
Elasticity of Demand
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Demand schedule: a table of prices and the
quantity demanded at each price.
To draw a demand curve:
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List the quantity demanded at each price.
The Curve will graph the quantity demanded of a
good or service at each possible price.
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A change in quantity demanded is caused by a
change in the price of a good.
If something other than price causes demand to
increase or decrease, this is known as a change
in demand and shifts the demand curve.
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Population
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Income
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When population increases, opportunities to buy
and sell increase.
Demand for most products increases, shifting the
curve to the right.
An increased income allows consumers to buy more
products or a greater quantity of a single product.
Tastes and preferences, including facts
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Refers to what people like and prefer to choose.
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Substitutes
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When a new competitor is added or an old
competitor leaves the market.
Butter vs. Margarine
Complementary goods
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Products that rely upon one another, demand for
one affects demand for the other.
The decrease in the price of one product will cause
an increase in demand for both products.
Cameras and film
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Elasticity: economic concept dealing with
consumers’ responsiveness to an increase or
decrease in price of a product
Price Elasticity of Demand: economic concept
that deals with how much demand varies
according to changes in price
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Elastic Demand
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Occurs when the demand for some goods is greatly
affected by the price.
One particular brand of coffee increases in price;
consumers will purchase more of the other brands.
Inelastic Demand
Occurs when the demand for some goods is less
affected by price.
 Salt, pepper, and sugar are products consumers will
purchase at almost any cost.
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What Determines Price Elasticity of Demand?
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How many substitutes exist and how closely they
provide the same quality and service.
 Fewer or no substitutes make demand inelastic.
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Percent of a personal budget spent on an item
 The higher the percent of budget, the more elastic the
demand.
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How much consumers have to adjust to the new
price.
 More time makes for greater elasticity.
The Law of Supply and the
Supply Curve
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Supply is the willingness and ability to provide
goods to the consumers.
The Law of Supply states:
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As the price rises for a good the quantity supplied
generally rises.
As the price falls, the quantity supplied also falls.
A direct relationship exists between price and
quantity supplied.
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Increase in price and increase in production
leads to an increase in profits.
Higher prices encourage more competition to
join the market.
Higher prices turn potential suppliers into
actual suppliers, adding to the total output.
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As with demand, graphs and tables can explain
the Law of Supply.
Supply schedule: shows the quantity supplied at
each given price.
A supply curve graphs the quantities supplied
at each possible price.
The relationship between quantity and price is
direct and always moving in the same
direction.
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A change in quantity supplied is caused by a
change in price.
Something other than price can cause a change
in supply as a whole to increase or decrease.
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Price of Inputs
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The price of inputs, or the costs of production- raw
materials, wages, insurance, utilities, etc.- can cause
an increase in supply.
Number of Firms in the Industry
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Competition, or the number of companies in an
industry, can cause an increase in supply
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Taxes
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An increase in taxes can cause a decrease in supply.
If taxes increase, businesses will not be willing to
supply as much as before because the cost of
production will rise.
Technology
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An improvement in technology can cause an
increase in supply
Technology: the science used to develop new
products or methods of production and distribution.
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Adding units to increase production increases
total output for a limited time period.
The extra output for each additional unit will
eventually decrease.
Businesses will continue to add units of a factor
of production until doing so no longer
increases revenue.
Putting Supply and
Demand Together
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In the real world, demand and supply work
together.
As the price of goods goes down, the quantity
demanded rises and the quantity supplied falls.
As the price goes up, the quantity demanded
falls and the quantity supplied rises.
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Sellers and buyers work together indirectly to
place goods and the equilibrium price.
Equilibrium Price: the price at which the amount
producers are willing to supply is equal to the
amount consumers are willing to buy
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If the demand curve shifts due to something
other than price, the equilibrium price will
change.
If the supply curve shifts due to something
other than price, the equilibrium price will
change.
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Rising prices signal producers to make more
and consumers to purchase less.
Falling prices signal producers to make less
and consumers to purchase more.
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Types of Signals:
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Shortages
 Occurs when the quantity demanded (at equilibrium
price) is greater than the quantity supplied.
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Surpluses
 Occurs when the quantity supplied (at equilibrium
price) is grater than quantity demanded.
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Market Forces
 Can cause the prices to rise or fall to correct shortages
and surpluses.
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On occasion the government will get involved
in setting prices.
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If the government believes the market forces of
supply and demand are unfair it may try to protect
consumers and suppliers.
Special interest groups use pressure on elected
officials to protect certain industries.
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Price Ceilings
Price Ceilings: a maximum price set by the
government to prevent prices from going above a
certain level.
 Items in short supply might be rationed.
 Shortages can lead to a black market, or illegal places
to purchase such products at exorbitant prices.
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Price Floors
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Price Floors: a minimum price set by the government
to prevent prices from going below a certain level
Price floors set minimum wage levels and support
agricultural prices.