Download MA3.02 Notes - josephquinn

MA3.02 Notes
OBJECTIVE: 3.02 Interpret the theory of supply and demand
A. Explain supply and demand.
1. Supply: The amount of goods producers are willing and able to produce and sell at a given price during a
certain period of time. Producers prefer to supply when the price is high; this is known as a sellers’
market. For example, when a popular music artist releases a new CD, producers will produce more
because consumers are willing to pay full price.
2. Demand: A consumer’s willingness and ability to buy products at a given price during a certain period of
time. Consumers prefer to buy when the price is low; this is known as a buyers’ market. For example,
Zach makes minimum wage and prefers to purchase CDs when they go on sale.
3. The law of supply: With all other factors being equal, as the price of a product increases, the quantity
supplied will increase, and as the price of a product decreases, the quantity supplied will decrease.
4. The law of demand: With all other factors being equal, as the price of a product increases, consumer
demand for the product decreases, and as the price of a product decreases, consumer demand for the
product increases.
B.
Summarize surplus, shortage, and equilibrium.
1. Surplus: When supply exceeds demand.
a. Can occur when price is too high.
b. Can occur when customers choose a competitor’s product.
2. Shortage: When demand exceeds supply, also referred to as scarcity.
a. Producers can increase prices and customers may continue to purchase the product.
b. A shortage of a product may result in a customer purchasing a substitute product.
3. Equilibrium: Occurs when supply and demand are equal.
a. Both the producer and customer are satisfied and agree upon a price.
b. People’s wants and needs are met and at the same time the supplier’s needs are met.
C.
Explain elasticity.
1. Elasticity: The degree to which demand for a product is affected by its price.
a. Elastic demand: Refers to how changes in the price of a product result in a change on the demand for
that product. For example, when the price of a cheeseburger is reduced, demand may increase. If
the price of a cheeseburger increases, demand may decrease.
b. Inelastic demand: Refers to how changes in the price of a product have very little affect on the
demand for that product. For example, some people might be willing to pay any price for gas.
2. Factors that affect the elasticity of demand.
a. Availability of substitutes. If a substitute is easily obtainable, demand becomes more elastic. For
example, I prefer Pepsi but if Coke is on sale, I will buy Coke.
b. Brand loyalty. Many customers will only purchase a certain brand. In general, brand loyal customers
will accept no substitutes. In this situation, demand becomes inelastic. For example, if someone is
brand loyal and only purchases Gatorade, he/she will purchase Gatorade even when the price is
significantly higher than the price of Powerade.
c. Price relative to income. When an increase in the price of a good or service does not have a major
impact on a customer’s budget, the demand is usually inelastic. For example, if the price of Orbit
gum increases from $0.99 to $1.29, this has little impact on the customer’s budget. In this case the
demand is inelastic. When an increase in the price of a good or service has a major impact on a
customer’s budget, the customer most likely will no longer buy a product. In this case, the demand is
elastic. For example, a Honda Accord has a price increase of $2,000. This would have a major impact
on a household income of less than $20,000 per year. In this case, the demand is elastic.
d. Luxury vs. necessity (want vs. need). When a product is a necessity, demand is usually inelastic. For
example, purchasing medicine for a sick child would be a necessity. When a product is a luxury,
demand is most likely to be elastic. For example, going out to eat versus fixing dinner at home would
be a luxury.
e. Urgency of purchase. If a purchase must be made immediately, demand tends to be inelastic. For
example, if a car breaks down the owner may need to get it fixed ASAP.