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Demand and Supply
When you buy something,
do you ever wonder why it
sells at that particular price?
The Marketplace

Any place where buyers and sellers come
together and freely decide what goods and
services to buy and sell.
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Demand—how people in the marketplace decide what
to buy and at what price.
Supply—how producers in the marketplace decide
what to sell and at what price.
Voluntary Exchange—together the decisions on what
to sell, what to buy, when to buy, and how much to buy
of an item.
The Law of Demand

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Demand—represents
all of the different
quantities of a good or
service that
consumers will
purchase at various
prices.
Law of Demand
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As prices go up, quantity
demanded goes down.
As prices go down, quantity
demanded goes up.
Factors That Effect Quantity
Demanded
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Real Income Effect
Substitution Effect
Diminishing Marginal Utility
Real Income Effect

Real Income Effect—The consumer
can’t keep buying something when the
price goes up and income stays the
same.
Income Effect Example

The lesson of the income effect
is that there is nominal income
(what you're paid), and real
income (the basket of goods
and services that you can buy
with what you're paid). And a
corollary is that when prices of
different items in your real
income change, this constitutes
a change in income. This is
because you must now choose
(opportunity cost here) how to
adjust your basket of goods and
services. If the price of one item
in the basket goes up, you have
some basic options:

1) Buy less of the item in question this is because you can now get
fewer units for the same amount of
nominal income.
2) Buy the same amount, but
because you must spend more
nominal income to get the same
quantity of the good in question,
you will have to buy less of
something else.
3) Buy the same amount of
everything, but borrow against
future spending/consumption to pay
for current consumption (go into
debt).
4) Some combination of above.
Substitution Effect

Substitution Effect—The concept that if
two items are comparable in satisfying
the same need and one price goes up,
consumers will buy the other.
• Example:
• Going to and renting movies are priced the same.
• The price of going to a movie goes up.
• The demand for renting a movie will now go up
while the demand for going to movies will go down.
Diminishing Marginal Utility

Utility—defines the power that a good or service has to
satisfy a want.
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Based on utility consumers decide what to buy and how
much to pay for it.
Marginal Utility—defines the additional amount of
satisfaction that a consumer receives upon additional use
of a good or service.
Law of Diminishing Marginal Utility—This rule states that
the additional satisfaction a consumer gets from
purchasing one more unit of a product will lessen with
each additional unit purchased.
Diminishing Marginal Utility

For example, say you go to a buffet and the first plate of
food you eat is very good. On a scale of ten you would
give it a ten. Now your hunger has been somewhat
tamed, but you get another full plate of food. Since you're
not as hungry, your enjoyment rates at a seven at best.
Most people would stop before their utility drops even
more, but say you go back to eat a third full plate of food
and your utility drops even more to a three. If you kept
eating, you would eventually reach a point at which your
eating makes you sick, providing dissatisfaction, or 'disutility'.
Demand Schedule

Economists track the
quantities demanded
at different prices by
forming a demand
schedule
Demand Curve

A graph that is
formed using the
data from the
demand schedule
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Y-axis will always be
price
X-axis will always be
quantity demanded
What Determines Demand?
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Changes in Population—
when population increases,
opportunities to buy and sell
increase.
Changes in Income
Changes in taste and
preferences—what people
like and prefer to choose.
Substitutes
Complementary Goods—a
product often used with
another product. (Film and
Cameras)
Elasticity

Elasticity—how economics measures a consumer
response to an increase or decrease in price.
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Elastic Demand—situation in which the rise or fall in a
product’s price greatly impacts the willingness to buy.
Inelastic Demand—situation in which the rise or fall of a
product’s price has little impact on the willingness to buy.
Supply

The willingness and ability of producers
to provide goods and services at
different prices in the marketplace.
The Law of Supply
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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.
How does supply differ from
demand?

Like the demand
schedule and
demand curve, there
is also a supply
schedule that charts
the data of supplies
and a supply curve
that graphs these
supply findings.
What Determines How Much
Supply There is?
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Price of inputs—raw materials and
wages mainly
Number of firms in the industry—more
firms, more quantity supplied.
Taxes—businesses are normally taxed
on the amount of supply they produce
Technology—creating new methods to
produce supply.
The Law of Diminishing Returns

As more units of a factor of production
(labor) are added to other factors
(equipment), the total output continues to
increase at a diminishing rate.
Putting Supply and Demand
Together
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What do Cabbage Patch Kids, Tickle Me
Elmo, Beanie Babies, and Furbys all
have in common?
• At one point, usually before Christmas, they
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were all in short supply.
Shortages occur when quantity demanded
exceeds quantity supplied at the current price.
What is the perfect price to charge
for an item and yet keep it in supply?
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Equilibrium Price
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The price where the quantity demanded and the
quantity supplied are equal and intersect on a graph.
The price will shift constantly depending on the
amount of demand
• Demand goes up, price generally goes up.
• Demand goes down, price generally goes down.
Shortages (demand is greater than supply) and
surpluses (supply is greater than demand) are
attempted to be controlled by businesses in order to
stabilize the price.
Equilibrium Price
Shift in Equilibrium Price Due to
Increased Supply
What would happen if the demand
increased instead of supply?
What Happens Here?
What is the government’s role in
controlling price?
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Government sets a price ceiling on goods. (Govn’t
controlled housing)
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The government may have to resort to rationing
(distributing) goods.
Finally, the government has laws to try to control the
black market.
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A legal maximum price that can be charged for a good.
The illegal “underground” activity of selling a good for far
above its designed price.
Government sets a price floor on goods. (minimum wage)
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A legal minimum price that can be charged for a good.
Effects of Price Ceiling and
Price Floor