Download Demand, Supply and Markets

Demand, Supply and Markets
Joudrey
The Market
• A market is any network that keeps buyers and sellers in
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•
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contact with one another so they can exchange goods
and services.
Can have a physical setting or can be done over the
phone or computer.
Exists wherever the forces of supply and demand meet
to create an exchange.
In a market, the total number of sellers make up supply
and the total number of buyers make up demand.
The Market System
• Market consists of:
– Consumers - create a demand for a product
• Demand
– the amount consumers desire to purchase at various
prices
– Not what they will buy, but what they would like to
buy!
• Effective demand – must be willing AND able to
pay
Individual and Market Demand
• Market demand – consists of the sum of
all individual demand schedules
(a table
showing the quantity demanded at a particular price)
in the market
• Represented by a demand curve
• At higher prices, consumers generally
willing to purchase less than at lower
prices
• Demand curve – negative slope,
downward sloping from left to right
The Demand Curve
Price ($)
Slopes downwards from left to
right (a negative slope) - an
inverse relationship between
price and quantity demanded.
Quantity demanded higher at
lower prices.
As price falls, quantity
demanded rises.
$10
As price rises, quantity
demanded falls.
$5
Demand
100
150
Quantity Demanded (000s)
Demand
• Demand refers to the quantities of a good or
•
•
service that buyers are willing and able to buy at
various prices in a particular time period.
A demand schedule is a list of prices and the
number of items that would be bought at each
price.
Ability to pay is the ultimate determining factor.
Demand Curve
• A demand curve is just like a demand
schedule. It shows the quantities of a
good or service that buyers would be
willing and able to buy at various times,
on a graph.
• The graph always represents the
relationship between quantity and price.
The Law of Demand
• States that when the price of a good is
raised (and there are no other changes)
less of it will be demanded. If a large
amount of a good is put on the market
(and there are no other changes) then it
can only be sold at a lower price.
The Law of Diminishing Marginal
Utility
• Utility means satisfaction.
• The law states that each additional unit of a
good consumed at any given time yields less
satisfaction than the one previously consumed.
This law helps explain why the demand curve
slopes down to the right. People usually would
only be willing to buy more of a good if the price
was reduced.
Elasticity Of Demand
• Elasticity of demand
•
refers to the
responsiveness of the
quantity demanded to a
change in price.
If there is an increase or
decrease in demand with
a change in price,
demand is elastic if the
percentage change in
demand is greater than
the percentage change in
price.
• Demand is inelastic if it
•
stays the same with a
change in price. The
percentage change in
demand is less than the
percentage change in
price. (gas)
Unitary elasticity
means a change in price
brings about an exactly
proportionate change in
quantity demanded.
Factors That Determine Elasticity Of
Demand
• 1. Substitutes or alternatives available
• 2. Small items are inelastic, big items are elastic.
• 3. Essential items are inelastic, luxuries are
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elastic.
4. Over time all goods are elastic.
Normal Good vs. Inferior Good
• Normal good – goods we purchase when
times are good.
• Inferior good – goods we buy when times
are tough
Shifts In Demand
• Shifts occur when there is a change in the
quantity of a product demanded for
reasons other than a price change.
• A shift to the right means there has been
an increase in the quantity demanded at a
particular price.
• A shift to the left means a decrease.
• This applies to supply as well.
Supply
• Supply refers to the quantity of goods and
•
services producers are willing and able to
produce at a particular price.
A supply schedule is a table which shows the
quantities of a good or service that sellers are
willing and able to sell at various prices. This
data can then be used to draw a supply curve,
showing the relationship between price and
quantity supplied.
Equilibrium Price
• The point at which a demand and supply curve
•
intersect is referred to as the Equilibrium
Price, the price at which buyers and sellers
agree or the price at which the quantity supplied
and the quantity demanded are equal.
It is also referred to as the market clearing
price, where the market is cleared of a product,
thus using resources efficiently.
Surplus vs. Shortage
• A surplus occurs when supply is greater
than demand and more of a good is
supplied than is demanded. This causes
an increase in competition and prices fall.
• A shortage occurs when demand is greater
than supply and less of a good is supplied
than demanded. This increase in demand
causes prices to rise.
Shifts In Supply
• All things remaining equal, a supply curve shows
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•
how quantity supplied changes at various prices.
Changes such as new technology, higher prices
for supplies, weather and production costs can
cause the supply curve to shift.
A shift to the right means an increase in the
quantity supplied at various prices. A shift to the
left means a decrease in quantity supplied at
various prices.
Market Equilibrium
• This is seldom reached because so many factors
•
•
continuously influence the supply and demand of goods
and services.
Problems such as shortages and surpluses are usually
worked out as supply and demand work toward
equilibrium.
Scarcity forces us to make decisions, price being an
important deciding factor. That is why the dynamic of
the interaction of supply and demand in the marketplace
determines what is produced, how it is produced and
who gets how much (the three essential questions).
Elasticity of Supply
• Supply is elastic if the percentage change
in the quantity supplied is greater than the
percentage change in price. For example,
if price goes down 10%, but suppliers
produce 20% less, then supply is elastic.
• Supply is inelastic if the percentage
change in quantity supplied is less than
the percentage change in price.
Supply Determinants
• Many factors influence elasticity of supply, but
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time is most important!! Over time, suppliers
can react better to price changes, taking
advantage of an increase in price by producing
more, or less if the price decreases.
Supply of goods that can be stored easily,
inexpensively and for a long period of time, will
be more elastic than products that spoil easily
and are difficult to store. (fresh fish)
The Price System
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1.
2.
3.
4.
5.
The answers to the three major questions are arrived
at automatically through the price system. The price
system………
Acts as a guide to owners of resources about where
they can get the best deal for their labor, land and
capital.
Signal opportunities to entrepreneurs and provides
incentive to adjust production to meet the
opportunities.
Inform consumers as to how to best deal with their
scarce resources.
Signal shortages and surpluses.
Bring order to the marketplace as supply and demand
move toward equilibrium
Government Price Fixing
• Ceiling Price – highest price that can be
charged legally for a good or service.
• Floor Price – minimum price below which
it is illegal to buy or sell a good or service.
Government Intervention
• Subsidies – grant of money (result in
lower prices for consumers and more
revenue for the business)
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– Drawbacks: tax payers pay for this and it
could keep inefficient business running.
Quotas – restriction placed on the amount of
products that producers are allowed to produce.
(ex. Milk, meat, vegetables)
Rent control
Minimum wage
Activity #1
• In your own words tell me (include
examples for each):
• What factors make the
• What factors make the
• What factors make the
• What factors make the
demand elastic
demand inelastic
supply elastic
supply inelastic
Activity #2
• Draw the following curves separately and
explain what makes the graph more
vertical or horizontal by using an example:
• Inelastic demand
• Elastic demand
• Unitary demand curve
• Inelastic supply
• Elastic supply
• Unitary supply curve
Activity #3
• Explain marginal utility using your own
example
• Explain why we get a bargain on almost
everything we buy by relating purchases
to marginal utility and the demand curve.
• Read think like an economist case. Answer
the related question 1 on page 99-101.