Download Supply and Demand

Supply and Demand
Objective 8.04
EQ How do supply and demand
affect prices?
Laws of Supply and Demand
Supply
Quantity that producers will provide at each price
•
Demand
Quantity that consumers will buy at each price
•
•

Must include: Want, Willingness and Resources.
Law of Supply


As Price goes up producers will be willing to produce more of
a good or service
Law of Demand

As Price goes up consumers will be unable or unwilling to buy
as much
Demand Schedule
PRICE
.25 cents
.50 cents
.75 cents
$1.00
$1.25
$1.50
$1.75
$2.00
QUANTITY
25
24
22
20
5
4
3
1
Labeling the Demand Curve Graph
$2.00
$1.75
$1.50
Price
$1.25
$1.00
$.75
$.50
$.25
0
5
10
15
Quantity
20
25
Supply and Demand
Surplus
1.
•
When the amount supplied exceeds the demand
Shortage
2.
•
When the amount demanded exceeds the supply
Utility
3.
•
The power of a good to satisfy your wants and
needs
Law of Diminishing Marginal Utility
4.
•
The more of something you get, the less it
satisfies you
Supply and Demand
Supply
5.
•
Quantity that producers will provide at each price
Demand
6.
•
Quantity that consumers will buy at each price
Equilibrium Price
7.
•
Price at which the quantity demanded and supplied
will be equal
Elasticity
8.
•
The degree to which there will be a change in
quantity demanded or supplied when there is a
change in price
Elasticity
 Elastic



Demand/Supply:
When there is a change in price there will be a large
change in the quantity demanded./supplied
Tends to be a more horizontal demand curve.
Tends to be goods / services that are wants
 Inelastic



Demand/Supply:
When there is a change in price there will be a small
change in the quantity demanded/supplied.
Tends to be a more vertical demand curve.
Tends to be goods / services that are needs
Elasticity
A
more horizontal
demand curve
 A more
vertical
demand curve
Price Change
BIG
 Means
a more
elastic good or
service
small
 Means
a less
elastic good or
service
Substitutes and Complements

Substitutes (Substitute Goods)


Complements (Complementary Goods)


goods that can be used in place of each other,
because they satisfy the same need
goods that are typically used or bought with
certain other goods
Substitution Effect

when two goods satisfy the same need or want,
people will tend to buy the cheaper of the two.
Because of this competition, prices will come
down.
Markets and Elasticity

Market Demand


Market Supply


The extent (how much) demand will change when there is a
change in price
Supply Elasticity


Total produced by all suppliers of a specific good or service
Demand Elasticity


Total demand of all consumers for a specific good or service
The extent (how much) supply will change when there is a
change in price
Profit


The money a businesses has left over from total sales after it
has paid all of its costs (total costs)
$Total Sales - $Total Costs = Profit
Factors that Influence Demand

Population

Number of Consumers in the area
Consumer’s Expectations



How consumers perceive (think about) the future
Tastes and Preferences

Popularity of a product, likes and dislikes
Consumer’s Income



How much money do consumers have to spend?
Substitutes


How available and expensive are competing products?
Complements

How available and expensive are the goods that are used with
this product?
Factors that Influence Supply







Cost of Resources

Costs of the resources to produce the good or service
Productivity

How much wood would a wood chuck chuck, if a wood chuck
could chuck wood?
Taxes

How high are taxes on this business?
Government Regulation (laws)

Subsidies: Government payments for certain actions

Policies: Minimum wage increase, (de)regulations, restrictions
Technology

New cheaper and better ways of production
Expectations

Looking at the future… “Will consumer demand be higher in a
year?”
Number of Suppliers

How many businesses produce the same good or service?
Demand and Supply Schedules
Price
$2.00
Quantity
Demanded
12 Million
Price
$2.00
Quantity
Supplied
3 Million
$4.00
9 Million
$4.00
6 Million
$6.00
6 Million
$6.00
9 Million
$8.00
3 Million
$8.00
12 Million
Elasticity
EQ: What role does substitution
play in elasticity in deciding price?
Law of Supply
•Remember the Law of Supply?
•The law of supply states that as price
increases the Producer has an incentive to
produce more.
•If price decreases, the producer has an
incentive to produce less.
Law of Demand
 Remember
 The
the Law of Demand?
law of demand states that as the price
of a product increases, more people will
be unwilling or unable to purchase the
product.
 When the price of the product decreases,
more people will be willing and able to
purchase the product.
Demand and Supply Curves
Price in Dollars
$10
$9
$8
$7
$6
$5
$4
$3
$2
$1
$0
Supply
Curve
Surplus
Equilibrium
Point
Equilibrium
Price
Shortage
Demand
Curve
3
6
9
Quantity in Millions
12
Increases in Supply
10
Price
8
6
Original Equilibrium
Point
4
Surplus
New Equilibrium
Point
2
2
4
6
8
Quantity Demanded
10
Decrease In Supply
10
8
Price
New Equilibrium Point
6
Shortage
Original Equilibrium
Point
4
2
2
4
6
8
Quantity Demanded
10
Decrease in Demand
10
Price
8
6
Original Equilibrium
Point
Surplus
4
New Equilibrium Point
2
2
4
6
8
Quantity Demanded
10
Increase in Demand
10
Price
8
New Equilibrium
Point
6
Shortage
Original Equilibrium
Point
4
2
2
4
6
8
Quantity Demanded
10
3 Major Factors affecting Elastic
Demand
 The

substitution effect
The greater the number of substitutes for a
good, the greater the elasticity.
 Degree


of necessity
If a product is absolutely necessary, it will be
less elastic.
If a product is a luxury, it will be more elastic.
 Proportion

of income
The greater the proportion of income the good
requires, the more elastic it will be.
Determining Elasticity

What is a good that has many substitutes?
 When the price of one good goes up, what
happens to the demand of the others?
 What would happen to the demand curve of the
original good?
 What would happen to the demand curve of the
substitute good?
 What are some examples of an inelastic good that
is a necessity?
 What is an inelastic good that is not a necessity?