Download Supply and Demand - CECEconomics2012

SUPPLY AND DEMAND
WHA T A RE SUPPLY A ND DEMAND, A ND WHA T FACTORS
INFLUENCE THEM?
WARM UP: DEMAND SCHEDULE
Price
Number willing to
buy
• Why might some students be
willing to pay $X for this
product?
• Why might some students
choose not to pay even $1 for
this product?
• You have created a demand
curve for the product. What
happens to the quantity
demanded when the price
goes down? When the price
goes up?
• Most demand curves look
similar to the one you created.
Given this, what do you think
the “law of demand” might
say?
DEMAND AND PRICE
• Demand
• The amount of a good or service that consumers are willing
and able to buy at all prices in a given period
• Quantity demanded
• The amount of a good or service that consumers are willing
and able to buy at a specific price.
• Demand curve
• Shows the relationship between price and the quantity that
buyers are willing and able to pay.
GRAPHING INDIVIDUAL DEMAND
MARKET DEMAND
• Market demand
• The sum of all the individual quantities demanded in a
market.
THE LAW OF DEMAND
• As price increases, quantity demanded decreases.
• Why is this?
• The law of diminishing marginal utility
• People will buy ever larger quantities of a good or service only if
the price is low enough.
• The income effect
• Income is scarce, only so much money can be spent. If the
price of a good or service increases, they will not be able to buy
the same quantity as they did at the original price.
• The substitution effect
• A different good can satisfy the same want.
DEMAND SHIFTERS: FACTORS THAT
CAUSE A CHANGE IN DEMAND
•
•
•
•
•
•
Changes in income
Changes in the number of consumers
Changes in consumer tastes and preferences
Changes in customer expectations
Changes in the price of substitute goods
Changes in the price of complementary goods
• A product that is consumed along with some other product
DEMAND SHIFTERS
• Increased demand=
demand curve shifts
to the right
• Decreased demand=
demand curve shifts
to the left
• When a factor other
than price causes the
quantities demanded
at every price to
change, a demand
curve has shifted.
ELASTICITY OF DEMAND
• The measure of a customers’ sensitivity to a change
in price
• Inelastic
• Price increase on necessities
• toothpaste
• Elastic
• Price increase in a non-necessity item, may chose to buy
another product/brand
• Calculating and graphing elasticity of demand
• Demand elasticity=percentage change in quantity
demanded/percentage change in price
TOTAL REVENUE TEST
• Used to gauge the impact of prices on revenue.
• Total revenue= (quantity of a good sold)(price of the good)
FACTORS THAT INFLUENCE
ELASTICITY OF DEMAND
•
•
•
•
Availability of substitutes
Price relative to income
Necessities versus luxuries
Time need to adjust to a price change
SUPPLY AND PRICE
• Supply
• The amount of a good or service that producers are willing
to offer for sale at all prices in a given period.
• Quantity supplied
• The amount of a good or service that producers are willing
and able to offer for sale at a specific price.
• Supply curve
• Shows the relationship between the price and the quantity
that producers are willing and able to supply.
GRAPHING INDIVIDUAL SUPPLY
MARKET SUPPLY
• The sum of all the individual quantities supplied
THE LAW OF SUPPLY
• As price increases, quantity supplied increases
• Why is this?
• Production decisions by existing producers
• Producers want to maximize profits, and one way to do this is
based on revenue
• When prices increase, the desire to make a profit leads producers
to increase production of goods, and as a result expect profits to
increase.
• When prices fall, producers are likely to decrease production.
• Market entries and exits
• When the price of a good or service increases, new firms may enter
a new market because they see the potential for profit.
• If prices drop, the reverse will happen, and the producer will exit the
market.
SUPPLY SHIFTERS: FACTORS THAT
CAUSE A CHANGE IN SUPPLY
• Changes in the cost of inputs
• Changes in the number of producers
• Changes in conditions due to natural disasters or
international events
• Changes in technology
• Changes in producer expectations
• Changes in government policy
• Subsidy- cash payment to the producer
• Excise tax- tax on the manufacture or sale of a good
SUPPLY SHIFTERS
• Increased supply=
supply curve shifts to
the right
• Decreased supply=
supply curve shifts to
the left
• When a factor other
than price causes the
quantities supplied at
every price to
change, a supply
curve has shifted.
SUPPLY ELASTICITY
• Measures a producer’s sensitivity to price changes
• Law of supply- the quantity supplied moves in the
same direction as price
• A producer who has an elastic supply will respond
to an increase in price with an increase in the
quantity supplied.
• Yogurt makers- flexible producers
• Antiques dealer- nonflexible producers
• Supply of antiques is inelastic
CALCULATING AND GRAPHING
ELASTICITY OF SUPPLY
• Supply
elasticity=percentage
change in quantity
supplied/percentage
change in price
• Unitary elastic supply- a
supply elasticity equal
exactly to one
• The flatter the supply
curve, the more likely it
is elastic. The steeper
the curve, the more
likely it is inelastic.
FACTORS THAT INFLUENCE
ELASTICITY OF SUPPLY
• Supply chain
• Availability of inputs
• Mobility of inputs
• Storage capacity
• Time needed to
adjust to a price
change