Download 03.25.14 05 Demand and Supply

What are demand and supply, and what
factors influence them?
 For
there to be a demand for a good or
service, two conditions must be met…
 People
must be willing to buy it.
 For
there to be a demand for a good or
service, two conditions must be met…
 People
must be able to buy it.
quantity demanded – the amount of a good or
service that consumers are willing and able
to buy at a specific price
Demand – the amount of a good or service that
consumers are willing and able to buy at all
prices in a given period
demand curve – shows the relationship
between price and the quantity that buyers
are willing and able to buy
 The
Law of Demand
as price increases,
quantity demanded
decreases, and vice
versa
 Why
do price and
quantity demanded
move in opposite
directions?
 As
people consume
more and more of
something, they gain
less satisfaction from
it. This means that for
people to continue
buying larger quantities
of something, the price
has to be low enough.
 People’s
incomes are
limited. They only
have so much to
spend. If the price of
a good or service goes
up, people will not be
able to buy as much
of it as before.
 Sometimes
two
different goods can
satisfy the same want.
These are known as
substitute goods. If
the price of one goes
up, people will buy
the cheaper one
instead.
 As
consumers buy
more in response to
a decrease in price
(or less in response
to an increase in
price), the quantity
demanded “moves
along the demand
curve.”

Only a change in price
can cause a change in
quantity demanded.
 Opposite
every consumer in a market
exchange is a producer. Producers supply the
goods and services that consumers demand.
 How
do producers decide what to make, and
how much of it to make?
 Price
has a lot to do with how much of
something a producer is willing to make.
 Let’s
say that you are
good at crafting
furniture. You purchase
the raw wood, tools,
hardware, glue and
other supplies. You also
invest your time into
the task. All together,
to craft one rocking
chair, it costs about
$100.
 How
many of you would
be willing to sell these
chairs for $100?
 What
about $110?
 What
about $150?
 Producers
take into account the profit they
will earn. That is, the money they will have
left over from selling their good or service,
after covering the cost of the inputs
(materials, labor, etc.).
 The
higher the price of something, the more
profit a producer will earn, and the more of
that thing the producer will be willing to
produce.
 supply
is the amount of a good or service
that producers are willing and able to offer
for sale at all prices in a given period
 quantity
supplied is the amount of a good or
service that producers are willing and able to
offer for sale at a specific price.
 Let’s
take Jasmine’s business, for example:
 The
Law of Supply states that as the price
increases, the quantity supplied increases,
and vice versa.
 Why
is this the case?
 Firstly,
when prices increase,
existing businesses bring in
more revenue (the amount
of money received in the
course of doing business).
 Bringing in more revenue is
likely to increase profits,
thus producers increase
production.
 Secondly,
if prices rise, new firms may enter
the market seeing the potential for profit.
 Conversely, if prices fall, some firms may
exit the market because of reduced profits.
 Economists
define elasticity as the degree to
which a quantity demanded or a quantity
supplied changes in response to a change in
price.
 An
elastic good or service is one in which the
quantity supplied or demanded changes
greatly in response to a change in price.
 An inelastic good or service is one in which
the quantity supplied or demanded changes
little in response to a change in price.
 Elasticity
of demand is
a measure of
consumers’ sensitivity
to a change in price.
 Goods
or services with
an elastic demand
experience big changes
in quantity demanded
if the price changes.
 Goods
or services with
an inelastic demand
experience small
changes in quantity
demanded if the price
changes.
 People
need gasoline,
and will generally pay
for it at almost any
price – with more or
less grumbling.
 Calculating
 <1
Demand Elasticity
is inelastic
 >1 is elastic
 =1 is “unitary elastic demand”
 Availability
of substitutes.
 Price
relative to income.
 Necessities
versus luxuries.
 Time
needed to adjust to a price change.
2008
Fixed!...
 Elasticity
of supply is a
measure of the
sensitivity of producers
to a change in price.
 Goods
or services with
an elastic supply
experience big changes
in quantity supplied if
the price changes.
 Goods
or services with
an inelastic supply
experience small
changes in quantity
supplied if the price
changes.
 To
grow more bananas
takes time – it requires
clearing more land,
planting more trees,
and waiting.
 Calculating
 <1
Supply Elasticity
is inelastic
 >1 is elastic
 =1 is “unitary elastic demand”
 Availability
of inputs.
 Mobility
of inputs.
 Storage
capacity.
 Time
needed to adjust to a price
change.