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Chapter 7
Demand & Supply
Demand
the amount of a good or service that
consumers are able and willing to
buy at various possible prices.
Law of Demand
• As price goes up quantity
demanded goes down.
• As price goes down, quantity
demanded goes up.
The quantity demanded and price
move in opposite directions.
(Inverse)
Demand Schedule
Demand Curve
Law of Demand
The factors that explain this inverse relation
between price and quantity demanded are:
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•
•
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Real Income Effect
Substitute Goods
Marginal Utility
Diminishing Marginal Utility
Real Income Effect- individuals cannot keep buying
the same quantity of a product if its price rises
while their income stays the same
Substitute Goods- A product that satisfies the same
basic want as another product. Substitute goods
may be used in place of one another.
Marginal Utility -the extra satisfaction or pleasure
achieved from the increase of one additional unit of
a good or service.
Diminishing Marginal Utility-the additional
satisfaction a consumer gets from purchasing one
more unit of a product will lessen with each
additional unit purchased
What Can Cause Demand to Change?
Demand Shifters/Determinants
Factors other than price can shift demand.
• Changes in income.
• Changes in the number of consumers.
• Changes in consumer tastes and preferences.
• Changes in consumer expectations.
• Changes in the price of substitute goods.
• Changes in the price of complementary
goods.
Demand Curve with Shifters
Decrease
Demand Curve with Shifters-Increase
Elasticity of Demand- A measure
of consumer’s sensitivity to a
change in price.
Inelastic- a product’s price
change has little impact on the
quantity demanded by
consumers. (Salt, Sugar,
medicine, milk).
Factors that influence Elasticity of
Demand
1.
2.
3.
4.
Availability of Substitutes.
Price Relative to Income.
Necessities versus luxuries.
Time needed to adjust to a price
change.- Elasticity can change over
time. Gasoline has become more
elastic.
Supply
• The amount of good or service
that producers are able and
willing to supply at various prices.
Law of Supply
• As the price rises for a good, the
quantity supplied generally rises.
• As the price falls, the quantity
supplied also falls.
Price and quantity supplied move in
the same direction
Supply Schedule
Supply Curve
What Can Cause Supply to Change?
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•
•
•
•
•
Supply Shifters/Determinants
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.
Supply Curve with Shifters-Increase
Supply Curve with Shifters-Decrease
Law of Diminishing Returns
• As more units of a factor of
production (such as labor) are added
to other factors of production (such
as equipment), after some point
total output continues to increase
but at a diminishing rate.
What Happens When Demand Meets
Supply?
Equilibrium Price
This is the price at which the amount
producers are willing to supply is equal
to the amount consumers are willing
to buy.
Equilibrium Price
Prices Serve as Signals
What happens when the Price isn’t “Right?”
When the price is too low:
Shortages- quantity demanded is greater
than the quantity supplied.
When the price is too high:
Surpluses- quantity supplied is greater than
quantity demanded.
Price Controls
• Price Ceiling- a legal (gov’t set) maximum price
that may be charged for a particular good or
service. example: what landlords can charge for
rent, the price of gasoline.
Effective price ceilings–and resulting shortages–
often lead to nonmarket ways of distributing goods
and services.
The government may resort to:
• Rationing- or limiting, items that are in short
supply.
• Black Market- illegally high prices are charged for
items in short supply.
Price Controls-Continued
• Price Floor- government set
minimum price that can be charged
for goods and services.
Price floors prevent prices from
dropping too low. Example- minimum
wage, supporting agricultural prices.