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Chapter 7
Demand and Supply
Section 1
Demand
The Marketplace
 Consumers influence the price of
goods in a market economy
 Demand is how people decide what to
buy and at what price
 Supply is how sellers decide how
much to sell and what to charge
 A market represents actions between
buyers and sellers
DEMAND
 Market economy – people act in their own
best interests to answer What, How, For
whom
 Demand is created only when the customer
is both willing and able to buy a product
 Quantity demanded is the amount (quantity)
of an item that consumers are willing and
able to buy at a certain price
DEMAND
 Before you can start a business, you
have to know what the DEMAND is for
your product!
 If you open a pizza place, and there are 3
other pizza places in the neighborhood,
the demand is different than if you’re the
only one!!
Demand: Example
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Bicycle Shop
Ask: Where the demand is?
Set up where have a lot of bicycle riders and few
shops
Ask: How do you measure demand?
Visit other shops to gauge reactions of
consumers
Poll consumers (prices, determine demand)
Study past data
Gives you idea of desire, willingness, and ability
for people to pay
Voluntary Exchange
 A buyer and seller exercise their
economic freedom by working toward
satisfactory terms of an exchange.
 Both have to believe they are better off
after the exchange.
The Law of Demand
 Consumers buy more of a good
when its price decreases and
less when its price increases.
 As price goes up, quantity
demanded goes down.
 As price does down, quantity
demanded goes up.
The Law of Demand
 Quantity demanded and price move in
opposite directions (inverse relationship)
PRICE ↑ QUANITY DEMANDED ↓
PRICE ↓ QUANITY DEMANDED ↑
Discussion Question
 How does the seesaw illustrate the
relationship between price and quantity
demanded?
Price
Quantity
Income Effect
# 1 = PRICE
 This will effect the QUANTITY DEMANDED:
A. Income Effect
When people are limited by their income as to what
they can purchase. If the price rises and their
income stays the same, they cannot buy the same
quantity of a product.
Ex: When gas prices rise and your income does not.
What happens when the price of gas goes down
and your income remains the same?
Substitution Effect
B. Substitution Effect
When people can replace one
product with another if it satisfies
the same need.
Ex: McDonald’s vs. Wendy’s
Practice
 Write an example from personal
experience of how price, real income, or
the substitution effect changed your
decision to buy a good or service.
Diminishing Marginal Utility
 Utility:
-used to describe the amount of
usefulness or satisfaction that someone
gets from the use of a product
 Marginal utility:
-the extra usefulness or satisfaction a
person gets from acquiring or using one
or more unit of a product
Diminishing marginal utility
 The extra satisfaction we get from using
additional quantities of the product
begins to diminish
 Not willing to pay as much for 2nd, 3rd,
or 4th as we did the first
 Ex. Cold drink
 Marginal utility < the price =
STOP buying
Practice
 Describe an instance in your own life
when diminishing marginal utility caused
you to decrease the quantity you
demanded of a product or service
 Imagine you sell popcorn at the local
football stadium. How would diminishing
marginal utility effect the prices of your
popcorn after half-time?
Section 2
The Demand Curve and
Elasticity of Demand
Demand Schedule
 Demand schedule is a chart.
 When the data is graphed, it forms a
demand curve with a downward slope.
DEMAND SCHEDULE
The numbers in
the demand
schedule to the
right show that as
the price per CD
decreases, the
quantity
demanded
increases. Note
that at $16 each, a
quantity of 500
million CDs will be
demanded.
Graphing the Demand Curve
Part B
Plotting the
Price–
Find letter E. Note
that it represents
a number of CDs
demanded (500
million) at a
specific price
($16).
Graphing the Demand Curve
Part C
Demand Curve
for CDs
This line is the
demand curve, which
always falls from left
to right (downward
sloping)
How many CDs will
be demanded at a
price of $12 each?
Change in Demand
Increase in demand = curve will shift right
Decrease in demand = curve will shift left
DETERMINANTS OF DEMAND
 The other Determinants effect a Demand
change – price stays the same, but people
willing to buy different amounts of the
product
DETERMINANTS OF DEMAND
1. Consumer income (rise in income, more $ to
spend = greater demand; lower income, less $
to spend = less demand)
2. Consumer tastes
3. Related Products
A. Substitutes
B. Complements
4. Future Expectations (expected income of
buyer, expected price, expected new
technology)
5. Population (the total # of buyers in the market)
– this is for the total market demand
Determinants of Demand
Income
• The demand curve D1
represents CD demand
before income
decreased. The demand
curve D2 represents CD
demand after income
decreased. If your
income goes up,
however, you may buy
more CDs at all possible
prices, which would shift
the demand curve to the
right.
Part B
Change in Demand if
Your Income Decreases
Determinants of Demand
• When a product
becomes a fad, more
of it is demanded at
all prices, and the
entire demand curve
shifts to the right.
Notice how D1–
representing demand
for Beanie Babies™
before they became
popular–becomes
D2– demand after
they became a fad.
Fad
Part C
Change in Demand
if an Item Becomes a Fad
DEMAND CHEAT SHEET!
Demand is about the CONSUMER
 INVERSE RELATIONSHIP BETWEEN PRICE AND
QUANTITY DEMANDED

As price goes down, quantity demanded goes up
As price goes up, quantity demanded goes down

Determinants shift the demand curve
– If we have more money to spend, our demand is higher
– If a product is the hottest style/trend, our demand is
higher
– If a substitute is available, demand is lower for the
original product; higher for the substitute
Turn to pg. 175 and complete #1-3
Price Elasticity of Demand
 Elasticity: measure how
sensitive consumers are
to price change
 Demand Elasticity: how
much consumers respond
to a given change in price.
 Because some goods and
services are affected by
price more than others, we
classify demand as either
elastic or inelastic.
Elastic
 Small price
•
changes can
make big changes
in demand
•
 Amount bought
will go up when
price goes down •
 You can wait to
buy
Inelastic
Price changes
don’t affect
demand
Lower price will
NOT affect the
amount bought
You can’t wait
to buy
Elastic
-CocaCola
-CDs
-Cars
Inelastic
 Milk
 Gasoline
 Electricity
Demand is elastic if you answer
YES to the following questions:
 Can the purchase be delayed?
 Yes = elastic
 No = inelastic
 Are adequate substitutes available?
 Yes = elastic
 No = inelastic
 Does the purchase use a large portion
of your income?
 Yes = elastic
 No = inelastic
(Ex: car)
(Ex: salt)
Factors Affecting Elasticity
Existence of substitutes
(insulin vs soda)
% of budget devoted to that
good (salt vs cars)
Time consumers are given
to adjust to price
(electricity)
Section 3
The Law of Supply and
the Supply Curve
The Law of Supply
As the price rises for a
good, the quantity supplied
generally rises.
As the price falls, the
quantity supplied also falls.
Law of Supply
 Quantity Supplied – the
amount of a good or
service that a producer is
willing and able to supply at
a specific price
Incentive of Greater Profits
 Profit incentive motivates people in a
market economy.
 The higher price of a good, the greater the
incentive for a producer to produce more.
Supply Curve
Change in Supply
 Producers will supply more goods or fewer
goods at every possible price.
 A change in price does NOT cause this
movement.
Determinants of Supply
1. If price of inputs drops, a producer can
supply more at a lower production cost.
Which way does the curve shift?
 If the cost of inputs increase , suppliers will
offer fewer goods for sale at every price.
Which was does the curve shift?
Determinants of Supply
2. Number of businesses in the industry: as
more firms enter the industry, greater
quantities are supplied at every price –
supply curve shifts to the right.
Determinants of Supply
3. Taxes: causes production costs to go up,
supply goes down.
 Shifts to the left
Determinants of Supply
4. Technology: Improvements in
technology will increase supply.
 New technology usually reduces the cost
of production (automobiles)
Law of Diminishing Return
 Total production keeps growing but the
rate of increase is smaller
 Each worker is still making a positive
contribution to total output (but
diminishing)
Example
 10 machines, 10 workers.
 Hire an 11th worker, production increases
by 1,000 per week.
 Hire 12th worker, increases by only 900.
 Why?
 There are not enough machines, and
people might be getting in each other’s
way.
Section 4
Putting Supply and
Demand Together
Equilibrium Price
 The price at which the quantity supplied
by sellers is the same as the quantity
demanded by buyers.
Where the two curves intersect is
the equilibrium price
Prices as Signals
 Rising prices signals producers to produce
more and consumers to purchase less.
What do falling prices mean?
Falling prices signals producers to produce
less and consumers to purchase more.
Shortages
 Occurs when the quantity demanded is
greater than the quantity supplied
Surpluses
 Suppliers produce more than consumers
want to purchase in the marketplace.
 Extra inventory
 Prices will have to drop to reach
equilibrium price
Price Controls
 Price ceiling: government-set price
maximum price that can be charged for a
good or service.
 Price floor: government-set minimum price
that can be charged for a good or service.
Minimum wage
Rationing
 Government limits items that are in short
supply.
 Determines everyone’s “fair” share
 This is expensive because of high
administrative cost
 Black market