Download supply and demand

How does Supply and Demand
shape the economic
marketplace?
How does demand affect
economic activity?
THE LAW OF DEMAND
• The concept that people will buy more if the
price is low and less if the price is high.
• In a market economy, prices are set by
demand and supply
• To understand prices you must first
understand these two concepts
Demand
• The desire, willingness, and ability to buy
goods and services
• All 3 conditions must be met to create
demand
• Ex: If I am craving a Bojangles Cajun Filet
Biscuit, but I have no money, I have no
demand for that product
Individual Demand Schedule
• Demand Schedule
• Table showing quantities of demand at
different prices or
• Willingness to buy good or service over a
range of possible prices
Demand Curve
• Graph that shows the amount of a product
that would be bought at all possible prices in
the market
• Price is always on the vertical axis
• Quantity is always on the horizontal axis
THE LAW OF DEMAND
• Demand curves slope down because people
are willing to buy less of a product at a higher
price
• Law of Demand
– Quantity and price move in opposite directions
– P up then Q down, if P down then Q up
Individual vs. Market Demands
• Market Demand
– The total demand of all consumers for a product
or service
• Works exactly the same as demand the
numbers are just larger
Diminishing Marginal Utility
• Utility
– The pleasure, usefulness, or satisfaction we get
from using a product
• Varies from person to person
• Certain goods may provide 0 (zero) utility for
some, yet a great deal for others
• In most cases the more a product we consume
at one time, the less utility we get from each
additional unit
Diminishing Marginal Utility
• This is called diminishing marginal utility
• This is why the demand curves slope downward
• Ex: Slices of Mario’s Pizza
– 1st slice is AMAZING and so is the second, but the
more I continue to eat my enjoyment of each
successive slice will start to decrease
– If I keep eating after I am full, I will get sick and there
is no utility in that
• Diminishing marginal utility explains why we stop
buying something when the marginal benefit
(utility) is less than the cost
Changes in Demand
• Demand for any particular good will change
overtime
• These changes can be shown graphically
• An increase in demand will cause the whole
demand curve the SHIFT TO THE RIGHT, while
a decrease in demand will cause the whole
curve to SHIFT TO THE LEFT.
• REMEMBER: changes in price cause a change
in QUANTITY demanded, not in demand itself
Factors Causing Change in Demand
1.
2.
3.
4.
5.
Changes in Population
Change in Consumer Income
Changes in Consumer Taste and Preferences
Changes in The Price of Substitutes
Changes in Prices of Complements
Changes in Population
(Number of Customers)
• If the population of an area goes up there will
be more consumers demanding goods and
services
• This will cause an increase in demand
• If the population goes down the opposite will
occur
• Changes in birth rates, death rates, wars,
famines, and migration patterns can ALL cause
this to happen
Changes in Consumer Income
• The more money you have to spend, the
higher the demand for a product will be in
most cases
• Higher Income increases demand for normal
goods
– Normal good- goods for which demand increases
as income increase and decreases if income
deceases with price remaining constant
– Ex: Holidays, cars, diamonds, brand name fashion,
hi-tech products
Consumer Income
• Higher income decreases demand for inferior
goods
– Inferior goods- good that decreases in demand
when consumer income rises or increases in
demand if consumer income decreases
– Ex: Used cars, city bus, hamburger, frozen dinners,
off-brand grocery items, shopping at Walmart etc.
• Of course, lower incomes will decrease
demand for normal goods and increase
demand for inferior goods
Changes in Consumer Tastes and
Preferences
• When products become popular, demand
increases
• When the trend dies, demand decreases
• Ex: Neon clothing
Changes in Price of Substitute
• Substitute– product that can be used in the place of another
• If the price of a good goes up, then the
demand for its substitute will increase and
vice-versa
• Ex: If the price of coffee doubles, then
demand for tea will increase
Changes in Prices of Complements
• Complement
– Goods that are used together
• When the price of one good goes up, the
demand for its complement will decrease, and
vice versa
• Ex: Peanut butter and Jelly
Elasticity of Demand
• Demand Elasticity
– The extent to which a change in price causes change in
quantity demanded
• Elastic Demand
• For goods with elastic demand, changes in price cause
relatively larger changes in quantity demanded
• BECAUSE OF SUBSTITUTES
• Types of goods that have elastic demand include:
goods that have substitutes, expensive items, items
whose purchase can be postponed
• Normally, sales increase with drop in prices and
decrease with rise in prices
Elasticity of Demand
• Inelastic Demand
– For goods with inelastic demand, changes in price
have little effect on the quantity demanded
– Goods that have few substitutes and goods that
are necessities have inelastic demand
• Ex: Gasoline
How does supply affect
economic activity?
An Introduction to Supply
• We have already learned that demand is one
of the major forces that helps to determine
prices
• Supply is the other
• Supply- all the various quantities (amounts) of
a good or service that producers are willing to
sell at all possible market prices
• It is roughly the opposite of demand
The Law of Supply
• Law of Supply- principle that suppliers will
normally offer more for sale at high prices and
less for sale at lower prices
• If price increases, then quantity increases,, and if
Price decreases, then quantity decreases
• Law of Supply shows a direct relationship
between price and quantity whereas the law of
demand showed an inverse (opposite)
relationship. Price down quantity up, price up
quantity down
• With supply, price and quantity move in the same
direction (Up or down)
Supply Schedule
• Supply schedule- a table showing the quantities supplied at
different price levels
• We can illustrate this graphically using a supply curve
• Supply curve- a graph that shows the amount of a product
that would be supplied at all possible prices in the market
• Prices are on the vertical axis and quantity is on the
horizontal axis
• The demand curve slopes downward, the supply curve will
ALWAYS sloped upward
• The profit motive helps to explain the law of supply
• Businesses want to make a profit
• So it would be in a producers best interest to see more of a
good at a higher price in order to make a better profit
Market Supply
• Market supply Curve- show the supply for a
product at all prices for all producers of that
product
• Just like the market demand curve, the market
supply curve looks exactly the same as an
individual curve, only the numbers are larger
Changes in Supply
• Remember that often changes over time
• Supply can also increase or decrease
depending on many different factors
• If supply decreases the curve SHIFTS TO THE
LEFT
• If supply increases the curve SHIFTS TO THE
RIGHT
Change in Cost of Production
Includes:
• Resources
• Productivity
• Technology
Changes in Price of Resources
• When the factors of production increase in
price it becomes more expensive to
manufacture goods and services
• This will cause the supply curve to SHIFT TO
THE LEFT
• The opposite is also true
Productivity
• The degree to which resources are being used
efficiently to produce goods and services
• One way of cutting costs is to increase
productivity. Higher productivity decreases
cost per unit.
• This will shift the supply curve TO THE RIGHT
• The opposite is also true
Technology
• The methods or process used to make goods
and services
• New technology can cut costs for a business
shifting the supply curve RIGHT
Government Regulations
• In general, government regulation decreases
supply (LEFT) and relaxed regulation increase
supply (RIGHT)
Taxes
• Increased taxes decrease supply because it
makes goods more expensive to make
• Decreased taxes increase supply
Subsidy
• A government payment to an individual,
business, or other group for certain actions
• Government subsidies serve as incentives to
produce, so the supply curve would SHIFT TO
THE RIGHT
Changes in Number of Producers
• More producers means more supply (RIGHT)
• Less producers means less supply (LEFT)
Expectations of Producers
• If businesses believe that demand will be high,
they will increase production (RIGHT)
• Ex: There are more bathing suits for sale in the
spring and summer than in the winter
• If businesses believe demand will fall, they
stop making so many and supply SHIFTS LEFT
Elasticity of Supply
• Supply elasticity- the measure of how the quantity
supplied of a good or service changes in response to
changes in price
• If quantity changes a lot when a change in price occurs,
then that good is considered to be elastic
• Goods where production can be changed quickly have
elastic supply
• Ex: Candy bars, snow cones, kites, etc.
• Goods where quantity supplied changes very little when
price changes are considered inelastic
• Ex: Oil
• If oil prices go up, oil companies can’t find new
resources, drill wells, and set up refineries and pipelines
very quickly
Equilibrium
• The point where the supply and demand
curve meet
• Once prices reach equilibrium, they tend to
stay there until there is a change in supply or
demand (NOT IN QUANITITY DEMANDED)
Surplus, Shortage, Equilibrium
• Surplus
– Where the quantity supplied is higher than the
quantity demanded
– Graphically, a surplus will be shown by the
horizontal distance between the supply and
demand curves at any point above where the two
curves meet
– If a surplus exists, this tells us the price is too high
and consumers will refuse to buy the item at that
price causing sellers to reduce the price
Surplus, Shortage, Equilibrium
• Shortage
– Quantity demanded is higher than the quantity
supplied
– Graphically, a shortage can be shown as the
horizontal distance between the two curves at any
point below where they intersect
– a shortage signals that prices are too low and
suppliers are not producing enough of their goods
to meet demand
• This will cause sellers to raise prices
Surplus, Shortage, Equilibrium
• The market economy eliminates shortages and
surpluses when it operate without
government restrictions
• During a shortage:
– Prices will rise
• During a surplus
– Prices will fall
• This happens until a balance is achieved
between supply and demand
S & D Quiz
Give the 9 factors affecting supply and demand
Label each factor with the name of the curve it
affects.
Demand
Supply
Review
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Civics Textbook
P. 572 2-5
Pp. 578 2-5
P. 586 2-6
Supply and Demand
For each of the following situations, identify which curve is affected and how it is affected
(↑↓). ONLY ONE CURVE WILL MOVE. Record the determinant of supply or demand
being described. Illustrate the effect on the graph. Label the original curves S1 / D1 – and
label the new curve S2 or D2. Use ↑↓ arrows to describe what happens to equilibrium
price and equilibrium quantity in each situation.
1. The government subsidizes corn production.
What will happen to the supply and demand
curve for corn?
2. The USA wins the World Cup. What happens to
the supply and demand curve for t shirts?
3. Average income decreases. What happens to
the supply and demand curve for Calvin Klein
merchandise?
Question: A survey indicated that chocolate is Americans’ favorite
ice cream flavor. For each of the following, indicate the possible
effects on demand, supply, or both as well as
equilibrium price and quantity of chocolate ice cream.
a. A severe drought in the Midwest causes dairy farmers to
reduce the number of milk-producing cattle in their herds
by a third. These dairy farmers supply cream that is used to
manufacture chocolate ice cream.
b. A new report by the American Medical Association
reveals that chocolate does, in fact, have significant health
benefits
c. The discovery of cheaper synthetic vanilla flavoring
lowers the price of vanilla ice cream.
d. New technology for mixing and freezing ice cream lowers
manufacturers’ costs of producing chocolate ice cream.
1. A local grocery store orders 200 cases of Pepsi
each week and sells them at a price of $6.00 per
case. At the end of the first week, they have only
sold 160 cases. What economic situation is the
grocery store facing and what will have to happen
to price in order for equilibrium to be attained?
a. surplus; price will rise.
b. surplus; price will fall.
c. shortage; price will rise.
d. shortage; price will fall.
e. nothing since the market is in equilibrium.
2. Which of the following can lead to an increase
in the supply for good X?
a. a decrease in the number of sellers of good X.
b. an increase in the price of inputs used to
make good X.
c. an increase in consumers' income, assuming
good X is a normal.
d. an improvement in technology used in
production of good X.
e. none of the above
3. An increase in the price of electricity will:
a. increase the demand for kerosene heaters
b. increase the demand for light bulbs
c. increase the demand for stereos
d. increase the demand for TVs.
4. True or False? Explain.
In economics, "normal good" is the name for a
good a normal individual can afford.
Thousands of bushels
demanded
Price per bushel, $
Thousands of bushels
supplied
85
3.40
72
80
3.70
73
75
4.00
75
70
4.30
77
65
4.60
79
60
4.90
81
Surplus (+)
or shortage (--)
a. Fill in the surplus/shortage
column. Use the information in
that column to state the
equilibrium price and
equilibrium quantity in this
market.
b. Graph the demand for
wheat and the supply of
wheat.
c. Why is $3.40 not the
equilibrium price in this
market? How about $4.90?
d. "Surpluses drive prices up;
shortages drive them down."
Do you agree?
e. Now suppose that the
government establishes a
ceiling (maximum legal) price
for wheat at $3.70. Carefully
explain the effects of such a
ceiling and demonstrate your
answer graphically.
Price, $
Quantity demanded
Quantity supplied
2.10
800
7,200
1.80
1,600
4,800
1.60
2,400
2,400
1.40
3,200
800
1.20
4,100
200
a. What is the equilibrium price of
hot dogs? What makes you think
so?
b. If the organizers of the sporting
event decide to set the price at
1.80, how many hot dogs will be
sold?
For each of the following scenarios, use a supply and demand
diagram to illustrate the effect of the given shock on the
equilibrium price and quantity in the specified competitive market.
Explain whether there is a shift in the demand curve, the supply
curve, or neither.
(a) An unexpected temporary heat wave hits the East Coast.
Show the effect in the ice cream market in New England.
(b) The government introduces a tax on ice cream which is
paid by producers. What is the effect in the ice cream market?
(c) China and Mexico are major producers of textiles. Workers
in Mexico decide to go on strike. Show the effect on the
market for Mexican textiles.
(d) Show the effect of the situation described in (c) on the
market for Chinese textiles.
(e) Suppose the government imposes a price cap on bottled
water. Show the effect in the bottled water market.
Question: Show in a diagram the effect on the demand curve, the supply
curve, the equilibrium price, and the equilibrium quantity of each of the
following events.
a. Case 1: The salaries of journalists go up.
Case 2: There is a big news event in your town, which is
reported in the
newspapers.
b. The market for St. Louis Rams cotton T-shirts
Case 1: The Rams win the Super Bowl.
Case 2: The price of cotton increases.
The market for newspapers in your town
c. The market for bagels
Case 1: People realize how fattening bagels are.
Case 2: People have less time to make themselves a
cooked breakfast.
a. The market for the Krugman and Wells
economics textbook
Case 1: Your professor makes it required reading for
all of his or her students.
Case 2: Printing costs for textbooks are lowered by
the use of synthetic paper.