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Unit 5 Supply and Demand © OnlineTexts.com p. 1 The Law of Demand • The law of demand holds that other • things equal, as the price of a good or service rises, its quantity demanded falls. – The reverse is also true: as the price of a good or service falls, its quantity demanded increases. – Demand- desire, willingness, and ability to actually buy a good or service © OnlineTexts.com p. 2 Demand Curve The demand curve has a negative slope, consistent with the law of demand. © OnlineTexts.com p. 3 Shift in the Demand Curve • A change in any variable other than price that influences quantity demanded produces a shift in the demand curve or a change in demand. • Factors that shift the demand curve include: – – – – Change in consumer incomes Population change Consumer preferences Prices of related goods: • Substitutes: goods consumed in place of one another • Complements: goods consumed jointly © OnlineTexts.com p. 4 Factors that impact demand 1) 2) 3) 4) 5) Change in number of consumers Change in consumers’ tastes Change in consumers’ expectations Change in substitutes Change in complements © OnlineTexts.com p. 5 Supply • Supply refers to all the various quantities of a good or service that producers are willing to sell at all possible market prices © OnlineTexts.com p. 6 The Law of Supply • The law of supply holds that other things equal, as the price of a good rises, its quantity supplied will rise, and vice versa. • Why do producers produce more output when prices rise? – They seek higher profits – They can cover higher marginal costs of production © OnlineTexts.com p. 7 Supply Curve The supply curve has a positive slope, consistent with the law of supply. © OnlineTexts.com p. 8 Shift in the Supply Curve • A change in any variable other than price that influences quantity supplied produces a shift in the supply curve or a change in supply. • Factors that shift the supply curve include: – Change in input costs – Increase in technology – Change in size of the industry © OnlineTexts.com p. 9 Factors that impact supply 1) Changes in the cost of resources 2) Productivity 3) Technology © OnlineTexts.com p. 10 Equilibrium • In economics, an equilibrium is a situation in which: – there is no inherent tendency to change, – quantity demanded equals quantity supplied, and – the market just clears. © OnlineTexts.com p. 11 Equilibrium Equilibrium occurs at a price of $3 and a quantity of 30 units. © OnlineTexts.com p. 12 Shortages and Surpluses • A shortage occurs when quantity demanded exceeds quantity supplied. – A shortage implies the market price is too low. • A surplus occurs when quantity supplied exceeds quantity demanded. – A surplus implies the market price is too high. © OnlineTexts.com p. 13 Shortage and Surplus © OnlineTexts.com p. 14 Factors that impact demand 1) 2) 3) 4) 5) Change in number of consumers Change in consumers’ tastes Change in consumers’ expectations Change in substitutes Change in complements © OnlineTexts.com p. 15 Shift in the Demand Curve This demand curve has shifted to the right. Quantity demanded is now higher at any given price. © OnlineTexts.com p. 16 Equilibrium After a Demand Shift The shift in the demand curve moves the market equilibrium from point A to point B, resulting in a higher price and higher quantity. © OnlineTexts.com p. 17 Factors that impact supply 1) Changes in the cost of resources 2) Productivity 3) Technology © OnlineTexts.com p. 18 Shift in the Supply Curve For an given rental price, quantity supplied is now lower than before. © OnlineTexts.com p. 19 Equilibrium After a Supply Shift The shift in the supply curve moves the market equilibrium from point A to point B, resulting in a higher price and lower quantity. © OnlineTexts.com p. 20 Price Ceilings & Floors • A price ceiling is a legal maximum that can be charged for a good. – Results in a shortage of a product – Common examples include apartment rentals and credit cards interest rates. • A price floor is a legal minimum that can be charged for a good. – Results in a surplus of a product – Common examples include soybeans, milk, minimum wage © OnlineTexts.com p. 21 Price Ceiling A price ceiling is set at $2 resulting in a shortage of 20 units. © OnlineTexts.com p. 22 Price Floor A price floor is set at $4 resulting in a surplus of 20 units. © OnlineTexts.com p. 23 Practice Quantity Demanded increases P r i c e D1 Quantity Demanded © OnlineTexts.com p. 24 Practice Quantity Demanded increases P r i c e D1 Quantity Demanded D2 © OnlineTexts.com p. 25 Practice Quantity Demanded decreases P r i c e D1 D2 Quantity Demanded © OnlineTexts.com p. 26 Practice Supply Demanded increases P r i c e S1 Quantity Supplied © OnlineTexts.com p. 27 Practice Supply Demanded increases P r i c e S1 S2 Quantity Supplied © OnlineTexts.com p. 28 Practice Supply Demanded decreases P r i c e S2 S1 Quantity Supplied © OnlineTexts.com p. 29 Practice Supply Demanded decreases S1 P r i c e E1 D1 Quantity Supplied © OnlineTexts.com p. 30 You have 10 minutes to review study guide • Look over Socialism on page 686 • Look over The Fed on page 476 • Turn in all journals on round table • You need a pencil for the test. © OnlineTexts.com p. 31 Supply and Demand Poster project • Checklist • Pick a product that will be impacted by supply/demand • Decide what headlines you will use (total 6) to show the factors that affect supply/demand • Create 6 total graphs that would show the result (be sure to label everything) © OnlineTexts.com p. 32
