Download Unit II: How Markets Work

Unit II: How Markets Work
Part I – Supply and Demand
Demand

The desire, willingness and ability to
buy a good or service
Affective Demand
Must want to buy
 Must be willing to buy
 Must have the resources to buy

What is market demand?

The total amount of demand created by
all consumers for a product
Demand Schedule

A table that lists the various quantities
of a product that will be bought at
different prices
$50
$40
$30
$20
$10
$5
Demand Curve

A graph that shows the amount of a
product that will be bought at all
possible prices
Direction of the Demand Curve

Downward Slope
What does the law of demand
state?

As price goes UP demand goes DOWN
and visa versa
What does utility refer to?

Satisfaction
Diminishing Marginal Utility

Principle that additional satisfaction
goes down as we consume more of a
product
Determinants of Demand
changes in:
 Buyers (#of) – changes in population
 Income – people earn more they spend more
 Tastes – change in popularity or fads
 Expectations – feelings of the future
 Related goods


Substitutes – goods that can replace others
Compliments – goods that go along with another
Decrease in demand at every price
will produce a Left shift in demand
curve
An increase in demand at every
price will produce a right shift in
demand curve
Demand Elasticity

How much demand for a product is
affected by a change in price
Factors affecting elasticity
Percentage of Income
 Availability of substitutes
 Necessity or Luxury
 Length of time

What is supply?

The various amounts of a good or
service that producers will supply at
different prices
The Law of Supply

Suppliers will generally offer more for
sale at higher prices and less at lower
prices.
What does a Supply Schedule
illustrate?

How much will be supplied at different
prices
Supply Schedule for Video Games
Price Per Video Game
Quantity Supplied
$50
200
$40
190
$30
170
$20
130
$10
100
$05
10
What does a supply curve
illustrate?

The amount of a good or service that
will be supplied at different prices
In what direction does the supply
curve slope reading from left to
right?

Upward
What can cause a shift in supply at
every price?
The Cost of Resources

The materials used to produce
Productivity

How efficient the work force is
Technology

The methods used to make goods and
services
Government Policies

Gov regulations increase costs of
production
Taxes
Higher taxes = higher costs
 Lower taxes = lower costs

Subsidies

Government payment to help do
something (decreases costs)
Expectations

What owners believe demand will be
Number of Suppliers
More suppliers = more supply
 Less suppliers = less supply

Shift in Supply
Price of Video
Games
$50
Original Q
Supplied
200
Change in Q
Supplied
300
$40
190
290
$30
170
270
$20
130
230
$10
100
200
$05
10
110
When market supply increases at
every price the supply curve shifts
to the

Right
Now suppose the government
increases taxes on the industry.
It will decrease
 Label this on the graph assuming that 100
less will supplied label it S3

What does supply elasticity mean?
How much supply is affected by a
change in price
 Elastic Supply – quantity changes a
great deal when price changes
 Inelastic Supply – quantity changes
little when price changes

What affects the elasticity of
supply?

How quickly a company can change
how much it produces
Equilibrium Price

The price at which
the amount
demanded is equal
to the amount
supplied
What is the equilibrium price of
video games in our market?
$25
What is a surplus?

When there is more supply than
demand
What is a shortage?

When there is greater demand than
supply
If price was set at $40 in our video
game market what would exist?
 Surplus
What about $10?
 Shortage
What impact will a shortage have
on price?

Prices will go up
Surplus?

Prices go down
What are price controls?

When the government sets the price of
goods and services because they feel
forces of supply and demand are unfair
Price Ceiling
Maximum price that can be charged set
by government
 Example = Rent Control

Price Floor
Government set minimum price
 Example = minimum wage

Price as Signals
Determine What to produce by telling
producers what they can make a profit
off of
 Determine How to produce – least
costly means more profit
 Determines Who gets what

Advantages of Price
Prices are Neutral – they do not favor
producer or consumer
 Prices are Flexible – they can adjust to
changes in the market quickly
 Prices provide Freedom of Choice – a
variety of products at different prices
allows consumers to choose
 Prices are Familiar – they are easily
understood
