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Unit II:
Demand and Supply
Booth/Econ
Prentice Hall
LAW OF DEMAND
•Price
•Demand
What kind of relationship does price and demand
have? Why?
What kind of relationship does price and supply have?
Why?
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Section:
1 2 3
Law of Diminishing Marginal Utility
• Util = One unit of something
(satisfaction gained)
• Def.
Marginal benefit from using
each additional unit of good or
service during a given time period
tends to decline as each is used.
• Example= Hot dogs at game
$4…(worth the price)
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Section:
1 2 3
The Demand Schedule
•
A demand schedule is a
table that lists the
quantity of a good a
person will buy at each
different price.
•
A market demand schedule is
a table that lists the quantity
of a good all consumers in a
market will buy at each
different price.
Demand Schedules
Individual Demand Schedule
•jf
Price of a
slice of pizza
Quantity demanded
per day
$.50
$1.00
$1.50
$2.00
$2.50
$3.00
5
4
3
2
1
0
Market Demand Schedule
Price of a
slice of pizza
$.50
$1.00
$1.50
$2.00
$2.50
$3.00
Quantity demanded
per day
300
250
200
150
100
50
What is the Go
difference
between a market and
individual demand
To
Chapter 4, Section 1
Section:
1 2 3
The Demand Curve
• A demand curve is a
Market Demand Curve
graphical representation of a
demand schedule.
demand curve:
1.Downward sloping
2.Must assume ceteris paribus
3.Relationship between price
and quantity
• What is the one factor that
causes a shift in the quantity
demanded?
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Section:
1PRICE!!
2 3
Price per slice (in dollars)
• Three characteristics of every
3.00
2.50
2.00
1.50
1.00
Demand
.50
0
0
50 100 150 200 250 300 350
Slices of pizza per day
Chapter 4, Section 1
•
•
Movement along the demand curve is a result in a
consumer changing their behavior based on a
change in price.
Increase in quantity demanded is demonstrated by
moving down the demand curve
• Decrease in quantity demanded is
demonstrated by moving up the demand
curve
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Section:
1 2 3
Six Factors That Affect Demand
1.Income
2.Market Size
3.Consumer Tastes
4.Consumer Expectations
5.Substitutes
6.Complements
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Section:
1 2 3
Shifting the Whole Demand Curve
1. Income
Changes in consumers incomes
affect demand. A normal good is a
good that consumers demand more
of when their incomes increase. An
inferior good is a good that
consumers demand less of when
their income increases.
3. Population (Market Size)
Increase in population (migration or
birth rates) usually causes demand
to increase and vice versa.
2. Consumer Expectations
When consumers expect prices to
increase in the future, they will buy
more now. If they expect prices to
fall, they will wait to buy later.
4. Consumer Tastes and
Advertising
Consumers will buy more of a good
or service that is more popular.
Advertising is used to influence
consumer demand.
What else do you think could influence YOUR demand for a
Go To
Chapter 4, Section 2
1 2 3product?
Section:
Shifting the Curve (cont.)
Price of Related Goods
The demand curve for one good can be affected by
a change in the demand for another good.
5. Complements
are two goods that are
bought and used together.
Example: skis and ski
boots
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Section:
1 2 3
6. Substitutes
(interchangeable)are
goods used in place of one
another. Example: skis
and snowboards
Shifting the Curve (cont.)
•
An increase in demand is shown
by moving the demand curve to
the right
–What would cause an
increase in demand?
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
•
A decrease in demand is shown
by moving the demand curve to
the left?
–What would cause a decrease
in demand?
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Section:
1 2 3
What Is Elasticity of Demand?
Elasticity of demand is a measure of how
consumers react to a change in price.
• Demand for a good • Demand for a good
that consumers will that is very sensitive
to changes in price
continue to buy
is elastic.
despite a price
•
Price
has
a
huge
increase is inelastic,
impact on QD
(price has little
impact on QD).
Why would a Go
prescription
drug, like insulin, have
inelastic
demand
for a
To
Chapter
4,
Section
3
3 with diabetes?
1 2person
Section:
Factors Affecting Elasticity
1. Availability of Substitutes
2. Relative Importance
If there are few substitutes for a
good, then demand will not likely
decrease as price increases. The
opposite is also usually true.
Another factor determining elasticity
of demand is how much of your
budget you spend on the good.
3. Necessities versus
Luxuries
4. Change over Time
Whether a person considers a good Demand sometimes becomes more
elastic over time because people
to be a necessity or a luxury has a
can eventually find substitutes.
great impact on the good’s elasticity
of demand for that person.
What are some other factors that you feel could impact a
Go To
Chapterof
4, Section
3
consumersSection:
response
a product?
1 12to23a change in the price
Supply Curves
2. Always upward sloping
3. Must have ceteris
paribus (“all things held
constant”) to exist
Market Supply Curve
Supply
3.00
2.50
Price (in dollars)
Characteristics of a Supply
Curve
1. Relationship between
price and quantity
supplied
2.00
1.50
1.00
.50
0
0
500
1000 1500 2000 2500 3000 3500
Output (slices per day)
A market supply curve is a graph of the quantity
supplied of a good
1 2by3all suppliers at different prices
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Section:
The Law of Supply
According to the law of supply, as price
increases, supply increases. By contrast as
price decreases, supply
Price
Supply
decreases.
Supply
Price
Quantity
As price
increases…
supplied
increases
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Section:
1 2 3
As price
falls…
Quantity
supplied
falls
How Does the Law of Supply Work?
Economists use the term quantity supplied to describe how much of
a good is offered for sale at a specific price. Just like demand,
quantity supplied indicates movement along the supply curve,
because ONLY price is being considered (ceteris paribus).
Why do suppliers produce more as the price increases?
1.The promise of increased revenues when prices are high
encourages firms to produce more. The more you can make, the
more you will produce!
2.Rising prices draw new firms into a market and add to the quantity
supplied of a good.
Higher Production + Market Entry = Law of Supply
Go To
Section:
1 2 $$$$-3
More
More Supply!
Supply Schedules
A market supply schedule is a chart that lists how
much of a good all suppliers will offer at
different prices.
Market Supply Schedule
Price per slice of pizza
Slices supplied per day
$.50
1,000
$1.00
1,500
$1.50
2,000
$2.00
2,500
$2.50
3,000
$3.00
3,500
What would 1an individual
supply schedule list?
2 3
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Section:
Input Costs and Supply
• Any change in the cost of an input such as the
raw materials, machinery, or labor used to
produce a good, will affect supply.
• As input costs increase, the firm’s marginal
costs also increase, decreasing profitability
and supply.
• Input costs can also decrease.
New
technology can greatly decrease costs and
increase supply.
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Section:
1 2 3
Government Influences on Supply
By raising or lowering the cost of producing goods, the government can
encourage or discourage an entrepreneur or industry.
Subsidies
A subsidy is a government payment that
supports a business or market. Subsidies
cause the supply of a good to increase.
Taxes
The government can reduce the supply of
some goods by placing an excise tax on
them. An excise tax is a tax on the
production or sale of a good.
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Section:
1 2 3
Other Factors Influencing Supply
• Number of Suppliers
– If more firms enter a market, the market supply of the
good will rise. If firms leave the market, supply will
decrease.
• The Global Economy
– The supply of imported goods and services has an
impact on the supply of the same goods and services
here.
– Government import restrictions will cause a decrease in
the supply of restricted goods.
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Section:
1 2 3
Elasticity of Supply
Elasticity of supply is a measure of the
way quantity supplied reacts to a
change in price.
• If supply is not
very responsive to
changes in price, it
is considered
inelastic.
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Section:
• If supply is very
sensitive to
changes in price it
is considered
elastic.
Why can’t I respond to a
change in price for trees,
1 but
2 I can
3 for taxi rides?
Elastic
What Affects
Elasticity of
Supply?
Go To
Section:
1 2 3
Chapter 6: Prices
Presentation Pro
Essential Questions: Chapter 6
Balancing the Market
The point at which quantity demanded and quantity supplied come
together is known as equilibrium.
Finding Equilibrium
Equilibrium Point
Combined Supply and Demand Schedule
$3.50
$2.50
$2.00
Equilibrium
Price
$1.50
$1.00
$.50
Supply
0
50
a
Equilibrium
Quantity
Price per slice
$3.00
Demand
100 150 200 250 300
Slices of pizza per day
Price of
a slice
of pizza
Quantity
demanded
Quantity
supplied
$ .50
300
100
$1.00
250
150
$1.50
200
200
$2.00
150
250
$2.50
100
300
$3.00
50
350
350
Supply
= Equilibrium
1 +2 Demand
3
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Section:
Result
Shortage from
excess demand
Equilibrium
Surplus from
excess supply
Market Disequilibrium
If the market price or quantity supplied is anywhere but
at the equilibrium price, the market is in a state called
disequilibrium. There are two causes for disequilibrium:
Excess Demand
Excess Supply
•
•
•
Excess demand occurs when
quantity demanded is more than
quantity supplied.
Shortage
•
Excess supply occurs when quantity
supplied exceeds quantity
demanded.
Surplus
Interactions between buyers and sellers will always
Go To
push
1 market
2 3back towards equilibrium.
Section: the
Price Ceilings
•
•
A price ceiling is a maximum price that can be legally charged for a
good.
An example of a price ceiling is rent control, a situation where a
government sets a maximum amount that can be charged for rent in an
area.
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Section:
1 2 3
Price Floors
•
A price floor is a minimum price, set
by the government, that must be
paid for a good or service.
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Section:
1 2 3
•
One well-known price floor is the
minimum wage, which sets a
minimum price that an employer can
pay a worker for an hour of labor.
Advantages of Prices
Prices provide a language for buyers and sellers.
1. Prices as an Incentive
Prices communicate to both buyers and sellers whether goods or services are
scarce or easily available. Prices can encourage or discourage production.
2. Signals
Think of prices as a traffic light. A relatively high price is a green light telling
producers to make more. A relatively low price is a red light telling producers to
make less.
3. Flexibility
In many markets, prices are much more flexible than production levels. They can
be easily increased or decreased to solve problems of excess supply or excess
demand.
4. Price System is "Free"
Unlike central planning, a distribution system based on prices costs nothing to
administer.
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Section:
1 2 3