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Objective—Students will understand the concept of DEMAND AND SUPPLY and the law of demand and law of supply. DEMAND: • The quantities of a product which consumers are willing and able to purchase at various prices. Please note… • If you add the words “…and able…” between “…willing…” and “…to buy…”, so that it reads…”…Willing and able to buy…”, now you have something called • Effective Demand. • (I might be willing to buy a certain car, but…am I able?) LAW OF DEMAND: • As the price of the product (P) goes down, the quantity (Q) of the product which consumers are willing to purchase goes up, and vice versa. Or..as a memory aid… • http://www.youtube.com/watch?v=I_izvAb hExY&ob=av2e • OR..in symbols.. Q^ P ^ Q v, P v • This shows an inverse relationship of P to Q. Price Effect • If the price changes, the law of demand says that the quantity will change. • It is NOT a change in demand to have the quantity change when the price changes, it is merely a movement along the curve. • Why does the demand curve slope down and to the right? In other words…why do people tend to buy more of a product at a lower price? 3 possible reasons for “price effect” • 1. New Buyer Effect – A lower price lures new buyers into the market. • 2. Real Income Effect – At a lower price, it is as though the consumer has more money to spend. • 3. Substitution Effect – At a lower price, people will substitute the lower priced product for the higher priced one. SHIFT FACTORS—the sources of demand • The “shift factors” are sometimes called “determinants of demand”. • I use a mnemonic of “TIPSCWE”, using the first letters of … Taste and Preference • What people want to buy because of fashion, style, or custom. Income • If people’s incomes increase, they will buy more of what we call “NORMAL GOODS”. • If an increase in income causes a decrease in demand, we call that product an “INFERIOR GOOD”. Population • more people, more demand. • Fewer people, less demand. Substitutes • prices of a substitute good may affect a good’s demand. Complements • Goods which “go along with” another good will affect that good’s demand. Wealth • A person’s accumulated wealth from past income, if it changes, can affect one’s current demand. Expectations • If a person expects something to go up in price, or to go to a shortage situation, they will buy now. • And…the opposite if they think it is going to go down in price, they will wait to purchase. Supply. • is the quantities of the product that producers are willing and able to market at various prices The Law of Supply • states that as the price of the product increases, the quantities that producers are willing to market will also increase. This shows a direct relationship between price and quantity. Price Effect - supply • A change in price causes a change in quantity supplied, not a change in supply. This is known as the Price Effect. Supply Schedule and Curve • A supply schedule is a table showing prices and quantities supplied. • A supply curve is a graph showing the data from the supply schedule. • The supply curve slopes UP and to the Right. Shifters… • Cost of production – in many ways, the most important shifters. • Technology related to production • Number of firms • Taxes • Expectations • But… Supply shifters (Determinants of supply) • A Mnemomic? • Productivity Indirect tax Number of firms Technology Subsidies Weather Costs of production • OR… PASIFIC-an alternate Demand Shifter memory aid • Population Advertising Substitutes (price of) Incomes Fashions and trends Interest rates Complements (price of) Demand Increase- curve shifts to the right “AT ALL PRICES" Demand Decrease • Note: “at all prices”… Supply Increase… again..curve moves right Supply decrease curve moves left… Both S and D shift…