Download Supply and Demand

Supply and Demand
Chapter 3
What is demand?

Demand is the willingness and ability to
buy a product.

Has to have both characteristics or it is not
demand!
Demand schedule
Price

Data the shows the
relationship between
price of the product
and how much people
are willing and able to
buy.
Quantity
Law of demand



As the price of the
product increases,
the quantity
demanded
decreases.
P
 Qd
Inverse relationship
Price
Quantity
0.25
22
0.50
17
0.75
12
$1.00
8
$1.25
1
Graph 
Price
Quantity
0.25
22
0.50
17
0.75
12
$1.00
8
$1.25
1
P
D1
Q
Price elasticity of demand


When price changes occur how “much” do
buyers adjust? Magnitude of change
Businesses want to know how buyers
react to a price change.



Which makes more $? Raising or lowering P
Guess wrong and lose money for your
company
Inelastic or Elastic demand
Determinants of Price Elasticity
ELASTIC DEMAND
 Luxury
 Large portion of
budget
 Large number of
substitutes
 Longer time period,
durable goods
INELASTIC DEMAND
 Necessities
 Small portion of
budget
 No substitutes
 Short time period,
non-durable goods
Price Elasticity of Demand
ELASTIC DEMAND
 Small change in
price leads to large
change in Qd
INELASTIC DEMAND
 Large change in
price leads to small
change in Qd
Total Revenue Test
•Total Revenue (TR) = P * Q
•Law of demand; inverse relationship between
variables. P
* Qd
= TR
•Elastic demand; decrease P  increase TR
Quantity effect > Price effect
•Inelastic demand; decrease P  decrease TR
Price effect > Quantity effect
Worksheet Elasticity # 1
Price rises from $5 to $6. Quantity demanded decreases from
15 to 10.
Old price * old quantity demanded = old total revenue
New price * new quantity demanded = new total revenue
P
T. R.
Elastic/Inelastic
Worksheet Elasticity # 2
Price rises from $6 to $9. Quantity demanded decreases from
60 to 50.
Old price * old quantity demanded = old total revenue
New price * new quantity demanded = new total revenue
P
T. R.
Elastic/Inelastic
Worksheet Elasticity # 3
Price rises from $6.50 to $6. Quantity demanded increases
from 100 to 200.
Old price * old quantity demanded = old total revenue
New price * new quantity demanded = new total revenue
P
T. R.
Elastic/Inelastic
Worksheet Elasticity # 4-6
#4 Why do businesses care about price
elasticity of demand?
#5 Which effect is greater for elastic demand,
P or Q?
#6 Which effect is greater for inelastic demand,
P or Q?
Change in Demand

Six non-price factors
(determinants of
demand) which
impact buying at each
and every price
causing a SHIFT to a
new demand line.
P
D1
Q
Change in Consumer Income


When there is an
increase in income 
demand increases.
Everyone gets $1
INCREASE demand;
shift curve RIGHT

P
Mt. Dew
D2
D1
Q
Change in Tastes & Preferences


Bad news, unhealthy,
out of fashion 
demand decreases.
Drinking Mt. Dew
causes migraines
DECREASE demand;
shift curve LEFT

P
Mt. Dew
D2 D1
Q
Change in Price of Substitute Good


This or That; goods
that are rivals. You
would want only one
not both!
Price of Mellow
Yellow goes up 
P
Mt. Dew
D1
Q
Change in Price of Complimentary Good


This and That; goods
that go together like
peanut butter and
jelly  Would want
both or neither!
Price of chips goes
up 
P
Mt. Dew
D1
Q
Change in Consumer Price Expectations

Anticipate future price
change, influences
buying behavior today
P
Mt. Dew
D1
Q
Change in Number of Consumers

If there is an increase
in the number of
consumers 
P
Mt. Dew
D1
Q
REVIEW




D
Shifts occur because something OTHER
than the price of product has changed.
Shift means that at each and every price
more/less is being bought. New D line
Increase; shift right
Decrease; shift left
Show and explain the difference
between a change in quantity
demanded and a change in
demand.
Both show changes in people’s
willingness & ability to buy
Qd
D
What is supply?

Supply is the willingness and ability to
make a product.

Has to have both characteristics or it is not
supply!
Profit motive
Supply schedule

Data the shows the
relationship between
price of the product
and how much
businesses are willing
and able to make.
Price
Quantity
$90
8,000
$120
20,000
$150
30,000
$180
39,000
$210
45,000
Law of Supply




As the price of the
product increases,
the quantity supplied
increases.
P
 Qs
Direct relationship
Graph the data!
Price
Quantity
$90
8,000
$120
20,000
$150
30,000
$180
39,000
$210
45,000
Price elasticity of supply



When price changes occur “how much” do
businesses adjust? Magnitude of change
Businesses want to react to a price change but
limited by time.
Inelastic supply



Unresponsive to price changes, takes time
Natural resources, Agricultural products
Elastic supply


Responsive to price changes, can adjust quickly
Factory or manufactured products
Change in Supply

Six non-price factors
(determinants of
supply) which impact
selling at each and
every price causing a
SHIFT to a new
supply line.
P
S1
Q
Change in Cost of Production


When there is an
increase in cost of
production  supply
decreases.
Workers get a 10%
increase in wages.
DECREASE supply;
shift curve left
P
Inline Skates
S2
S1

Q
Change in Number of Sellers


If new businesses
open, increasing
competition  supply
increases.
Skates R Us opens
INCREASE supply;
shift curve RIGHT
P
Inline Skates
S1
S2

Q
Change in Technology


Improvements in
making products
increases efficiency.
Robotics used in
inline skate factory 
P
Inline Skates
S1
Q
Change in Government Policy
A.
B.
C.
Taxes are a cost of
production for a
business. Decrease tax

Tariffs & quotas. Impose
trade barriers 
Subsidies are payments
to business, lower cost
of production. Decrease
subsidy 
P
Inline Skates
S1
Q
Change in Profit Opportunities


Business don’t care
what they make as
long as they make
money!
Skateboards are
latest fad 
P
Inline Skates
S1
Q
Natural Disaster or Strike

Bad news for
producing product 
decrease supply
P
Inline Skates
S1
Q
REVIEW




S
Shifts occur because something OTHER
than the price of product has changed.
Shift means that at each and every price
more/less is being bought. New S line
Increase; shift right
Decrease; shift left
Show and explain the difference
between a change in quantity
supplied and a change in supply.
Both show changes in business’
willingness & ability to make a product
Qs
S
Price floor





Concern is sellers
can’t make profit
Government sets
legal MINIMUM price
in market (above EQ)
Buyers 
Sellers 
Creates surplus
P
Inline Skates
S1
P1
D1
Q1
Q
Price ceiling





Concern is buyers
can’t afford product
Government sets
legal MAXIMUM price
in market (below EQ)
Sellers 
Buyers 
Creates shortage
P
Inline Skates
S1
P1
D1
Q1
Q
Supply and Demand summary

How is price determined in a market
economy?



Interactions of buyers AND sellers
Different motivations/strategies
“Free” market is favored, government
intervention disrupts ability of market
adjustments and creates surpluses or
shortages.
Real World…
a.
Read headline…
Supply or Demand?
b.
Increase or Decrease?

c.
d.
e.
Identify “factor”
Graph change
Interpret graph,
predict what will
happen to EQ P & Q
P
Pencils
S1
P1
D1
Q1
Q