Download Supply and Demand Notes

SUPPLY AND DEMAND
Demand
• Demand – the willingness and ability of people to buy a
product at a certain price
• Law of Demand – people buy more of a product at a
lower price
– As price goes up, willingness to buy goes down
– Demand and price have an ___________ relationship
DEMAND
PRICE
Proving the Law of Demand
• Diminishing marginal utility
• Income Effect
• Substitution Effect
Diminishing Marginal Utility
• What is marginal utility?
– The satisfaction one gets from one more unit
of a product
• With every additional unit consumed in a
certain time period, additional satisfaction
decreases
Satisfaction
More units
Income Effect
The effect that increasing or
decreasing
prices have on income.
– As price goes up, your buying
power goes down
– As price goes down, buying power
increases
Substitution Effect
The change in the mix of goods purchased as a
result of increasing and decreasing relative
prices.
 Price of OJ goes up, consumers substitute
with apple juice
 Price of beef falls, consumers substitute
beef for chicken or pork
Demand Schedule
• Shows how
much
(QUANTITY)
of a product
people will buy
at a certain
price
PRICE
# of bikes
demanded
$300
3
$275
5
$250
10
$225
16
$200
20
$175
28
$150
35
Graphing Demand
Use the demand schedule to create a demand curve
Graphing Checklist
• Always title graph
• Always label axis
– X axis = always
quantity
– Y axis = always
price
• Accurate scale
• Plot points & connect
• Label all lines
• Label all
intersections
350
Demand curve is
always _________
300
250
200
150
100
5 10
15 20 25 30 35 40
Determinants of Demand
Besides price, what causes demand to
change?
• Consumer Incomes
• Consumer Attitudes
• Complementary Goods
– products that are used together – gas & cars
• Substitute Goods
– Goods that can take the place of other goods –
Butter & Margarine ; name brand & generic
Shifting Demand on a graph
Quantity will shift with demand
• Increase in
demand = line
shifts up to the
right (D1 is drawn in
for you, the dashed
lines show you that
there was an increase
in quantity)
• Decrease in
demand = line
shifts down to
the left (Draw a
decrease in demand
and label D2. Choose a
price point and then
show how quantity
decreased)
350
P
R
I
C
E
300
250
Price
200
150
D1
100
D
5 10
Q
15 20 25 30Q1 40
QUANTITY
SUPPLY
• Supply – the quantity of products that a firm is willing &
able to make available for sale at different prices
• Law of Supply – the quantity of goods supplied will be
greater at a higher price than at a lower price
– As price goes up, production goes up
– Price & supply have a ______ relationship
SUPPLY
PRICE
Supply Schedule
• Shows the quantity of a product
producers are willing to supply at
different prices
– Using your demand schedule, invert your numbers for quantity,
keeping price the same
– Using an X/Y graph, plot this new schedule; Be sure to title,
label axis, and provide accurate scale
Graphing Supply
Use the supply schedule to create a supply curve
PRICE
$300
$275
$250
$225
$200
$175
$150
# of bikes
produced
35
28
20
16
10
5
3
350
300
250
200
Supply curve is always
____________
150
100
5 10
15 20 25 30 35 40
Determinants of Supply
Besides price of the commodity, what
causes supply to change?
• Cost of the inputs (factors of production)
• Changes in technology
Shifting Supply
• Increase in supply
= line shifts down
to the right (draw in,
and label S1, draw in
price line, use dashed
lines to show increase)
• Decrease in
supply = line
shifts up to the left
(draw in, and label S2,
follow same instructions
as above for a decrease)
S
350
P
R
I
C
E
300
250
200
150
100
5 10
15 20 25 30 35 40
QUANTITY
Finding Equilibrium
• Draw in supply & demand
lines on the same graph
using the previous data
• Title the graph
• Equilibrium occurs where
Supply & Demand
intersect
– When S=D, you found E
– Label equilibrium
• Equilibrium also known as
market clearing
• What is the market
clearing price in this
example? ____
• What is the market
clearing quantity? ______
• Why is this important to
producers?
350
300
P
R 250
I
C 200
E
150
100
5 10
15 20 25 30 35 40
QUANTITY
Shortages
quantity ________ > quantity _______ = Shortage
• Results when a seller
charges less than the
equilibrium price
Prove the shortage - draw in a
price line below E & label, at
the intersections points with S
& D drop dashed lines to
quantity, label quantity
demanded (QD) and quantity
supplied (QS)
• Upward pressure on price
– When there are
shortages, prices go up
S
P
R
I
C
E
E
D
QUANTITY
SURPLUS
quantity _______ < quantity _________ = surplus
• Results when a seller charges
more than the equilibrium price
Prove the surplus - draw in a price
line above E & label, at the
intersections points with S & D
drop dashed lines to quantity,
label quantity demanded (QD)
and quantity supplied (QS)
• Downward pressure on price
– When there are surpluses,
prices go down
S
P
R
I
C
E
E
D
QUANTITY