Download Market Economy: Supply and Demand

SUPPLY AND DEMAND
What is supply? Give an example.
 What is demand? Give an example.
 What happens to the price of goods if there is an
increase in demand? Give an example.
 What happens to the price of goods if there is an
decrease in demand? Give an example.
 What happens to the price of goods if there is an
increase in supply? Give an example.
 What happens to the price of goods if there is a
decrease in supply? Give an example.

SUPPLY AND DEMAND
Economics 8.03-8.06,
Ch. 21
I. CIRCULAR FLOW OF ECONOMICS
A.
Factor Market- where firms buy factors of
production from households
1.
2.
Labor- earn wages from work
Capital- return on investments, sell goods the
firms
Factor market: Incomes
Households
Businesses
B.
Product Market- business supply goods and
services for sale to households
1.
Households return money by buying from the firms
Factor market: Incomes
Businesses
Households
Product market: Expenditures
C.
In a mixed economy, the government also plays a
role
1.
2.
Individuals and businesses pay taxes to the government
The government uses that money to regulate the
economy, make public works, and provide entitlements
Factor market: Incomes
Entitlements
and Services
Taxes
Households
Taxes
and Fees
Regulation
Government
Product market: Expenditures
Businesses
WARM UP
-What
is the difference between
the factor market and the
product market?
-How does the government serve
as an intermediary between the
product market and factor
market?
-What is the difference between
supply and demand?
II. SUPPLY AND DEMAND
A.
Demand (Consumers)
1.
2.
Demand- desire to own something and the ability to
pay for it
Law of demand- When a good’s price is lower,
consumers will buy more of it.
When the price is higher, consumers will buy less of it.
B.
Supply (Producers)
1.
2.
Supply- the amount of goods available
Law of supply- The higher the price, the larger the
quantity produced.
As price falls, quantity of supply falls.
PRICE
PROFITS
PRICE
PROFITS
C.
Equilibrium Price
1.
2.
a.
b.
When quantity demand and quantity supplied are at the
same price then they reach an equilibrium price
Equilibrium is ideal:
Producers get more if their product gets sold
the right amount of product is available for the consumers
who want it
EXAMPLE
Price
Cars Supplied
Cars Demanded
$5000
20
60
$7500
25
50
$10000
30
40
$12500
35
30
$15000
40
20
$17500
45
10
1.
2.
3.
4.
5.
6.
Why does quantity supplied go up with price?
Why does quantity demanded go down with price?
What is the equilibrium price?
If the price was $10000, how many cars would be sold? Why?
If the price was $15000, how many cars would be sold? Why?
Why is the equilibrium price usually ideal for both consumers and
producers?
Price in thousands
20 K
15 K
Surplus
10 K
Shortage
5K
10
20
30
40
Quantity
Supplied/Demanded
50
60
Price
$1
$2
$3
$4
$5
$6
$7
$8
$9
$10
Round 1
Round 2
Round 3
EXAMPLE: PIZZA!
Supply and Demand Schedule:
Price per Slice Slices
Supplied
$3.00
$2.50
$2.00
$1.50
$1.00
$0.50
300
250
200
150
100
50
Slices
Demanded
50
100
150
200
250
300
1.
2.
3.
4.
5.
If the price was $1, how many would be sold?
What is this an example of?
If the price was $2.50, how many would be sold?
What is this an example of?
What is the equilibrium price?
What would happen to the equilibrium price if
many of America’s milk cows died?
What would happen to the equilibrium price if a
new study demonstrated that pizza has hidden
health benefits?
SUPPLY AND DEMAND: PIZZA SLICES
$3.50
$3.00
$2.50
Surplus
$2.00
Equilibrium price:
175 slices at $1.75
$1.50
Demand
Supply
$1.00
Shortage
$0.50
$0.00
50
Slices
100
Slices
150
Slices
200
Slices
250
Slices
300
Slices
D.
Surplus
1.
2.
If supply exceeds demand there is a surplus
Price is too high so goods and services exchanged are
limited by demand
E.
Shortage
1.
2.
If demand exceeds supply, there will be a shortage
Price is too low so goods and services exchanged are
limited by supply
Price
$1
$2
$3
$4
$5
$6
$7
$8
$9
$10
Round 1
Round 2
Round 3
III. SHIFTS IN MARKET
EQUILIBRIUM
A.
Problem of Excess Demand
a sudden increase in demand leads to a shortage
because demand>supply
2. When demand increases, equilibrium price will
increase
1.
BEANIE BABIES SALES
$6
$5
$4
$3
Supply
E: $4.00
E: $3.50
Demand
$2
$1
$0
1000
2000
3000
4000
B.
Fall in Demand
1.
2.
After a fad passes its peak, excess demand turns into
excess supply (surplus)
Price and quantity slide downward and eventually
original equilibrium is restored
WARM UP
 -What
happens if there is too much supply?
Is the price too high or too low when there is
too much supply?
 -What happens if there is not enough supply
to meet demand? Is the price too high or too
low when there is too much demand?
 -What do you think would happen to the
demand for new puppies if there was a new
law that stated every dog owner had to get a
mandatory $1000 yearly license? What about
the price?
C. Changes in Demand
1. Substitutes- competing related
goods
a. Increase in price of one will
cause a rise in demand of
the other
b. Ex: butter and margarine
2. Complements- goods that are
dependent on each other
a. Increase in price of one will
cause a fall in demand of
the other
b. Ex: Xbox and games
3. Demand elasticity- market in which a change in
price will cause a change in demand (luxury goods
with substitutes)
4. Demand inelasticity- market in which a change in
price will not cause a significant change in demand
(necessary good with no substitutes)
SHIFTS IN SUPPLY AND DEMAND
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Gold after a Glenn Beck says it is the best investment
Cheerios after a store brand version is released
Cranberry juice after a cranberry crop failure
Gasoline after a large oil reserve is discovered
Hannah Montana memorabilia after the next teen pop
sensation comes out
Xbox consoles after the first Halo game was released
Michael Jackson music after he dies
Big screen TVs if income taxes are doubled
Would the market for Snickers be described as
elastic or inelastic?
What would the result be if the government
stated that no gasoline could be sold over $2.25?
D.
Reasons for changes in supply
1.
2.
3.
4.
5.
6.
Cost of resources
Amount available
Productivity
Technology
Government: Regulations,
taxes, and subsidies- gov’t
money to help production
Expectations
E.
Market inhibitors
1.
Price ceiling- a maximum price is
set for a good/service
a.
b.
2.
Ex: rent control
Result: market shortage
Price floor- a minimum price is
set for a good/service
a.
b.
Ex: minimum wage
Result: market surplus
SURPLUS
SHORTAGE
IV. COMPETITION
A.
B.
Competition increases market efficiency, growth,
quality while decreasing prices
Market is most efficient when it is close to
perfect competition- pure competition at
equilibrium
1.
Many buyers and sellersno one is powerful enough to influence quantity or
price
b. Buyers benefit when more sellers- more goods at
better quality at lower price
a.
2.
Identical products- no difference in product sold
3.
Informed buyers and sellers- consumers know
enough about the market to find the best deal
4.
Free market entry and exit- firms must be able
to enter markets when they can make money
and leave when they can’t stay in business
Review Questions
1.
2.
3.
4.
5.
In the circular flow free enterprise model, how
are prices for goods established?
In what situation would a shoe store reduce the
price of shoes?
A new technology increases the speed of
computers without increasing production costs.
What is the likely effect of this technology?
In a market economic system, what happens to
the price of a good when its supply increases
and its demand decreases?
What impact would healthy competition have on
prices, quality, and choice of products?