Ch. 21 Ch. 21

SUPPLY & DEMANDSUPPLY & DEMAND

DemandDemand• Desire, willingness, and

ability must all be present in the consumer for demand to exist

• Demand Schedule: a table that show the various quantities of a product or service that someone is willing to buy over a range of possible prices

Demand Schedule

Demand ScheduleShown as a graph:

Demand cont.Demand cont. • Each point represents how much

of a product a person will buy at a certain price

• Demand Curve – formed by connecting the points – always slopes downward (Demand = Down)

• Shows most people are willing to buy less of a product at a higher price and more at a low price

• Law of Demand– Quantity demanded and price

move in opposite directions

– P D P D

Market DemandMarket Demand• Market Demand – total demand

of all consumers for a product or service– Example – Tobacco

• We buy products for their utility (pleasure, usefulness or satisfaction products give us) – it is different for everyone – Example –

• Diminishing Marginal Utility– Our additional satisfaction

tends to go down as we consume more units

– Therefore we are willing to pay less for it as we use more of it

– Example – Pizza, Roller Coaster Rides

Demand can only occur when a Demand can only occur when a buyer is:buyer is:

1. Limited by time2. Buying complimentary

goods3. Willing & able to buy4. Determined to sell

Factors Affecting Market DemandFactors Affecting Market Demand1. Consumers entering or leaving

the market (population changes)

• Why would population change?

2. Incomes, tastes or expectations change

• Real Income Effect – as more people have more money, they spend it – contributes to a healthy economy

• Normal Goods vs. Inferior Goods• Tastes – Demand for VCRs

declined as the taste for DVDs rose

• Expectations – if expected price of item will go down soon, Demand will go down today

Class Question: What would explain shift in the demand curve to the left?

Factors Affecting Market Demand Factors Affecting Market Demand cont.cont.

3. Prices of related goods change

• Complements move in the same direction (Peanut Butter and Jelly) = P(Price)1 QD(Quantity Demand)1 D(Demand)2

• Substitutes move in opposite directions (Pepsi and Coke) P1 QD1 D2

Class Exercise: In your notes, explain this graph using the compliments peanut butter and jelly and substitutes Pepsi and Coke

What will happen in the wheat What will happen in the wheat market if buyers are expecting market if buyers are expecting

higher prices in the near future?higher prices in the near future?

1. The demand for rice will increase.2. The demand for rice will decrease.3. The demand for rice will be unaffected 4. The supply of rice will increase.

Shifts in Market DemandShifts in Market Demand• If Market

Demand rises, the demand curve will shift to the right

• If Market Demand drops, the demand curve will shift to the left (think less is left)

Elasticity of DemandElasticity of Demand• Extent of change in price causes a change in

demand• Elastic products – demand changes by large

amounts when the price is only slightly changed• Inelastic products – demand changes by small

amounts or does not change at all even if price changes drastically

• Products with substitutes or luxury items are more elastic

• Products with few or no substitutes are inelastic

Elasticity of Demand cont.Elasticity of Demand cont.

Elastic Demand Examples: Inelastic Demand Examples:

Perfectly Elastic Demand Curve

Perfectly Inelastic Demand Curve

If two products are commonly used If two products are commonly used together they are called:together they are called:

1. Substitutes

2. Elastic

3. Inelastic

4. Complements

Show D shift in restaurants in Mooresville after local textile mill hires a 1000 new workers.

Show D shift in Maxwell coffee when Folgers's coffee fields in Africa suffer a serious drought.

Show D shift in Ramen noodles after Mr. Cleland gets a $5,000 raise from Iredell-Statesville Schools.

Show D shift in IPods when the price of IPods goes up (think about it).

Show D shift in car industry when US starts going through a recession.

Show D shift in buns when the price of beef goes up.

Show D shift in polyester suits from the 1970s to today.

Show D shift in coffee creamer when Folgers's coffee field workers leave work because of violence in the region.

Show D shift in land in the North Carolina in the next 20 years.

Show D shift in holiday gifts this past Christmas due to the instability of the economy.

SupplySupply• Can be 1 supplier or total

supply for a product• Producers offer different

quantities of a product depending on the price consumers are willing to pay

• Supply Schedule– Quantities producers

are willing to supply at various prices

• The supply schedule graphed shows the supply curve.

Supply ScheduleShown as a graph:

Supply Schedule

Supply cont.Supply cont. • Each point represents how much of

a product a company will produce or supply at a certain price

• Supply Curve – formed by connecting the points – always slopes up (Up is in Supply)

• Shows most companies are willing to supply more of a product at a higher price and less at a lower price

• Law of Supply– As price rises, quantity supplied

rises– As price falls, quantity supplied

falls– Quantity demanded and price

move in same direction

– P S P S

Which of the following is NOT a factor of Which of the following is NOT a factor of demand?demand?

1. Law of Diminishing Returns

2. Real Income3. Diminishing Marginal

Utility4. Substitution

Profit MotiveProfit Motive

• Higher prices mean higher profits for suppliers• Higher profits mean suppliers are willing to

produce more• Price is the most significant influence on

quantity supplied

Market SupplyMarket Supply• Market Supply – total

supply for all providers of a good or services

• Law of Diminishing Return (Diminishing Marginal Benefit in book)– as producers make more

of a item it becomes less profitable till it hits a point where the supplier loses money.

– Example: Farmland and assembly line work

Worker 2 is the highest point of marginal product for the company then starts diminishing returns. By how much?

Where does producing another item cost the company money?

Factors Affecting Market SupplyFactors Affecting Market Supply1. Cost of Production Changes

• 4 factors of production (natural resources)

• Includes productivity (labor)• Includes technology

(entrepreneurship)2. Government policies changes

• Tighter government regulations restrict supply

• Relaxed regulations lower the cost• Higher taxes = higher cost• Subsidies lower cost

3. Producers expectations change (as in expected price)

4. Price of other good produced by the same company

5. Change in the number of producers

According to the Law of Supply as price According to the Law of Supply as price increases:increases:

1. Supply cannot be determined

2. Supply does not change

3. Supply increases

4. Supply decreases

Shifts in Market SupplyShifts in Market Supply• If Market

Supply rises, the supply curve will shift to the right

• If Market Supply drops, the supply curve will shift to the left (again less is left)

Elasticity of SupplyElasticity of Supply • How quantity supplied changes in response to

changes in price• Elastic product

– If quantity supplied changes a lot in response to a small price change

– Products made quickly with less investment & unskilled workers are elastic

• Inelastic product– If quantity supplied changes little to price change– Products that cannot be made quickly or are expensive

tend to be inelastic– Example –

Elasticity of Supply cont.Elasticity of Supply cont.Elastic Supply Examples: Inelastic Supply Examples:

Apple will make a profit of $200 more for IPod Touch in 2 months. Draw the Supply Curve.

Farmer Cleland found out that the price of Soybeans rose by $1 a bushel. Draw the Supply Curve for Corn.

Farmer Cleland found out that the price of Soybeans rose by $1 a bushel. Draw the Supply Curve for Soybeans.

GM has just developed a cheaper engine for it’s compact cars.

AFL-CIO has just agreed on a wage cut for it’s union members.

Barack Obama has just placed a clean air tax on West Virginia coal companies.

North Carolina lowers its gasoline tax.

The supply of restaurants when In-N-Out Burger comes to Mooresville.

The Government increases the subsidy for companies that make solar energy panels.

The price of gasoline has gone up in the past month.

There is a decline in the amount of land used to grow cotton.

Supply & Demand in the MarketSupply & Demand in the Market

• Markets bring buyers (demand) & sellers (supply) together

• These forces compete to establish price– QD = QS

• Prices then affect economic decisions

Equilibrium PointEquilibrium Point• The point where supply and

demand meet in balance• Neither a shortage nor

surplus exists• In Market economies,

equilibrium points naturally occur

• Once a price is at equilibrium, it stays there until market supply or demand changes

Surplus & ShortagesSurplus & Shortages• A surplus will be at the top of the curves• A shortage will be at the bottom of the curves

• A surplus signals the price is too high• A shortage signals the price is too low

The Surplus in this graph is __________________

The Shortage in this graph is ______________

At $12, QD = 2 QS = 4

At $6, QD = 5 QS = 2

Price CeilingPrice Ceiling• Government or

group imposed limit on how high a price can get for a product– Examples: Rent prices

in NYC after WWII, Gas Prices

• Must be below Equilibrium Price to be effective– Why?

• Causes Shortages in the Market

Ineffective

Effective

What is the Shortage in the graph?

Price FloorPrice Floor• Government or Group imposed limit on how low the price

of an item can get– Example: Minimum Wage, Agriculture

• Must be above Equilibrium Price to work– Why?

• Causes Surplus in the Market

150 375

What is the Surplus from the Price Floor?

Class QuestionClass Question

Which of the following is characteristic Which of the following is characteristic of an elastic product?of an elastic product?

1. Consumers have no options

2. Occurs in a monopoly

3. Has many competing brands

4. Dominated by one seller

Changes in Supply and Demand TOGETHERChanges in Supply and Demand TOGETHER

Demand Increases:Price IncreasesQuantity Increases

Demand Decreases:Price DecreasesQuantity Decreases

Supply Increases:Price DecreasesQuantity Increases

Supply Decreases:Price IncreasesQuantity Decreases

Changes in Supply and Demand Changes in Supply and Demand TOGETHERTOGETHER

• Supply Increases, Demand Decreases– Try to graph it first

• What happens to price and quantity?

Price Decreases, Quantity Indeterminate

Changes in Supply and Demand Changes in Supply and Demand TOGETHERTOGETHER

• Supply Decreases, Demand Increases– Try to graph it first

• What happens to price and quantity?

Price Increases, Quantity Indeterminate

Changes in Supply and Demand Changes in Supply and Demand TOGETHERTOGETHER

• Supply Increases, Demand Increases– Try to graph it first

• What happens to price and quantity?

Quantity Increases,Price Indeterminate

Changes in Supply and Demand Changes in Supply and Demand TOGETHERTOGETHER

• Supply Decreases, Demand Decreases– Try to graph it first

• What happens to price and quantity?

Quantity Decreases,Price Indeterminate

Practice Problem #1Practice Problem #1

• What happens to the price and quantity of IPods if Consumer Income increases?– What has changed?– Will it affect S or D?– Will S or D increase or

decrease?• Try to graph the

situation• Does it look like this

Practice Problem #2Practice Problem #2

• What happens to the price and quantity of tobacco if the government reduces government subsidies?– What has changed?– Will it affect S or D?– Will S or D increase or

decrease?

• Try to graph the situation• Does it look like this

If quantity supplied is greater than If quantity supplied is greater than quantity demanded there is:quantity demanded there is:

1. A shortage2. A surplus3. A bull market4. A deficit

In a free market, who determines how much of In a free market, who determines how much of a good will be sold and the price at which it will a good will be sold and the price at which it will

be sold?be sold?1. Suppliers2. Demanders3. The government 4. Both suppliers and demanders