Unit 2Supply and Demand

Demand

What is demand?›The desire, ability, and willingness of consumers to buy a product.

Law of Demand

Quantity demanded (Q-d) of a product varies inversely with price (P), other things equal.

P Q-d

P Q-d

The Demand Schedule Table relating prices to quantity-

demanded.Price

per CDNumber of CDs

Demanded$ 30 0$ 25 0$ 20 1$15 3$10 5$5 8

The Demand Curve

Illustrates the quantity that consumers will demand at each and every price.

Downward sloping.

Price

Quantity Demanded

Demand Curve

Change in Quantity-Demandedv. Change in Demand

• Caused by a change in the price of the product, other things equal.

• Illustrated by a movement along the current demand curve.

Change in quantity-

demanded

• Caused by a change in one of the four “non-price” determinants of demand, other things equal.

• Illustrated by a shift of the entire demand curve left or right.

Change in demand

A Change in Quantity-Demanded

Movement along the demand curveShows a change in the quantity of the

product purchased in response toa change in price,other things equal.

Example: If the price of an I-Phonedecreases, the quantity-demanded of I-phones would increase.

Price

Quantity Demanded

Change in Demand

Consumer IncomeConsumer Tastes

Price of Substitute GoodsPrice of Complement Goods

Other things equal, a change in 1 of the 4 factors listed below will shift the entire demand curve left or right.

This means that at each and every price, the quantity-demanded will also increase or decrease.

Diminishing Marginal Utility

• Marginal Utility: extra usefulness or satisfaction a person gets from acquiring one more unit of a product.

•Law of Diminishing Marginal Utility:As we consume more of a product, the extra satisfaction we get from using additional quantities diminishes.

Recap: Food Simulation• You got the most satisfaction

from the first unit of food consumption.

• You get less satisfaction from the second, and even less from the next but you continue to eat…

• When you reach the point where the marginal utility does not justify eating (i.e., you get sick), you stop.

↑ Consumption =↓ Demand

Recap: Food Simulation

•Because of diminishing satisfaction, we would not be willing to pay as much for the 2nd, 3rd, 4th, and so on, as we did the first.

DEFINE ‘ELASTIC’

What images come to mind when you hear this term?

Elasticity of DemandDemand Elasticity:

Extent to which changes in price cause changes in the quantity-demanded.

Have you ever bought a product that you needed and the cost was not important? - What was it? - Why didn’t the cost matter to you?

Elastic versus InnnnnnnnDEMAND

Elastic Demand• “Stretchy”

• Very response to a change in the price of a product

• Example – Luxury Food

Inelastic Demand• “Not Stretchy”

• Not response to the change in the price of a product

• Example – Milk

Estimating the Elasticity of Demand

1. Can the purchase be delayed?

2. Are adequate substitutes available?

3. Does the purchase use a large portion of income?

Yes to 2+ = ElasticNo to 2+ = Inelastic

Estimating theElasticity of Demand

DeterminingElasticity

FreshTomatoes Table Salt

Services of Medical Doctors

MilkGasoline

from SUNOCO

Gasoline in General

Can the purchase be delayed?

Are there adequate substitutes?

Does the purchase require a large portion of income?

Elastic?Inelastic?

Supply

What is supply?

•The ability and willingness ofproducers to offer products for sale.

›The producers (suppliers) decide how much to offer for sale at various prices.

›This decision depends on the cost of producing goods/services.

Law of Supply

The quantity supplied(Q-s)for a product varies directly with its price,other things equal.

P Q-s

P Q-s

Supply Schedule Table relating prices to quantity-

supplied.

Price per CD

Number of CDs Supplied

$ 30 8$ 25 7$ 20 6$ 15 4$10 2$5 0

The Supply Curve Illustrates the quantity that suppliers

will supply at each and every price.

Upward sloping.

Price

Quantity Supplied

Supply Curve

Change in Quantity-Supplied v. Change in SupplyS

• Caused by a change in the price of the product, other things equal.

• Illustrated by a movement along the current supply curve.

Change in

quantity-supplied

• Caused by a change in one of the eight “non-price” determinants of supply, other things equal.

• Illustrated by a shift of the entire supply curve left or right.

Change in supply

A Change in Quantity-Supplied

Movement along the supply curveShows a change in the quantity of the

product supplied in response toa change in price,other things equal.

Example: If the price of an I-phoneincreases, the quantity-supplied of I-phones would increase.

Price

Quantity Supplied

Change in Supply

1. Cost of Inputs2. Productivity3. Technology4. Taxes5. Subsidies6. Future Expectations7. Government Regulations8. Number of Sellers

Remember:Suppliers want to sell more at a higher price

Supply and DemandReview

What do you remember?

DEMAND

• What is demand?

– The quantity of goods and services we will buy at various prices.

• What are the four ‘non-price’ determinants of demand?

– Consumer Income - Consumer Taste

– Substitute Goods - Complement Goods

• How are changes in these illustrated on a demand curve?

– Movement of the demand curve In this case, quantity-demanded moves in the same direction.• In other words, when demand ↑ (↓), quantity-demanded

will be greater (or less) at each price.

• Changes in price cause changes in quantity-demanded.

– Movement on the demand curve In this case, quantity -demanded changes but DEMAND stays CONSTANT.

Supply• What is supply?

– The quantity of goods and services producers will offer for sale at various prices.

• What are the eight ‘non-price’ determinants of supply?

– # of Sellers - Productivity - Taxes

– Cost of Inputs - Technology - Subsidies

– Gov’t Regulations - Future Price Expectations

• How are changes in these illustrated on a supply curve?

– Movement of the supply curve In this case, Q-supplied moves in the same direction.• In other words, when supply ↑ (↓), quantity-supplied will

be greater (or less) at each price.

• Anytime “COST” ↑ (↓), Supply will ↓ (↑)

• Changes in a good’s own price causes a change in Q-supplied

– Movement on the supply curve Supply stays CONSTANT

The Price System at Work

Who determines the price of a good/service?

Price is determined by both the buyer and the seller.

Hypothesize…how do you think the goals of

buyers and sellers differ?

• Buyers– Buy more at lower prices

• Sellers– Sell more at higher prices

• Result – Market Equilibrium

• Quantity supplied = Quantity demanded– From this, we determine “Ep” and “Eq”

• Everyone is happy!

Shortages v. SurplusesDisequilibrium in the price system

Shortage Q-d > Q-s

• Exists when…– Price is below market equilibrium

• At a lower price…– Consumers want to buy more– Producers want to supply less

• To fix the shortage…– Producers realize consumers would be

willing to pay more … they increase price and offer more for sale

Surplus Q-s > Q-d“All who want it, have it”

• Exists when…– Price is above market equilibrium

• At a higher price…– Consumers want to buy less– Producers want to supply more

• To fix the surplus…– Producers are forced to lower prices …

and consumers will demand more

Headliners: Supply and Demand• Pretend you are a writer for the local

newspaper. • Your task is to create a ‘catchy’ headline and

write a brief news article detailing a scenario that would cause a change in supply or demand. Be sure to describe which determinant of supply or demand your article is discussing.

• Include drawings and a S&D graph to illustrate how the change in supply or demand would impact local consumers.

Examples of “catchy” headlines from recent news…• “J. Crew benefits as Mrs. Obama wears the Brand”• “Demand increasing for locally grown thanksgiving fixings”• “Tickets! Tickets! Who’s Got Tickets?”• “Consumer demand for small cars is here to stay”

Current Event2:1 Activity

Please read the following article and complete the following task –

2: 2 things you learned1: 1 question you would ask

the author

Shortage / Surplus Quiz1. Draw a supply and demand graph. Label everything including

equilibrium price & equilibrium quantity.

2. On the graph above, illustrate what happens if there is a decrease in government regulations for SUVs.

3. At the original equilibrium price (Ep you labeled in #2), is there a surplus or a shortage after the supply or demand curve shifted? Why does this situation occur?

4. On your graph, label the specific area that illustrates this surplus OR shortage.

5. How would the laws of supply and demand come into play to fix the situation?

Government Intervention

CauseTo achieve social

goals, the government fixes

prices.

EffectPrices cannot adjust to their equilibrium

levels.

Price Floor

• Government sets a minimum legal pricethat can be paid for a good or service.

• Example: Minimum Wage

Drawbacks of a Price Floor

Persistent Surplus: price is above equilibrium and sellers can’t find enough buyers.

Problem: How can we dispose of a surplus of goods?

Result: Artificially high prices create artificially high profit and may cause over-investment in an industry.

Price Ceiling

• Government sets a maximum legal pricethat can be paid for a good or service.

• Example: Rent Control

Drawbacks of a Price CeilingPersistent Shortage: price is below equilibrium.

Problem: Consumers continue to demand more than is being supplied.

Result: A Black Market could develop for a product, and the prices will be above the price ceiling and even about market equilibrium.

Illustrate Both

Persistent Surplus

Persistent Shortage

Create Your Own Political Cartoon

Your Task – applying the knowledge learned about price ceilings (floors), create a political cartoon that depicts a concern related to price ceilings (floors).

Be sure to show the frustrations of the consumers or producers involved, or the benefits of the policy.

Make sure to give your cartoon a title and/or caption! Be Creative.

Admit Ticket

Price Floor/Price Ceiling Review

What is a price ceiling? Provide two examples. Explain the major drawback of a price ceiling.

What is a price floor? Provide two examples. Explain the major drawback of a price floor.

Create a supply and demand graph, illustrateand label a price ceiling and a price floor.