Supply & Demand Concepts (Powerpoint Notes) Glencoe Economics Today and Tomorrow Textbook Readings Chapter 7 pp. 169-199 Supply & Demand Notes Market Any place where individuals can buy and sell goods. Where a buyers and sellers meet. o at home o in a store o by telephone o by mail (online) Market Economies decisions are based on actions of buyers and sellers. Market Economies will produce anything that people are willing and able to buy and that will bring a profit to the sellers. All markets have some common economic principles. Markets play a role in setting a price. Price Price is one indication of the scarcity of an item. If something is really short in supply, meaning that a lot of people want it the price will be high. Price can act as both an ENCOURAGEMENT or a DISCOURAGEMENT. Price is an obstacle. The higher the obstacle, the less of the product that will be bought. Sales at stores is evidence of this. Demand Is the amount or quantity of goods and services consumers are willing and able to buy at various prices. (Buyers-side of the market) Generally, the higher the price the less consumers will by of an item, AND the lower the price, the more consumers will buy. LAW OF DEMAND Consumers will generally buy less of an item at a high price than at a lower price. Consumption is subject to DIMINISHING MARGINAL UTILITY; less satisfaction; successive units yield less satisfaction unless price is reduced. Income effect, lower price increases purchasing power. DEMAND SCHEDULE Price Jars of Peanut Butter Per Month $1.50 5 $1.80 4 $2.50 3 $4.70 2 $8.00 1 Draw demand curve w/ the horizontal axis labeled as quantity, and the vertical axis as price. Change in Demand The demand curve actually shifts; moves to the left or to the right. Change in Quantity Demanded Movement along the demand curve. Change in price results in a change in quantity.
Price Elasticity of Demand Elasticity amount of change in quantity is greater than change in price. ΔQ > ΔP Inity amount of change in quantity is less than change in price. ΔQ < ΔP Draw three graphs w/ demand curves across the board at different angles to illustrate how a price change effects the quantity demanded in each graph. Perfectly Elastic o more horizontal; perfectly horizontal for it to be perfectly. o at one price individuals will buy as much as they can o characteristics: many substitutes expensive (requires higher percentage of budget) luxury items Perfectly In o graph tends to be more vertical. o The change in price has NO effect on change in quantity. o characteristics Few substitutes if any Inexpensive (requires small percentage of income) necessity must buy now o Examples established smokers and insulin. Table Salt Ice Cream Sports Car Gasoline Insulin Braces on Teeth Are there good substitutes? NO YES YES NO NO NO in What proportion of income does it use? SMALL SMALL LARGE SMALL SMALL LARGE in Is it a necessity or a luxury? in NECESSSITY LUXURY LUXURY NECESSITY NECESSITY LUXURY Conclusion INELASTIC ELASTIC ELASTIC INELASTIC INELASTIC ELASTIC
Determinants of Demand 1. Expectations (Tastes & Preferences) 2. Income 3. Substitutes and Complements 4. Population (Number of Buyers) These are often referred to price shifters. Expectations Tastes and Preferences Change in styles, tastes, and habits Diminishing Marginal Utility Utility refers to the usefulness or satisfaction of something. In any specific time period, each buyer of a product will derive less satisfaction from each successive unit of the good consumed. Yielding less and less satisfaction, consumers will only buy additional units if the price is reduced. Income (Y) Desire must be backed up by the ability to pay. Increases in income allows people to purchase more of some commodities. Commodities (steaks, sunscreen, stereos, etc.) whose demand varies directly with income are called normal goods. Substitutes & Compliments A substitute good is one that can be used in place of another good. o Ex. Nikes & Reeboks, sweaters & jackets, Toyotas & Hondas, Coke & Pepsi A complimentary good is one used together with another good. o Ex. Ham & Eggs, tuition & textbooks, movies & popcorn, cameras & film, TVs & VCRs, CDs & CD player Population (Number of Buyers) An increase in the number of consumers in a market increases demand. A decrease in the number of consumers in a market decreases demand. Supply The amount or quantity of goods and services that producers will provide at various prices. (Sellersside of the market) Producers must receive a price for their goods and services that will cover their costs and provide a profit in order to stay in business. LAW OF SUPPLY The higher the price, the more producers will supply; the lower the price, the less they will supply. Change in Supply The supply curve actually shifts; moves to the left or to the right. Change in Quantity Supplied Movement along the supply curve. Change in price results in a change in quantity.
Determinants of Demand 1. Technology 2. Price of Inputs 3. Taxes & Subsidies 4. Price of Related Goods 5. Number of Sellers Technology Normally advancement in technology will cause costs to fall. With advancement in technology supply curve will move to the right reducing price and increasing quantity. Price of Inputs Cost of land, labor, and capital resources. Price of inputs increase, supply decreases (moves to left) Price of inputs decrease, supply increases (moves to right) Taxes & Subsidies Decrease in taxes results in a decrease in costs of production, thus supply increases Increase in taxes results in an increase in costs of production, thus supply decreases Subsidy paying someone to do something; payments from the government If there is a subsidy, the government is giving you money to produce, so supply moves to the right and increases. The result, greater quantity at a lower price. o Government approach is that if you want more of something, subsidize; if you want less of something, then tax it. Price of Related Goods Is there an opportunity cost to production. Work on the assumption that the manufacturer can producer either Good A or Good B. If the manufacturer sees that they can get a higher price for Good A, then they produce more of Good A by moving along the supply curve. The result of this will be that the supply curve for Good B will decrease move to the left because the manufacturer will take resources allocated to Good A and transfer them to Good B. Number of Sellers If the number of sellers increases, then the supply will increase. If the number of sellers decreases, then the supply will decrease. Equilibrium The point where supply and demand meet; the amount of a product supplied equals the amount demanded. Also known as the market-clearing price. Results in equilibrium price and equilibrium quantity. Price The amount of money given or asked for when goods or services are bought or sold.
Surplus An oversupply of goods or services that occurs when supply is greater than demand. Price Floor a government or group-imposed limit on how low a price can be charged for a product. o Price is set above equilibrium price. Example is minimum wage. Shortage An undersupply of an item at a particular price. Price Ceiling a government-imposed limit on the price charged for a product. Intended to protect consumers from conditions that could make necessary commodities unattainable. Problem is it takes away incentive produce and sell at the imposed price. End result can be a shortage and the creation of an underground economy. Example is rent control.