Supply & Demand

1. Supply & Demand Mr. Barnett University High School 2012-2013

2. Auction Time! • Nobody “sets” a price • Nobody “sets” a quantity • Prices determined through interactions between people • Everybody places their own value on goods and services • Thus, prices and values are separate concepts • If people & countries all valued items the same there would be NO trade! • Why sell my bobblehead if I value it at $10 and so did everybody else? • Everybody has their own valuations and thus bid amount

3. Individual Valuations • Let’s graph our auction to see DEMAND • Every point on curve represents a person and their valuation of the good or service • These points are the quantities demanded at various prices

4. The Demand Curve • Mind your P’s and Q’s • Price on y-axis • Quantity on x-axis • Downward sloping from left to right • Inverse relationship between price and quantity • As price goes down, quantity demanded goes up • As price goes up, quantity demanded goes down

5. I Demand it! • Quantity Demanded – the amount of a good that buyers are wilingand ableto purchase • The Law of Demand: • The quantity demanded of a good falls when the price of the good rises, ceteris paribus • The quantity demanded of a good rises when the price of the good falls, ceteris paribus

6. The Demand Curve • HUGE difference between quantity demanded and demand • At $____, the quantity demanded is _____ units • If price drops from $____ to $______, the quantity demanded goes from _____ units to ____units. • However, demand stays the same • Demand is the entire curve • Quantity demanded represented by each point • A change in price ONLY causes movement along the curve!

7. The Demand Curve • Therefore, when prices change you go from one point to another on the demand curve • But, change in price DOES NOT change demand • Demand is represented by the ENTIRE curve • Think about this statement • If price changes from $_____ to $______, demand goes from ______to ______ units.

8. Let’s go to the Market • So what is a market exactly…. • Market – a group of buyers and sellers of a particular good or service • Competitive Market – a market in which there are manybuyers and many sellers so that each has a negligible impact on the market price

9. Let’s go to the Market • The entire demand curve can also be understood as a market demand curve • At any given price, the market demand is the sum of individual quantities demanded • Sum of horizontal individual demand curves • The total quantity demand for Kit-Kat bars At $3 • Cara wants 5 at $3, Chexi wants 2 at $3 • Cara’s quantity demanded at $3 + Chenxi’squantity demanded at $3 • 5+2 = 7 Kit-Kat bars…..market demand curve will have total quantity demanded point at 7 Kit-Kat bars for $3

10. Downward Slope • There are three reasons why the demand curve is downward sloping • Income Effect • Everybody has limited resources to purchase goods and services • Even the millionaires…just ask Mike Tyson or MC Hammer • Thus, we all budget a certain amount of our income for our wants and needs • How much would you be willing to spend on homework passes? • Budget did not change • Price of good changed • As price fell, quantity demanded increased • As price rose, quantity demanded decreased • Substitution Effect • Diminishing Marginal Utility

11. Downward Slope • There are three reasons why the demand curve is downward sloping • Substitution Effect • As the price risesfor a particular good or service relative to the price of another good, than the quantity demanded falls for that particular good • Vice versa, as the price drops for a particular good or service relative the price of another good, then the quantity demanded rises for that particular good • People will always substitute a higher priced good for a lower one if they are comparable and their income stays the same • Real Nominal Principle • What matters to people is the real value of money or income -its purchasing power-not its “face” value

12. Downward Slope • Diminishing MarginalUtility • Marginal – Additional • Utility – Satisfaction • So, diminishing marginal utility is the additional satisfaction one gets from consuming a good or service • In consumption: Eating too many Twinkies make you sick and your enjoyment from the Twinkies diminishes • In production: Too many workers but not enough machines generate idle workers and diminished returns • The only way a firm can convince you to purchase/consume more and more of a good or service is to lower the price • Hostess wants you to eat 1 more Twinkie! So they will lower the price

13. Summary • The demand curve is an illustration of the quantity demanded at various prices. • A change in price changes quantity demanded and not demand

14. Time to Incorporate