Ch. 21 Demand and Supply

1. Ch. 21Demand and Supply Section 1 Demand

2. An Introduction to Demand • In the U.S., the forces of supply and demand work together to set prices • Demand – the desire, willingness, and ability to buy a good or service. • 3 things must be in place if demand is to exist: • Consumer must want a good or service • Consumer must be willing to buy it • Consumer must havethe resources to buy it

3. Individual Demand Schedule • Demand schedule – table that lists the various quantities of a product or service that someone is willing to buy over a range of possible prices • Can be shown as points on a graph. • Prices = vertical axis • Quantities = horizontal axis • Each point shows how many units of a product an individual will buy at a certain price • Demand Curve – the line that connects these points

4. Individual Demand Schedule • The demand curve will always slope downward • This shows that people are less willing to buy at a higher price, and more willing to buy at a lower price. • This principle is known as the law of demand – quantity demanded and price will always move in opposite directions • Q P

5. Market Demand • Market Demand – the total demand of all consumers for a product or service. • Market demand can be shown as a demand schedule (table) and demand curve (graph)

7. Marginal Utility • We buy products for their utility – the pleasure, usefulness, or satisfaction they give us. • Utility of a good will be different for different people • Some products may have no utility for some people • Ex. Pizza when you are hungry

8. Marginal Utility (cont.) • Diminishing Marginal Utility – states that our additional satisfaction tends to go down as we consume more and more units • When we make a purchase, we consider whether the satisfaction we expect to gain is worth the money we must give up. • If the marginal utility > marginal costs = we make the purchase • If the marginal utility < marginal costs = we walk away

9. Marginal Utility (cont.) • Because marginal utility diminishes, we would be willing to pay less for the second item than the first. • We would also be willing to pay even less for the third item • Diminishing Marginal Utility can best be visualized in a downward sloping demand curve.

11. Section 2Factors Affecting Demand • Market Demand can change when: • More consumers enter the market • When incomes change • When tastes change • When expectations change • When prices of related goods change • A graph of a market demand curve can show these changes

12. Factors Affecting Demand (cont.) • When demand goes down, people are willing to buy fewer items at all possible prices. • The Demand Curve will shift to the left. • When demand goes up, people are willing to buy more items at all possible prices. • The Demand Curve will shift to the right.

13. Change In the # of Consumers • Demand is related to the number of consumers in the area • When more people move into an area, they buy more goods and services from local businesses. • Demand Curve shifts to the right

14. Change In the # of Consumers (cont.) • When many people move away from a region, demands for goods and services in the area decreases. • The Demand Curve shifts to the left • The number of consumers in an area can change due to changes in • Birthrates -- death rates • Immigration -- migration

15. Change in Consumer Income • Income changes affect demand • When economy is healthy, people receive raises or move to better paying jobs/positions • With more income, people are willing to buy more of a product at any particular price • In hard times, people lose their jobs. With less income, people buy less and demand goes down

16. Change in Consumer Taste • Consumer’s tastes change frequently • When a product is popular, the demand curve shifts to the right • When a product becomes outdated and obsolete, the popularity fades and demand decreases shifting the demand curve to the left

17. Change in Consumer Expectations • People’s expectations can have an affect on demand • If people believe hard times are on the way, they will buy less shifting the curve to the left • If people expect shortages of something, demand increases shifting the curve to the right

18. Price Changes in Goods • Competing products are called substitutes because consumers can use one in place of the other • Ex. JIF >>>> Peter Pan Coca-Cola >>>> Pepsi hamburgers >>>> hot dogs orange juice >>>> ??? • A change in the price of one good causes the demand for its substitute to move in the same direction

19. Price Changes in Goods (cont.) • Compliments are products that are used together. • Ex. JIF >>>> grape jelly Captain Crunch >>>> milk hot dogs >>>> buns computers >>>> ??? • The demand for one complimentary product moves in the opposite direction as the price of the other.

20. Price Changes in Goods (cont.) • Question: If the price of DVD players increased, what would you expect to happen to the demand of DVD movies??? Demand would drop

21. Demand Elasticity • When prices rise, we know that quantity demanded will go down, but we do not know by how much • Demand Elasticity is the extent to which a change in price causes a change in the quantity demanded for a product • Ex. $1.00 >>>$1.25 is a 25% increase for an ice cream cone but how much will the price change affect the people’s demand for the product

22. Demand Elasticity • For some goods and services, demand is elastic. • Each change in price causes a relatively larger percentage change in quantity demanded When the price of a product changes a little, the quantity demanded changes a lot • Price change % < demand change % = elastic

23. Demand Elasticity (cont.) • Demand for a good or service tends to be elastic if it has an attractive substitute. • Demand also tends to be elastic if the purchase for the item can be postponed.

24. Demand Inelasticity • For some goods and services, demand tends to be inelastic • Price changes have little effect on the quantity demanded • Demand for goods with few or no substitutes tend to be inelastic • Price change % > demand change % = inelastic

25. Demand Elasticity and Inelasticity • Question: Suppose the price of electricity went up 25%. As a result, the quantity of electricity demanded dropped by 2%. Would you describe the demand for electricity as elastic or inelastic??? electricity would be inelastic

26. Section 3What is Supply? • Supply – the various quantities of a good or service that producers are willing to sell at all possible market prices. • Supply can refer to the output of one producer or the output of all producers in the market. • Producers offer different quantities of a product depending on the price that buyers are willing to pay

27. What is Supply? (cont.) • Quantity supplied varies according to price, but in the opposite direction • As price rises, quantity supplied rises, and quantity demanded falls • P S D

28. What is Supply? (cont.) • Law of Supply dictates that sellers will normally offer more for sale at higher prices and less at lower prices • Higher prices mean higher profit • Higher profits are incentive to produce more.

29. Supply Schedule, Supply Curve • Supply Schedule – table that shows the quantities producers are willing to supply at various prices • As a graph form it can show the supply curve • The supply curve is opposite to the demand curve in that it normally slopes upward from left to right. • This reflects the fact that suppliers are generally willing to offer more product at higher prices, less at lower prices

30. Profit • Businesses provide goods and services to the public with the hopes of earning a profit – the money left over after a business covers it costs. • You try to sell at prices high enough to cover your costs with something left over • It is the primary goal for business owners in our economy

31. Profit (cont.) • Producers have a few options with what they can do with the profit from their business • Increase wages or hire on more workers • Invest back into the business by purchasing new space or equipment • Keep it all for themselves

32. Market Supply • Market Supply – total of the supply schedules for all providers of the same good or service • Works just like individual supply schedule and curve; just on a larger scale. • Price has the most influence on quantity supplied • Ex. Car Washing/labor

33. Factors Affecting Supply • Keep in mind, when the market supply goes down supply curve shifts to the left; when the market supply goes up supply curve shifts to the right. • Why would supply change in the whole market? • 8 factors or reasons that would affect supply.

34. Factors Affecting Supply (cont.) • Changes in the Cost of Resources When prices for resources fall, cost of production falls; producers willing to offer more at all prices 2. Productivity Efficiency is more output in same amount of time; reduces production costs; more products at every price 3. Technology Refers to methods or processes used to make goods or services; new technology can speed up production thus cutting costs

35. Factors Affecting Supply (cont.) • Change in government policy Tighter vs. relaxed government regulations can affect costs of production • Change in Taxes and Subsidies Subsidy—gov’t payment to an individual or business for certain actions; encourage producers to enter or even stay in the market; taxes and subsidies change production costs 6. Producer Expectations Predictions on what demand might look like in the near future

36. Factors Affecting Supply (cont.) • Number of Suppliers As more firms enter an industry, supply increases; suppliers leave, market supply decreases

37. Elasticity of Supply • Supply Elasticity– measures how quantity supplied of a good/service changes in response to a change in price • QS changes a lot compared to price =supply elastic • QS changes little compared to price =supply inelastic

38. Elasticity of Supply (cont.) • Products that cannot be made quickly or are expensive to produce tend to be inelastic • Products that can be made quickly without large investments of money or skilled labor tend to be supply elastic

39. Section 4Markets and Prices • Forces of supply and demand work together in markets to establish prices. • Prices form the basis of economic decision • Surplus – QS is higher than QD signals that the price is too high; consumers will not buy all of the product suppliers are willing to sell • Will not last long, price will be lowered to move product

40. Markets and Prices (cont.) • Shortage – QD is higher than QS signals that the price is too low; suppliers will not supply all of the product that consumers are willing to buy. • Will not last long, sellers will raise their price • If left to itself, economy will fix itself. • Surplus forces price down; Shortage forces price up until balance is achieved

41. Markets and Prices (cont.) • Equilibrium Price – point at which supply and demand are balanced; neither surplus or shortage exist • Temporary changes may occur (Hurricane Katrina or Gustov) but the market will adjust to reach a new equilibrium price

42. Price Controls • Price Ceiling – Gov’t set maximum price that can be charged for a good or service • Price Floor -- Gov’t set minimum price that can be charged for a good or service

43. Price as Signals • Prices are signals that help businesses and consumers make decisions • Prices help businesses and consumers answer the 3 basic economic questions: WHAT TO PRODUCE HOW TO PRODUCE FOR WHOM TO PRODUCE

44. Advantages of Prices • Prices are Neutral favor neither producer or consumer; merely a compromise between the two • Prices are Flexible both react to unforeseen events by adjusting production and consumption based on the new prices

45. Advantages of Prices (cont.) • Prices and Freedom of Choice Pricing system and market economy provides consumers a variety of products and prices to choose from unlike command economies • Prices are Familiar This allows us to make buys quickly and efficiently; no misunderstanding, we know through prices the value of particular products