Supply and Demand

1. Supply and Demand What are supply and demand, and what factors influence them?

2. Warm up: Demand Schedule • Why might some students be willing to pay $X for this product? • Why might some students choose not to pay even $1 for this product? • You have created a demand curve for the product. What happens to the quantity demanded when the price goes down? When the price goes up? • Most demand curves look similar to the one you created. Given this, what do you think the “law of demand” might say?

3. Demand and price • Demand • The amount of a good or service that consumers are willing and able to buy at all prices in a given period • Quantity demanded • The amount of a good or service that consumers are willing and able to buy at a specific price. • Demand curve • Shows the relationship between price and the quantity that buyers are willing and able to pay.

4. Graphing individual demand

5. Market demand • Market demand • The sum of all the individual quantities demanded in a market.

6. The Law of Demand • As price increases, quantity demanded decreases. • Why is this? • The law of diminishing marginal utility • People will buy ever larger quantities of a good or service only if the price is low enough. • The income effect • Income is scarce, only so much money can be spent. If the price of a good or service increases, they will not be able to buy the same quantity as they did at the original price. • The substitution effect • A different good can satisfy the same want.

7. Demand shifters: factors that cause a change in demand • Changes in income • Changes in the number of consumers • Changes in consumer tastes and preferences • Changes in customer expectations • Changes in the price of substitute goods • Changes in the price of complementary goods • A product that is consumed along with some other product

8. Demand Shifters • Increased demand= demand curve shifts to the right • Decreased demand= demand curve shifts to the left • When a factor other than price causes the quantities demanded at every price to change, a demand curve has shifted.

9. Elasticity of demand • The measure of a customers’ sensitivity to a change in price • Inelastic • Price increase on necessities • toothpaste • Elastic • Price increase in a non-necessity item, may chose to buy another product/brand • Calculating and graphing elasticity of demand • Demand elasticity=percentage change in quantity demanded/percentage change in price

11. Total revenue test • Used to gauge the impact of prices on revenue. • Total revenue= (quantity of a good sold)(price of the good)

12. Factors that influence elasticity of demand • Availability of substitutes • Price relative to income • Necessities versus luxuries • Time need to adjust to a price change

13. Supply and price • Supply • The amount of a good or service that producers are willing to offer for sale at all prices in a given period. • Quantity supplied • The amount of a good or service that producers are willing and able to offer for sale at a specific price. • Supply curve • Shows the relationship between the price and the quantity that producers are willing and able to supply.

14. Graphing individual supply

15. Market supply • The sum of all the individual quantities supplied

16. The Law of Supply • As price increases, quantity supplied increases • Why is this? • Production decisions by existing producers • Producers want to maximize profits, and one way to do this is based on revenue • When prices increase, the desire to make a profit leads producers to increase production of goods, and as a result expect profits to increase. • When prices fall, producers are likely to decrease production. • Market entries and exits • When the price of a good or service increases, new firms may enter a new market because they see the potential for profit. • If prices drop, the reverse will happen, and the producer will exit the market.

17. Supply shifters: factors that cause a change in supply • Changes in the cost of inputs • Changes in the number of producers • Changes in conditions due to natural disasters or international events • Changes in technology • Changes in producer expectations • Changes in government policy • Subsidy- cash payment to the producer • Excise tax- tax on the manufacture or sale of a good

18. Supply Shifters • Increased supply= supply curve shifts to the right • Decreased supply= supply curve shifts to the left • When a factor other than price causes the quantities supplied at every price to change, a supply curve has shifted.

19. Supply elasticity • Measures a producer’s sensitivity to price changes • Law of supply- the quantity supplied moves in the same direction as price • A producer who has an elastic supply will respond to an increase in price with an increase in the quantity supplied. • Yogurt makers- flexible producers • Antiques dealer- nonflexible producers • Supply of antiques is inelastic

20. Calculating and graphing elasticity of supply • Supply elasticity=percentage change in quantity supplied/percentage change in price • Unitary elastic supply- a supply elasticity equal exactly to one • The flatter the supply curve, the more likely it is elastic. The steeper the curve, the more likely it is inelastic.

21. Factors that influence elasticity of supply • Supply chain • Availability of inputs • Mobility of inputs • Storage capacity • Time needed to adjust to a price change