Supply and Demand or

1. Supply and Demand or how prices are determined

2. Road map for Supply and Demand • Why Supply and Demand? • Demand or Quantity Demanded? • What is a shift? • Factors that Shift Demand • Supply or Quantity Supplied? • Factors that Shift Supply • Equilibrium • Headlines • Research Assignment (don’t worry it’s short!)

3. Why supply and demand? • In the product market there are two very strong forces that determine price • Demand represents the consumers that purchase a good or service • Supply represents the firms that produce a good or service • There are rules that economists have noted that dictate the behavior of firms and consumers that lead to the equilibrium price of a good or service

4. Demand or Quantity demanded? • Demand and quantity demanded are NOT the same thing! • At a given price, the quantity demanded is how many of a good will be bought • At $15.00 there will be 300 pizzas sold (QD = 300) • At $10.00 there will be 500 pizzas sold (QD = 500) • Quantity Demanded will always be a number • Demand represents all of the quantity demanded at all prices • Demand will always be a line • Demand follows the “Law of Demand” • As price increases, quantity demanded decreases • As price decreases, quantity demanded increases

5. What is a shift? • When something in a market changes the desire for a good, we call that a shift in the demand curve. • There are now more or less people who are willing and able to buy the good, and as a result the price and quantity sold of the good will change. • When something causes more people to wantthe good, that is a demand shift to the right • When something causesless people to want the good, that is a demand shift to the left

6. Factors that shift demand • There are five main reasons why the demand (remember the entire line) will shift to either the right or the left. • These are called Determinants of Demand as they determine the demand for the good! • Population • Consumer Tastes • Income • Related goods • Expectations of future price

7. Factors that shift demand • Population • A change to the population of a market will affect the demand for a good. • If there are more consumers the demand will increase • Demand shift right • If there are less consumers the demand will decrease • Demand shift left

8. Factors that shift demand • Consumer Tastes • A change to how consumers view a good will affect the demand for a good. • This would represent fads or trends (think Beanie Babies!) • Advertising also tends to be placed in this category as well as news reports • If consumers want the product more, the demand will increase • Demand shift right • If consumers want the product less, the demand will decrease • Demand shift left

9. Factors that shift demand • Income • A change to the income of the population of a market will affect the demand for a good, but be careful, income can have different effects on different goods • Normal Goods – when income increase consumers purchase more • Inferior Goods – when income increases consumers purchase less (Ramen noodles; cheaper restaurant choices) • For a normal good if there is an increase in Income the demand will increase • Demand shift right • For an inferior good if there is an increase in Income the demand will decrease • Demand shift left

10. Factors that shift demand • Related Goods • A change to the price of a related good will affect the demand for a good, but be careful, there are different ways goods can be related • Compliment Goods – goods that are bought together • milk and cereal; peanut butter and jelly; hot dogs and hot dog buns • Substitute Goods – goods that are bought instead of each other • Pepsi or Coke; Beef or Pork; Oranges or Bananas • If there is a decrease in the price of a compliment, people will buy more • Demand shift right • If there is a decrease in the price of a substitute, people will buy less • Demand shift left

11. Factors that shift demand • Expectation of Future Price • A change in the expectations of a future price will affect the demand for a good. • Consumers want the lowest price, so they will speed up or delay purchases based on expectations of future prices • How many toys are bought the weekend before Black Friday? • If consumers believe the future price will increase the demand will increase now • Demand shift right • If consumers believe the future price will decrease the demand will decrease now • Demand shift left

12. Demand Review! • When the price of a good changes, is that a shift in Demand or Quantity Demanded? • Quantity demanded • List the determinants of Demand (think P.R.I.C.E.) • PopulationRelated goodsIncomeConsumer expectationsExpectation of Future Price • Draw a Demand Curve and show the effect of an increase in demand

13. Supply or Quantity supplied? • supply and quantity supplied are NOT the same thing! • At a given price, the quantity supplied is how many of a good will be bought • At $1.50 there will be 8 slices of pizzas sold (QS = 8) • At $1.00 there will be 5 slices pizzas sold (QS = 5) • Quantity supplied will always be a number • Supply represents all of the quantity supplied at all prices • Supply will always be a line • Supply follows the “Law of Supply” • As price increases, quantity supplied increases • As price decreases, quantity supplied decreases

14. Can supply shift too? • When something in a market changes the ability to produce a good, we call that a shift in the supply curve. • There are now more or less producers who are willing and able to make the good, and as a result the price and quantity sold of the good will change. • When something causesan increase in outputof the good, that is a supply shift to the right • When something causesa decrease in outputof the good, that is a supply shift to the left

15. Factors that shift Supply • There are five main reasons why the supply (remember the entire line) will shift to either the right or the left. • These are called Determinants of Supply as they determine the supply for the good! • Number of Producers • Technology • Cost of Inputs • Related goods in production • Expectations of future price

16. Factors that shift supply • Number of Producers • A change to the number of producers of a market will affect the supply for a good. • If there are more producers the supply will increase • supply shift right • If there are less producers the supply will decrease • supply shift left

17. Factors that shift supply • Technology • A change to how the good is made will affect the supply for a good. • This could represent use of computers or automation in production • Electricity, the internet, and cell phones could be included here • If a new technology allows firms to make things with less time or money, the supply will increase • supply shift right • If technology is taken away (disaster knocks out power or communication), the supply will decrease • supply shift left

18. Factors that shift supply • Cost of Inputs • A change to the price of inputs will affect the supply for a good • Wages paid to labor and raw materials would affect supply here • Changes to government taxes and regulations would also apply here • If there is a decrease in the cost of inputs the supply will increase • supply shift right • If there is an increase in the cost of inputs the supply will decrease • supply shift left

19. Factors that shift supply • Related Goods in production • Sometimes goods are related by production in that a firm can decide to make either one good or another. • A juice factory that can make either apple or orange juice • If there is a decrease in the price of the substitute good, the firm will make less of that good and more of the original good • supply shift right for the original good • If there is an increase in the price of the substitute good, the firm will make more of that good and less of the original good • supply shift left for the original good

20. Factors that shift supply • Expectation of Future Price • A change in the expectations of a future price will affect the supply for a good. • Producers want the highest price, so they will speed up or delay production based on expectations of future prices • How many roses would you want to sell on February 3rd? • If producers believe the future price will decrease the supply will increase now • supply shift right • If producers believe the future price will increase the supply will decrease now • supply shift left

21. sUPPLY Review! • When the price of a good changes, is that a shift in Supply or Quantity Supplied? • Quantity supplied • List the determinants of Demand (think I.R.E.N.T.) • Input CostRelated GoodsExpectation of future priceNumber of firmsTechnology • Draw a supply curve and show the effect of a decrease in Supply

22. Equilibrium • Where supply and demand intersect is equilibrium • Equilibrium is the price at which the quantity demanded will equal the quantity supplied • Equilibrium is sometimes called the “market clearing price” as neither a surplus nor a shortage exists • At $1.50 the quantity supplied and the quantity demanded are both 600

23. Equilibrium • When demand shifts, the price and quantity will change in the same direction • A demand shift left will decrease both the price and quantity of a good (D1) • A demand shift right will increase both the price and quantity of a good (D2)

24. Equilibrium • When supply shifts, the price and quantity will change in opposite directions • A supply shift right will increase the quantity and decrease the price of a good (S2) • A supply shift left will decrease the quantity and increase the price of a good (S3)

25. Headlines • With a partner, determine if the following will affect primarily the supply or the demand for the good in question. Tell if the effect will shift it to the right or left and how price and quantity will be effected. • Example: Consider the market for pizza • Headline: Bad weather destroys half of nations tomato crops! • Determinant: • Cost of inputs • Effect: • Cost of tomato sauce will increase (input) causing the supply of pizza to decrease or shift left • Price and Quantity: • Pizza price will increase and quantity sold will decrease

26. Headlines • Consider the market for Coke • Headline: Pepsi goes on sale! • Determinant: • Price of a substitute good • Effect: • As people buy more Coke, they will buy less Pepsi. Demand shift left • Price and Quantity: • Coke price will decrease, and quantity sold will decrease

27. Headlines • Consider the market for milk • Headline: New study shows increase health benefits to milk! • Determinant: • Consumer Taste • Effect: • As people read the headline, they desire milk- demand shift right • Price and Quantity: • Milk price will increase, and quantity sold will increase

28. Headlines • Consider the market for caramel • Headline: People love caramel apples, and apples are on sale! • Determinant: • Related goods, compliments • Effect: • As people buy more apples, they will buy more caramel- demand shift right • Price and Quantity: • Caramel price will increase, and quantity sold will increase

29. Headlines • Consider the market for Fireworks • Headline: Sellers gear up for next month’s Fourth of July celebration! • Determinant: • Future expectation of prices • Effect: • Producers will expect higher prices near the Fourth of July, so they restrict supply now- supply shift left • Price and Quantity: • Fireworks’ prices will increase, and quantity sold will decrease

30. Headlines • Consider the market for Solar Cells • Headline: Government creates new per-unit subsidy for Solar Cells! • Determinant: • Cost of Input (subsidy) • Effect: • Producers are able to produce more as the subsidy lowers marginal cost, allowing them to produce more- supply shift right • Price and Quantity: • Solar Cell price will decrease, and quantity sold will increase

31. Research Assignment • Tonight search online newspapers for a headline that would indicate a potential change in the price of a good or service • Using your knowledge of Supply and Demand, write a ½ to 1 page argument on why Supply or Demand will affect the price and quantity of that good or service • Be sure to properly cite the website and cite evidence from the article to support your argument