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Demand and Supply

Learn about the fundamental concepts of demand and supply in the market, including the law of demand, law of supply, elasticity, and determinants of demand. Explore how changes in price and other factors can impact the market equilibrium.

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Demand and Supply

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  1. Demand and Supply

  2. Demand and Supply • What is a Market? • The process of freely exchanging goods and services between buyers and sellers. • Where does the market exist? • Local Market • National Market • International Market

  3. Demand and Supply • Voluntary Exchange • A transaction in which a buyer and a seller exercise their economic freedom by working out their own terms of exchange.

  4. Demand and Supply • Demand • The amount of a good or service that consumers are able and willing to buy at various prices during a specified time period. • Quantity Demanded • The amount of a good or service that a consumer is willing and able to purchase at a specific price.

  5. Demand and Supply • Law of Demand • Economic rule stating that the quantity demanded and price move in opposite directions. Quantity demanded Quantity demanded Price Price

  6. Demand and Supply • Real Income Effect • Economic rule stating that individuals cannot keep buying the same quantity of a product if its price rises while their income stays the same.

  7. Demand and Supply • Substitution Effect • Economic rule stating that if two items satisfy the same need and the price of one rises, people will buy the other.

  8. Demand and Supply • Utility • The ability of any good or service to satisfy consumer wants. • Marginal Utility • An additional amount of satisfaction.

  9. Demand and Supply • Law of Diminishing Marginal Utility • Rule stating that the additional satisfaction a consumer gets from purchasing one more unit of a product will lessen with each additional unit purchased.

  10. Law of Diminishing Marginal Utility

  11. Demand and Supply • Demand Schedule • Table showing quantities demanded at different possible prices. • Demand Curve • Downward sloping line that shows in graph form the quantities demanded at each possible price.

  12. Demand Schedule

  13. Demand Curve Price Quantity

  14. Demand and Supply • A change in quantity demanded is caused by a change in price and is shown as movement along the demand curve.

  15. Demand Curve Price Change in quantity demanded Quantity

  16. Demand and Supply • A change in demand is caused by something other than price and is shown as a shift of the entire demand curve. • A shift to the right is an increase in demand • A shift to the left is a decrease in demand

  17. Demand Shift Price A Change in demand Quantity

  18. Determinants of Demand • Changes in Population • Changes in Income • Changes in Tastes and Preferences • Substitutes • Complementary Goods

  19. Demand and Supply • Complementary Good • A product often used with another product • Camera and Memory Cards • Peanut Butter and Jelly • Golf Balls and Golf Clubs

  20. Demand and Supply • Elasticity • Consumers’ responsiveness to an increase or decrease in price of a product. • Price elasticity of demand • Economic concept that deals with how much demand varies according to changes in price.

  21. Demand and Supply • We can determine price elasticity of demand with the following formula: Price elasticity of demand = (Q2 – Q1) / [ (Q1 + Q2) / 2] (P2 – P1) / [ (P1 + P2 ) / 2] • If the answer is less than one it is said to be inelastic, and if it is greater than one it is elastic.

  22. Demand and Supply • Examples: Insulin • Q1 = 12 injections per week • Q2 = 14 injections per week • P1 = $20.00 per injection • P2 = $10.00 per injection Orange Juice • Q1 = 1 quart per week • Q2 = 3 quarts per week • P1 = $2.50 per quart • P2 = $2.25 per quart

  23. Demand and Supply • Elastic Demand • Situation in which the rise or fall in a product’s price greatly affect the amount that people are willing to buy.

  24. Elastic Demand

  25. Demand and Supply • Inelastic Demand • Situation in which a product’s price change has little impact on the quantity demanded by consumers.

  26. Demand is a consumer based analogy of how market interactions take place. • Supply, on the other hand, is a producer based analogy of market interacitons.

  27. Demand and Supply • Supply • The amount of a good or service that producers are able and willing to sell at various prices during a specified time period. • Quantity Supplied • The amount of a good or service that a producer is willing and able to supply at a specific price.

  28. Demand and Supply • Law of Supply • Economic rule stating that price and quantity supplied move in the same direction. Quantity supplied Quantity supplied Price Price

  29. Demand and Supply • Supply Schedule • Table showing quantities supplied at different possible prices. • Supply Curve • Upward-sloping line that shows in graph form the quantities supplied at each possible price.

  30. Supply Schedule

  31. Supply Curve Price Quantity

  32. Demand and Supply • A change in quantity supplied is caused by a change in price and is shown as movement along the supply curve.

  33. Supply Curve Price Quantity

  34. Demand and Supply • A change in supply is caused by something other than price and is shown as a shift of the entire supply curve. • A shift to the right is an increase in supply • A shift to the left is a decrease in supply

  35. Supply Curve Price Quantity

  36. Determinants of Supply • Price of Inputs • Number of Firms in the Industry • Taxes • Technology

  37. Law of Diminishing Returns • Economic rule that says as more units of a factor of production are added to other factors of production, after some point total output continues to increase but at a diminishing rate.

  38. Change in Output • 3 • 4 • 5 • 6 • 5 • 4 • 4 • 3 • 2 • 2

  39. Demand and Supply • In the real world, demand and supply operate together. As the price of a good goes down, the quantity demanded rises and the quantity supplied falls. As the price goes up, the quantity demanded falls and the quantity supplied rises.

  40. Demand and Supply • Equilibrium price • The price at which the amount producers are willing to supply is equal to the amount consumers are willing to buy.

  41. Price Quantity

  42. Price Quantity

  43. Demand and Supply • Shortage • Situation in which the quantity demanded is greater than the quantity supplied at the current price. • Surplus • Situation in which the quantity supplied is greater than the quantity demanded at the current price.

  44. Price Surplus Shortage Quantity

  45. Demand and Supply • Price ceiling • A legal maximum price that may be charged for a particular good or service.

  46. Government Set Prices P S $1,200 P0 ceiling 800 PC D Shortage Q Qs Q0 Qd 3-49 LO5

  47. Demand and Supply • Price floor • A legal minimum price below which a good or service may not be sold.

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