Supply and Demand

Supply and Demand Unit 2: Economic Principles in Agribusiness Lesson: EP5

Objectives Lesson Objective: • After completing the lesson on supply and demand, students will demonstrate their ability to apply the concept in real-world situations by obtaining a minimum score of 80% on a Supply and Demand Experience. Enabling Objectives: • Contrast demand and quantity demanded, define and illustrate the Law of Demand, identify three factors that may shift the demand curve, and contrast luxury and necessity items. • Contrast supply and quantity supplied, define and illustrate the Law of Supply, and identify three factors that may shift the supply curve. • Demonstrate how to determine price and what factors affect price to change, determine the point of equilibrium, and identify the reasons for surplus and shortage. • Define elasticity, describe three types of elasticity, calculate the priceelasticity for supply and demand, and illustrate the importance of understanding elasticities.

Key Terms • Demand • Quantity demanded • Law of Demand • Luxury items • Necessity items • Supply • Quantity supplied • Law of Supply • Surplus • Shortage • Equilibrium • Price • Elasticity • Elastic • Inelastic • Substitutes • Compliments • Normal Goods • Inferior Goods

How much would you pay?

Demand and Quantity Demanded • Demand • Amount buyers are willing and able to purchase at different prices and at a given time and place • Demand is the first component of price • Many people may be willing to buy a new car now, but if they are not able to, they have no effect on demand. • Quantity Demanded • How much buyers are willing to buy at each specific price • As the price changes, the quantity demanded will change

Law of Demand • When the price of a product is increased with no change in factors other than price, less product will be purchased. • When the price of a product is decreased with no change in factors other than price, more product will be purchased. • Consumers are willing and able to buy more at lower prices and less at higher prices.

Demand Schedule • A set of prices and the corresponding quantities of an item that would be purchased at each price at a given time and place

Demand Curve • Each point along the demand curve can be used to estimate the quantity demanded for a specific price level

Demand Shifters • Consumer Income • People have more money to spend and are usually more willing to buy an item • Population • The number of people trying to buy the same item increases, so the demand will also increase • Individual Taste • Some buy a product because it is needed, some buy it because it is a luxury, some buy it because it is the “in” thing to have

More Demand Shifters • Competing Products • If the price of a competing product is much lower than the standard price for an item, consumers will try the competing product; if they stay with the new product, the demand for the old product will decrease. • Consumer Expectations • If consumers expect a price to increase, they will more likely stock up on that item; if consumers expect a price decline, they may hold off making larger purchases; if enough people react the same way at the same time, it can effect demand and price. • Advertising and Promotions • Increase consumer awareness and desire to have a certain product

Changes to the Demand Curve • When the price of goods and services change, the quantities demanded change along the demand curve. • Increase in demand = demand curve will shift upward and to the right • Decrease in demand = demand curve will shift downward and to the left

Changes to the Demand Curve • Change in Quantity Demanded is a movement along the same demand curve. • Change in Demand causes us to move the demand curve to the right or left.

Luxury necessity

Luxury vs. Necessity • Luxury • Goods or services that are generally considered nonessential to the survival or well-being of an individual • In good economic times, consumers will spend more on luxury items than they will in hard times. • Necessity • Goods or services that are generally considered essential to the survival or well-being of an individual • Shelter, food, clothing, medication

Compliments and Substitutes Compliments Substitutes Goods that can be exchanged for one another Pepsi and Coke Ground pork and ground turkey Margarine and butter • Goods that people consume hand in hand • Hamburgers and cheese slices • Hot dogs and hot dog buns • DVD players and DVDs

Pillows and Bed Sheets • Compliment or substitute? • Compliment • What happens to the market for pillows when the price of bed sheets increases? • When the price of bed sheets increases, people will buy fewer bed sheets, thus buy fewer pillows.

Wood and Propane • Compliment or substitute? • Burning wood is a substitute for burning propane. • What happens to the demand for wood when the price of propane decreases? • If propane prices decrease, people will burn propane and not use their wood stoves.

What will happen to the demand for school lunches if 100 more people enrolled at your high school? • More people eating means more buyers, thus an increase in demand

What will happen to the demand for gasoline if the newspaper said the future price of a barrel of oil increased? • Expectations of a future price increase will cause people to demand more gasoline today.

What will happen to the demand for the latest iPhone if the major employer in town cuts wages by $0.50 / hour? • Since iPhones are a want, if people earn less income, the demand will decrease.

What will happen to the demand for the star player’s jersey following a Mizzou National Championship? • Since everyone would have a high satisfaction (utility) level for the Mizzou Tigers if they won….we would increase our demand for jerseys.

Supply and Quantity Supplied • Supply • The amount of a product or commodity that producers are willing and able to provide at different prices and a given time and place • Second component of price • Buyers may be very willing and able to buy a product, but if there is a limited supply, the demand may not be met immediately. • Quantity Supplied • How much suppliers are willing and able to provide at each specific price

Law of Supply • When the price of a product is lowered, assuming there is no change in factors other than price, less of the product will be supplied. • When the price of a product is increased, assuming there is no change in factors other than price, more of the product will be supplied.

Supply Schedule • A listing of the amount of a product the industry is willing to offer for sale at different prices

Supply Curve • Indicates the quantity of a product that supplies are willing to provide at various price levels • Plotted in the opposite direction to the demand curve

Supply Shifters • Supplier expectations • Suppliers try to predict the best strategy for the future. • If they expect an increase in price, they will try to increase production. • Natural forces • Floods, droughts, etc. • Storage and perishability • Storing grain at harvest when prices are normally lowest • Hard to store fresh fruit and vegetables • Harder to control supply of perishables, so dramatic price shifts may result

More Supply Shifters • Cost of production • Increase in cost of production will cause producers to produce less amounts of the item • Technology • Huge increases in the amount of crops produced from each acre of land • Government programs • Develop policies to try to control supply and increase prices of agricultural products

Changes to the Supply Curve • When the prices of goods and services change, the quantities supplied change along supply curves. • Decrease in supply = supply curve will shift to the left • Increase in supply = supply curve will shift to the right

Changes to the Supply (and Demand) Curve • What direction would the supply curve move if an increase in demand occurred? • A change in demand (or supply) will not cause a change in supply (or demand)

Changes to the Supply Curve • Change in Quantity Supplied is a movement along the same supply curve. • Change in Supply causes us to move the supply curve to the right or left.

What happens to the supply of cattle if the government requires electronic ID chips which a farmer must purchase? • The increased cost of the ID chips could cause the farmer to produce a lower amount of cattle or quit producing all together.

What happens to the supply of hot dogs when the price of hot dog buns decreases?

What happens to the supply of soybeans when the March Soybean Futures Contract increases by 34%?

What happens to the supply of chicken if Tyson opens a major chicken farm in Texas?

What happens to the supply for pork chops if a new processing technology makes processing pork more efficient?

What happens to the supply of farm machinery if the government creates a tax on all machinery and equipment?

Price • The result of the interaction of the forces of supply and demand • If demand increases without a change in supply, the price will _____________________________________ • If supply increases without a change in demand, the price will _____________________________________ go up drop

Point of Equilibrium • The point where supply and demand curves cross • Represented by the equilibrium point • The price at which demand and supply are equal • If there is a change in either supply or demand, there will be a new equilibrium point

Shortage vs. Surplus • If the price is too high • Supply will be greater than demand • A surplus will develop • Price will be pushed down towards the equilibriumprice due to competition among sellers • If the price is too low • Demand will be greater than supply • A shortage will result • Price will be pushed upwards to the equilibriumprice due to competition among buyers

Elasticity • The measure of how sensitive the market is to changes in price or quantity; measure of responsiveness

Types of Elasticity

Elasticity • Gas • Even if the price jumps by 10%, we buy about the same amount • Inelastic • Ice Cream • If the price jumps by 10%, we buy about 10% less • Unit Elastic • Hamburger • If the price jumps by 10%, we buy a lot less • Elastic

Demand Price Elasticity • The amount consumers will change their buying habits after a price change is measured by demandpriceelasticity % change in quantity demanded % change in price

The price of a movie ticket is $9.00, and the theater decides to lower it to $8.00. The attendance increases an average of 20 people per movie at $9.00 to 30 people per movie at $8.00. Was lowering the price a good management decision?

Was lowering the price a good management decision? • Demandprice elasticities are always negative • If the absolute value of the number is larger than 1, it means there is an elasticdemandand total revenue will increase with a cut in price as more people come. • If the number is less than 1, demand is inelastic, and total revenue will decrease because there will not be enough people to compensate for the difference in price. • If the number is equal to 1, it would be a state of unit elasticity.

Elasticity of Demand Unit ElasticDemand Curve InelasticDemand Curve ElasticDemand Curve A price increase will decrease total revenue A price increase will increase total revenue A price increase will not change total revenue

Factors Affecting a Good’s Elasticity • Number of substitutes • If a good has more and better substitutes, its demand will be more elastic • Coffee vs. electric power • How necessary the good is • A necessity has more of an inelasticdemand curve than a luxury • Its importance is relative to the consumer’s budget • Goods that make up a relatively small portion of a consumer’s budget have less elasticdemand curves • Milk vs. a new car • How long the consumer has to make the decision • The longer the consumer has to “shop around” and find substitutes, the more elastic the demand curve • A steak bought for supper tonight or one purchased for a barbeque next week

Cross Price Elasticity • Measure the responsiveness of quantity demanded of one good compare with the price change of another good % change in quantity demanded of good A % change in price of good B • Can determine if goods are substitutes, compliments, or not related This product’s price has not changed This product’s price has changed

Cross Price Elasticity Practice • X and Y are substitutes or compliments • X – hamburger buns; price has not changed • Y – beef; price has changed

Cross Price Elasticity Practice

Supply and Demand