Ch. 21 Demand and Supply

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Ch. 21Demand and Supply

• Section 1
• Demand

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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 have the resources to buy it

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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

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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

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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)

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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

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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 gt marginal costs we
  make the purchase
• If the marginal utility lt marginal costs we
  walk away

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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.

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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

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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.

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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

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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

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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

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Change in Consumer Taste

• Consumers 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

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Change in Consumer Expectations

• Peoples 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

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Price Changes in Goods

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

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Price Changes in Goods (cont.)

• Compliments are products that are used together.
  
• Ex. JIF gtgtgtgt grape jelly
• Captain Crunch gtgtgtgt milk
• hot dogs gtgtgtgt buns
• computers gtgtgtgt ???
• The demand for one complimentary product moves in
  the opposite direction as the price of the other.

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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

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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 gtgtgt1.25 is a 25 increase for an ice
  cream cone but how much will the price change
  affect the peoples demand for the product

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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 lt demand change elastic

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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.

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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 gt demand change inelastic

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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

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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

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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

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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.

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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

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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

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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

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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

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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.

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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

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Factors Affecting Supply (cont.)

• Change in government policy
• Tighter vs. relaxed government regulations can
  affect costs of production
• Change in Taxes and Subsidies
• Subsidygovt 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

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Factors Affecting Supply (cont.)

• Number of Suppliers
• As more firms enter an industry, supply
  increases suppliers leave, market supply
  decreases

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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

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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

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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

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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

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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

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Price Controls

• Price Ceiling Govt set maximum price that can
  be charged for a good or service
• Price Floor -- Govt set minimum price that can
  be charged for a good or service

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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

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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

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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