2. Supply and Demand

3. © OnlineTexts.com p. 2 The Law of Demand The law of demand holds that other things equal, as the price of a good or service rises, its quantity demanded falls. The law of demand holds that other things equal, as the price of a good or service rises, its quantity demanded falls. The reverse is also true: as the price of a good or service falls, its quantity demanded increases. The reverse is also true: as the price of a good or service falls, its quantity demanded increases.

4. © OnlineTexts.com p. 3 Demand Curve The demand curve has a negative slope, consistent with the law of demand.

5. © OnlineTexts.com p. 4 Shift in the Demand Curve This demand curve has shifted to the right. Quantity demanded is now higher at any given price.

6. Changes in Demand Vs Quantity Demanded ΔQuantity Demanded- caused by changes in price and is a movement along the line ΔQuantity Demanded- caused by changes in price and is a movement along the line ΔDemand- caused by changes in the determinates of demand; a shift to the right is an increase demand and a shift to the left is an decrease in demand. ΔDemand- caused by changes in the determinates of demand; a shift to the right is an increase demand and a shift to the left is an decrease in demand.

7. Determinants of Demand FACTORS THAT SHIFT THE DEMAND CURVE Change in consumer tastes Change in the number of buyers Change in consumer incomes Change in consumer expectations Change in the prices of complementary and substitute goods A change in any variable other than price that influences quantity demanded produces a shift in the demand curve or a change in demand. (Shifters)

8. Consumer Tastes Demand curves can shift due to changes in consumer tastes over time. Demand curves can shift due to changes in consumer tastes over time. Example: demand for beanie babies became very popular in 1990s, D Example: demand for beanie babies became very popular in 1990s, D But today not so much But today not so much

9. Number of Buyers An increase in the number of potential buyers will increase the demand for the good. An increase in the number of potential buyers will increase the demand for the good. Example: 10,000 new soldier are newly stationed at Ft. Carson; what happens to the demand for housing and apartments. Example: 10,000 new soldier are newly stationed at Ft. Carson; what happens to the demand for housing and apartments.

10. Changes in income can increase or decrease demand. Changes in income can increase or decrease demand. Normal goods Normal goods Inferior goods Inferior goods Consumer Income

11. Normal Good Normal good is a good whose demand increases with an increase in income. Normal good is a good whose demand increases with an increase in income. Examples: steak, air travel, and jewelry.

12. Inferior Good Inferior good is a good whose demand decreases with an increase in income. Inferior good is a good whose demand decreases with an increase in income. Examples: Ramen noodle, resale stores, and generics.

13. Prices of Other Goods Changes in the prices of other goods can increase or decrease demand. Changes in the prices of other goods can increase or decrease demand. Substitute good is a good that causes an increase in the demand for another good when its price increases. Substitute good is a good that causes an increase in the demand for another good when its price increases. Complementary good is a good that causes a decrease in the demand for another good when its price increases. Complementary good is a good that causes a decrease in the demand for another good when its price increases.

14. Substitute good An increase in the price of Pepsi will increase the demand for Coke. Pepsi and Coke are substitute An increase in the price of Pepsi will increase the demand for Coke. Pepsi and Coke are substitute Other examples: butter and margarine, apples and oranges

15. Complementary Good An increase in the price of peanut butter will reduce the demand for jelly. Peanut butter and jelly are complements. An increase in the price of peanut butter will reduce the demand for jelly. Peanut butter and jelly are complements. Other examples: razors and razor blades, shampoo and conditioner

16. Expected Future Prices An increase in the expected future price of a good increases current demand. An increase in the expected future price of a good increases current demand. For example, when people believe the price of gas will rise to $5 by Friday, people will fill up their tanks before Friday. For example, when people believe the price of gas will rise to $5 by Friday, people will fill up their tanks before Friday.

17. © OnlineTexts.com p. 16 The Law of Supply The law of supply holds that other things equal, as the price of a good rises, its quantity supplied will rise, and vice versa. The law of supply holds that other things equal, as the price of a good rises, its quantity supplied will rise, and vice versa. Why do producers produce more output when prices rise? Why do producers produce more output when prices rise? seek higher profits seek higher profits can cover higher marginal costs of production can cover higher marginal costs of production

18. © OnlineTexts.com p. 17 Supply Curve The supply curve has a positive slope, consistent with the law of supply.

19. © OnlineTexts.com p. 18 Shift in the Supply Curve For an given rental price, quantity supplied is now lower than before.

20. Changes in Supply Vs Quantity Supplied ΔQuantity Supplied- caused by changes in price and is a movement along the line ΔQuantity Supplied- caused by changes in price and is a movement along the line Δ Supply - caused by changes in the determinates of Supply; a shift to the right is an increase Supply and a shift to the left is a decrease in Supply. Δ Supply - caused by changes in the determinates of Supply; a shift to the right is an increase Supply and a shift to the left is a decrease in Supply.

21. Determinants of Supply FACTORS THAT SHIFT THE SUPPLY CURVE Change in resource prices or input prices Change in technology Change in taxes and subsidies Change in the prices of other goods Change in producer expectations Change in the number of suppliers A change in any variable other than price that influences quantity supplied produces a shift in the supply curve or a change in supply.

22. Costs Supply Any factor that changes the cost of production effects supply.

23. Change in Resource Prices or Input Prices Higher resource prices (CELL) raise production costs, which reduces profits and the incentive for firms to supply output at each product price. Higher resource prices (CELL) raise production costs, which reduces profits and the incentive for firms to supply output at each product price. Example: Example: An increase in the price of sugar in the cookie industry, increases cost of production, therefore reduces the supply of cookies. An increase in the price of sugar in the cookie industry, increases cost of production, therefore reduces the supply of cookies.

24. Change in Technology Changes in Technology enable firms to produce units of output with fewer resources; this lowers the cost of production and increases supply. Changes in Technology enable firms to produce units of output with fewer resources; this lowers the cost of production and increases supply. Example: Example: The development of computers increased production in many firms and increased supply. The development of computers increased production in many firms and increased supply. A disabling computer virus would decrease production. A disabling computer virus would decrease production.

25. Change in Taxes and Subsidies Changes in taxes or subsides change the cost of production, affecting the supply. Changes in taxes or subsides change the cost of production, affecting the supply. Example: Example: The Stimulus Spending Package gave car manufacturers 2.5 billion dollars to produce electric cars. The Stimulus Spending Package gave car manufacturers 2.5 billion dollars to produce electric cars.

26. Change in producer expectations Change in expectations about future prices of a product effect the supply. Change in expectations about future prices of a product effect the supply. Example: Example: If a firm expects the price to increase it may withhold some of their inventory from the market causing the supply to decrease. If a firm expects the price to increase it may withhold some of their inventory from the market causing the supply to decrease.

27. Change in the number of suppliers Increase in the number of suppliers, increase the supply on the market place. Increase in the number of suppliers, increase the supply on the market place. Example: Example: Hurricane wipes out half of orange growers in Florida, orange supply decreases. Hurricane wipes out half of orange growers in Florida, orange supply decreases.

28. Equilibrium In economics, an equilibrium is a situation in which: In economics, an equilibrium is a situation in which: there is no inherent tendency to change, there is no inherent tendency to change, quantity demanded equals quantity supplied, and quantity demanded equals quantity supplied, and the market just clears. the market just clears. © OnlineTexts.com p. 27

29. © OnlineTexts.com p. 28 Shortages and Surpluses A shortage occurs when quantity demanded exceeds quantity supplied. A shortage occurs when quantity demanded exceeds quantity supplied. A shortage implies the market price is too low. A shortage implies the market price is too low. A surplus occurs when quantity supplied exceeds quantity demanded. A surplus occurs when quantity supplied exceeds quantity demanded. A surplus implies the market price is too high. A surplus implies the market price is too high.

30. © OnlineTexts.com p. 29 Equilibrium Equilibrium occurs at a price of $3 and a quantity of 30 units.

31. Visual 2.6 Shifts in Demand and Supply

32. © OnlineTexts.com p. 31 Equilibrium After a Demand Shift The shift in the demand curve moves the market equilibrium from point A to point B, resulting in a higher price and higher quantity.

33. © OnlineTexts.com p. 32 Equilibrium After a Supply Shift The shift in the supply curve moves the market equilibrium from point A to point B, resulting in a higher price and lower quantity.

34. Prices Prices vary based on the supply and demand of a product. Prices vary based on the supply and demand of a product. High Demand + Low Supply = High Price High Demand + Low Supply = High Price Low demand + High supply = Low Price Low demand + High supply = Low Price Prices are a way to ration products and also to inform suppliers which products to make, so that they can maximize their profits. Prices are a way to ration products and also to inform suppliers which products to make, so that they can maximize their profits. This profit motive guides them to produce the products that we want and not waste resources on products that we do not want. This profit motive guides them to produce the products that we want and not waste resources on products that we do not want.

35. Price Ceilings A PC sets the maximum legal price a seller may charge for a product or service. A PC sets the maximum legal price a seller may charge for a product or service. Results in a shortage of a product Results in a shortage of a product Supposed Reasoning: Allows consumers to obtain “essential” goods Supposed Reasoning: Allows consumers to obtain “essential” goods Examples: rent control, credit cards, price controls in the 70’s on food and gas. Examples: rent control, credit cards, price controls in the 70’s on food and gas. Secondary Effects: Black Markets develop Secondary Effects: Black Markets develop

36. © OnlineTexts.com p. 35 Price Ceiling A price ceiling is set at $2 resulting in a shortage of 20 units.

37. Price Ceilings

38. Price Floors A PF sets the minimum legal price a seller may charge for a product or service. A PF sets the minimum legal price a seller may charge for a product or service. Supposed Reasoning: Government feels that the free market is not providing a sufficient income for certain groups. Supposed Reasoning: Government feels that the free market is not providing a sufficient income for certain groups. Examples: Agriculture and minimum wage Examples: Agriculture and minimum wage Secondary Effect: Taxpayers pay higher taxes to buy the excess surplus and to store the goods. Secondary Effect: Taxpayers pay higher taxes to buy the excess surplus and to store the goods.

39. © OnlineTexts.com p. 38 Price Floor A price floor is set at $4 resulting in a surplus of 20 units.

40. Price Floors

41. Morality Wage and price controls tend to harm the people they are intended to help. Wage and price controls tend to harm the people they are intended to help. The first US Minimum wage laws were intended to protect white construction workers from the competition of the newly freed slaves. The first US Minimum wage laws were intended to protect white construction workers from the competition of the newly freed slaves.

42. Other ways to ration products Need Based (Organ Transplant) Need Based (Organ Transplant) Government Decree Government Decree Waiting Lists (Public Housing) Waiting Lists (Public Housing) Lottery (Schools) Lottery (Schools) Combinations of above with prices Combinations of above with prices

43. Elasticity Price elasticity of demand is a measure of how much the quantity demanded of a good responds to a change in the price of that good. Responsiveness to changes in price

44. Perfectly Inelastic/Elastic Demand Curve

45. Visual 2.7 Qualities That Affect Elasticity of Demand