1. Unit II: Demand and Supply
Booth/Econ
Prentice Hall

2. LAW OF DEMAND Price Demand
What kind of relationship does price and demand have? Why?
What kind of relationship does price and supply have?
Why?

3. Law of Diminishing Marginal Utility
Util = One unit of something (satisfaction gained)
Def. Marginal benefit from using each additional unit of good or service during a given time period tends to decline as each is used.
Example= Hot dogs at game $4…(worth the price)

4. Individual Demand Schedule Market Demand Schedule
The Demand Schedule
A demand schedule is a table that lists the quantity of a good a person will buy at each different price.
A market demand schedule is a table that lists the quantity of a good all consumers in a market will buy at each different price.
Demand Schedules
Individual Demand Schedule
Price of a slice of pizza
Quantity demanded per day
Market Demand Schedule
Price of a slice of pizza
Quantity demanded per day
$.50
$1.00
$1.50
$2.00
$2.50
$3.00 5 4 3 2 1
$.50
$1.00
$1.50
$2.00
$2.50
$3.00
300
250
200
150
100 50
What is the difference between a market and individual demand schedule? jf 2 3
Chapter 4, Section 1

5. Price per slice (in dollars)
The Demand Curve
Market Demand Curve
3.00
2.50
2.00
1.50
1.00
.50 50
100
150
200
250
300
350
Slices of pizza per day
Price per slice (in dollars)
A demand curve is a graphical representation of a demand schedule.
Three characteristics of every demand curve:
Downward sloping
Must assume ceteris paribus
Relationship between price and quantity
What is the one factor that causes a shift in the quantity demanded?
Demand
PRICE!! 2 3
Chapter 4, Section 1

6. Movement along the demand curve is a result in a consumer changing their behavior based on a change in price.
Increase in quantity demanded is demonstrated by moving down the demand curve
Decrease in quantity demanded is demonstrated by moving up the demand curve

7. Six Factors That Affect Demand
Income
Market Size
Consumer Tastes
Consumer Expectations
Substitutes
Complements

8. Shifting the Whole Demand Curve
What else do you think could influence YOUR demand for a product? 1 3
Chapter 4, Section 2

9. Shifting the Curve (cont.)
Price of Related Goods
The demand curve for one good can be affected by a change in the demand for another good.
5. Complements are two goods that are bought and used together. Example: skis and ski boots
6. Substitutes (interchangeable)are goods used in place of one another. Example: skis and snowboards 1 3

10. Shifting the Curve (cont.)
An increase in demand is shown by moving the demand curve to the right
What would cause an increase in demand?
A decrease in demand is shown by moving the demand curve to the left?
What would cause a decrease in demand?
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

11. What Is Elasticity of Demand?
Elasticity of demand is a measure of how consumers react to a change in price.
Demand for a good that consumers will continue to buy despite a price increase is inelastic, (price has little impact on QD).
Demand for a good that is very sensitive to changes in price is elastic.
Price has a huge impact on QD
Why would a prescription drug, like insulin, have inelastic demand for a person with diabetes? 1 2
Chapter 4, Section 3

12. Factors Affecting Elasticity
What are some other factors that you feel could impact a consumers response to a change in the price of a product? 1 2
Chapter 4, Section 3

13. Output (slices per day)
Supply Curves
Market Supply Curve
Price (in dollars)
Output (slices per day)
3.00
2.50
2.00
1.50
1.00
.50
500
1000
1500
2000
2500
3000
3500
Characteristics of a Supply Curve
1. Relationship between price and quantity supplied
2. Always upward sloping
3. Must have ceteris paribus (“all things held constant”) to exist
Supply
A market supply curve is a graph of the quantity
supplied of a good by all suppliers at different prices

14. The Law of Supply
According to the law of supply, as price increases, supply increases. By contrast as price decreases, supply decreases.
Price
As price increases…
Supply
Quantity supplied increases
Price
As price falls…
Supply
Quantity supplied falls

15. How Does the Law of Supply Work?
Economists use the term quantity supplied to describe how much of a good is offered for sale at a specific price. Just like demand, quantity supplied indicates movement along the supply curve, because ONLY price is being considered (ceteris paribus).
Why do suppliers produce more as the price increases?
1.The promise of increased revenues when prices are high encourages firms to produce more. The more you can make, the more you will produce!
2.Rising prices draw new firms into a market and add to the quantity supplied of a good.
Higher Production + Market Entry = Law of Supply
More $$$$-- More Supply!

16. Price per slice of pizza Slices supplied per day
Supply Schedules
A market supply schedule is a chart that lists how much of a good all suppliers will offer at different prices.
$.50
1,000
Price per slice of pizza
Slices supplied per day
Market Supply Schedule
$1.00
1,500
$1.50
2,000
$2.00
2,500
$2.50
3,000
$3.00
3,500
What would an individual supply schedule list?

17. Input Costs and Supply
Any change in the cost of an input such as the raw materials, machinery, or labor used to produce a good, will affect supply.
As input costs increase, the firm’s marginal costs also increase, decreasing profitability and supply.
Input costs can also decrease. New technology can greatly decrease costs and increase supply.

18. Government Influences on Supply
By raising or lowering the cost of producing goods, the government can encourage or discourage an entrepreneur or industry.
Subsidies
A subsidy is a government payment that supports a business or market. Subsidies cause the supply of a good to increase.
Taxes
The government can reduce the supply of some goods by placing an excise tax on them. An excise tax is a tax on the production or sale of a good.

19. Other Factors Influencing Supply
Number of Suppliers
If more firms enter a market, the market supply of the good will rise. If firms leave the market, supply will decrease.
The Global Economy
The supply of imported goods and services has an impact on the supply of the same goods and services here.
Government import restrictions will cause a decrease in the supply of restricted goods.

20. change in price for trees,
Elasticity of Supply
Elasticity of supply is a measure of the way quantity supplied reacts to a change in price.
If supply is not very responsive to changes in price, it is considered inelastic.
If supply is very sensitive to changes in price it is considered elastic.
Why can’t I respond to a
change in price for trees,
but I can for taxi rides?
Elastic

21. What Affects Elasticity of Supply?
Time

22. Essential Questions: Chapter 6
Chapter 6: Prices
Essential Questions: Chapter 6

23. Price of a slice of pizza Combined Supply and Demand Schedule
Balancing the Market
The point at which quantity demanded and quantity supplied come together is known as equilibrium.
Price per slice
Equilibrium Point
Finding Equilibrium
Price of a slice of pizza
Quantity demanded
Quantity supplied
Result
Combined Supply and Demand Schedule
$ .50
300
100
$3.50
$3.00
$2.50
$2.00
$1.50
$1.00
$.50
Slices of pizza per day 50
150
200
250
350
Supply
Demand
$2.00
$2.50
$3.00
150
100 50
250
300
350
Surplus from excess supply
$1.00
250
150
Shortage from excess demand
$1.50
200
Equilibrium
Equilibrium Price a
Equilibrium Quantity
Supply + Demand = Equilibrium

24. Market Disequilibrium
If the market price or quantity supplied is anywhere but at the equilibrium price, the market is in a state called disequilibrium. There are two causes for disequilibrium:
Excess Demand
Excess demand occurs when quantity demanded is more than quantity supplied.
Shortage
Excess Supply
Excess supply occurs when quantity supplied exceeds quantity demanded.
Surplus
Interactions between buyers and sellers will always push the market back towards equilibrium.

25. Price Ceilings
A price ceiling is a maximum price that can be legally charged for a good.
An example of a price ceiling is rent control, a situation where a government sets a maximum amount that can be charged for rent in an area.

26. Price Floors
A price floor is a minimum price, set by the government, that must be paid for a good or service.
One well-known price floor is the minimum wage, which sets a minimum price that an employer can pay a worker for an hour of labor.

27. Prices provide a language for buyers and sellers.
Advantages of Prices
Prices provide a language for buyers and sellers.
1. Prices as an Incentive
Prices communicate to both buyers and sellers whether goods or services are scarce or easily available. Prices can encourage or discourage production.
2. Signals
Think of prices as a traffic light. A relatively high price is a green light telling producers to make more. A relatively low price is a red light telling producers to make less.
3. Flexibility
In many markets, prices are much more flexible than production levels. They can be easily increased or decreased to solve problems of excess supply or excess demand.
4. Price System is "Free"
Unlike central planning, a distribution system based on prices costs nothing to administer.