Unit II: Demand and Supply

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Unit II: Demand and Supply
Booth/Econ Prentice Hall

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?

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)

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

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

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

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

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

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

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? ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

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

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

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

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

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!

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?

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.

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.

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.

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

What Affects Elasticity of Supply?
Time

Essential Questions: Chapter 6
Chapter 6: Prices Essential Questions: Chapter 6

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

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.

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.

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.

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.