Presentation on theme: "Demand and Supply. Demand Consumers influence the price of goods in a market economy. Demand : the amount of a good or service that consumers are."— Presentation transcript:
Consumers influence the price of goods in a market economy. Demand : the amount of a good or service that consumers are able and willing to buy at various possible prices during a specified time period Supply : the amount of a good or service that producers are able and willing to sell at various prices during a specified time period A market represents actions between buyers and sellers.
The basis of activity in a market economy is the principle of voluntary exchange. Voluntary Exchange : a transaction in which a buyer and seller exercise their economic freedom by working out their own terms of exchange The seller sets the price and the buyer agrees to the product and price through the act of purchasing the product Supply and demand analysis is a model of how buyers and sellers behave in the marketplace.
Demand is created only when the customer is both willing and able to buy the product. The law of demand states: As price goes up, quantity demanded goes down. As price goes down, quantity demanded goes up.
Real Income Effect People are limited by their income as to what they can purchase. Real income effect forces people to make trade-offs. Substitution Effect People can replace one product with another if it satisfies the same need. Amazon Prime Music vs. iTunes
Diminishing Marginal Utility People will purchase additional items until the satisfaction from the last unit is equal to the price. The lessening of this satisfaction with each additional purchase is called diminishing marginal utility. Utility : the ability of any good or service to satisfy consumer wants
Demand schedule : a table of prices and the quantity demanded at each price. To draw a demand curve: List the quantity demanded at each price. The Curve will graph the quantity demanded of a good or service at each possible price.
A change in quantity demanded is caused by a change in the price of a good. If something other than price causes demand to increase or decrease, this is known as a change in demand and shifts the demand curve.
Population When population increases, opportunities to buy and sell increase. Demand for most products increases, shifting the curve to the right. Income An increased income allows consumers to buy more products or a greater quantity of a single product. Tastes and preferences, including facts Refers to what people like and prefer to choose.
Substitutes When a new competitor is added or an old competitor leaves the market. Butter vs. Margarine Complementary goods Products that rely upon one another, demand for one affects demand for the other. The decrease in the price of one product will cause an increase in demand for both products. Cameras and film
Elasticity : economic concept dealing with consumers’ responsiveness to an increase or decrease in price of a product Price Elasticity of Demand : economic concept that deals with how much demand varies according to changes in price
Elastic Demand Occurs when the demand for some goods is greatly affected by the price. One particular brand of coffee increases in price; consumers will purchase more of the other brands. Inelastic Demand Occurs when the demand for some goods is less affected by price. Salt, pepper, and sugar are products consumers will purchase at almost any cost.
What Determines Price Elasticity of Demand? How many substitutes exist and how closely they provide the same quality and service. Fewer or no substitutes make demand inelastic. Percent of a personal budget spent on an item The higher the percent of budget, the more elastic the demand. How much consumers have to adjust to the new price. More time makes for greater elasticity.
Supply is the willingness and ability to provide goods to the consumers. The Law of Supply states: As the price rises for a good the quantity supplied generally rises. As the price falls, the quantity supplied also falls. A direct relationship exists between price and quantity supplied.
Increase in price and increase in production leads to an increase in profits. Higher prices encourage more competition to join the market. Higher prices turn potential suppliers into actual suppliers, adding to the total output.
As with demand, graphs and tables can explain the Law of Supply. Supply schedule : shows the quantity supplied at each given price. A supply curve graphs the quantities supplied at each possible price. The relationship between quantity and price is direct and always moving in the same direction.
Price of Inputs The price of inputs, or the costs of production- raw materials, wages, insurance, utilities, etc.- can cause an increase in supply. Number of Firms in the Industry Competition, or the number of companies in an industry, can cause an increase in supply
Taxes An increase in taxes can cause a decrease in supply. If taxes increase, businesses will not be willing to supply as much as before because the cost of production will rise. Technology An improvement in technology can cause an increase in supply Technology : the science used to develop new products or methods of production and distribution.
Adding units to increase production increases total output for a limited time period. The extra output for each additional unit will eventually decrease. Businesses will continue to add units of a factor of production until doing so no longer increases revenue.
In the real world, demand and supply work together. As the price of goods goes down, the quantity demanded rises and the quantity supplied falls. As the price goes up, the quantity demanded falls and the quantity supplied rises.
Sellers and buyers work together indirectly to place goods and the equilibrium price. Equilibrium Price : the price at which the amount producers are willing to supply is equal to the amount consumers are willing to buy
If the demand curve shifts due to something other than price, the equilibrium price will change. If the supply curve shifts due to something other than price, the equilibrium price will change.
Rising prices signal producers to make more and consumers to purchase less. Falling prices signal producers to make less and consumers to purchase more.
Types of Signals: Shortages Occurs when the quantity demanded (at equilibrium price) is greater than the quantity supplied. Surpluses Occurs when the quantity supplied (at equilibrium price) is grater than quantity demanded. Market Forces Can cause the prices to rise or fall to correct shortages and surpluses.
On occasion the government will get involved in setting prices. If the government believes the market forces of supply and demand are unfair it may try to protect consumers and suppliers. Special interest groups use pressure on elected officials to protect certain industries.
Price Ceilings Price Ceilings : a maximum price set by the government to prevent prices from going above a certain level. Items in short supply might be rationed. Shortages can lead to a black market, or illegal places to purchase such products at exorbitant prices. Price Floors Price Floors : a minimum price set by the government to prevent prices from going below a certain level Price floors set minimum wage levels and support agricultural prices.