Chapter 7: Demand and Supply

Barter vs. monetary economy Barter – goods are traded directly for other goods Problems: requires double coincidence of wants you want what they have, they want what you have no match = needs not met! large number of trading ratios costs more to get information on goods/services available

Barter vs. monetary economy Monetary economy has lower transaction and information costs MORE EFFICIENT! Value based on TRUST It Really is Just Paper!

Markets In a market economy, the price of a good is determined by the interaction of demand and supply Seller & Buyer have to agree on a price for an exchange to take place

Demand A relationship between price and quantity demanded in a given time period

Demand schedule What would this demand schedule look like on a graph?

Demand curve Notice the direction of the “curve” – a demand curve will ALWAYS resemble this!

Graphing Demand! Qd = 40 – 2p Video Example Schedule Graphing Create a basic graph. Label the axis. 3. Graph each point from the demand schedule. 4. Draw the demand curve. Equation Graphing Qd = 40 – 2p Video Example Solve the equation to determine graph values. Graph the demand curve.

Law of demand When price goes up, quantity demanded goes down When price goes down, quantity demanded goes up

Change in quantity demanded vs. change in demand What is the difference? Change in quantity demanded Change in demand

What is the difference? Change in quantity demanded Change in demand Indicates a change OTHER than price. Such as a substitute, income, or fads that change WHAT is demanded. The ENTIRE demand curve moves to the left. Indicates HOW much product is demanded at a given price! PRICE it the KEY!

Practice Graphing #3 Demand Equation WIDGETS: Qd=60-2p **For each curve, is the curve elastic or inelastic? What information would be needed to better determine the answer?

Market demand curve Market demand is the horizontal summation of individual consumer demand curves (THE TOTAL OF ALL INDIVIDUALS’ DEMAND CURVES)

PRICE ELASTICITY OF DEMAND HOW responsive are consumers to price change? Changes in price have a great effect on consumer demand! SUCH AS: Crab Legs Changes in price have little effect on consumer demand! SUCH AS: Sugar

Determinants of demand What determinants are being demonstrated in this comparison? tastes and preferences prices of related goods and services income number of consumers expectations of future prices and income THIS IS REFERRING TO THE SHIFT TO THE LEFT OF THE ENTIRE DEMAND CURVE – NOT A PRICE EFFECT! VS.

Tastes and preferences These are not demanded due to change in FAD… among other reasons!!! Effect of fads:

Prices of related goods substitute goods complementary goods – an increase in the price of one results in an increase in the demand for the other. – an increase in the price of one results in a decrease in the demand for the other IN FUEL PRICE = DEMAND DEMAND

Change in the price of a substitute good Price of coffee rises:

Change in the price of a complementary good Price of DVDs rises:

Income and demand: normal goods A good is a normal good if an increase in income results in an increase in the demand for the good.

Income and demand: inferior goods A good is an inferior good if an increase in income results in a reduction in the demand for the good.

Demand and the # of buyers An increase in the number of buyers results in an increase in demand.

Expectations: How does this effect demand? A higher expected future price will increase current demand. A lower expected future price will decrease current demand. A higher expected future income will increase the demand for all normal goods. A lower expected future income will reduce the demand for all normal goods.

International effects exchange rate – the rate at which one currency is exchanged for another. currency appreciation – an increase in the value of a currency relative to other currencies. currency depreciation – a decrease in the value of a currency relative to other currencies.

International effects (continued) Domestic currency appreciation causes domestically produced goods and services to become more expensive in foreign countries. $ goes up = price of US goods up internationally An increase in the exchange value of the U.S. dollar results in a reduction in the demand for U.S. goods and services. DEMAND for US goods goes DOWN The demand for U.S. goods and services will rise if the U.S. dollar depreciates. $ worth decreases = INCREASE in DEMAND for US goods

12 19 28 40 55 Graph all 3 demand schedules. Schedules 2 & 3 will be on the same graph. Is one more elastic than the other? Support your answer. ** Complete Section 7.1-2 GR and do the 7.2 section assessment on page 185.