AIM: What is the Law of Supply? What is the Law of Demand? DO NOW: Interpret the image below.

What is Demand? Buyers have to be willing and able to purchase a product at a particular price The Law of Demand: as prices fall, the quantity demanded increases. As prices rise, the quantity demanded decreases. P  D  P  D  Ex: Porsche How many of you would like a Porsche [or like vehicle]? How many of you are able? What’s the difference between willing and able? Idea of time and place – at this time, you may be willing to buy a Porsche, but are not able, therefore you do not have a “DEMAND” for a Porsche

Demand Curve

Change in Quantity Demanded vs. Change in Demand Caused by change in price of good Displayed as movement along curve Caused by change in determinant of demand Results in a shift to a new demand curve Income Preference/Taste Consumer Expectations Population Change Prices of Related Goods

What is Supply? Indicates how much of a good producers are willing and able to offer for sale per period at each possible price. Law of Supply: as a good’s price increases (decreases), the quantity suppliers are willing and able to supply increases (decreases). P  QS  P  QS 

Supply Curve

Opportunity Cost Suppliers will choose among alternatives based on their expected benefit/cost

Change in Quantity Supplied vs. Change in Supply Caused by a change in a good’s own price Displayed as movement along curve Caused by change in determinant of supply Results in a shift to a new demand curve Technology Price of Relevant Resources Price of Alternative Goods Producer Expectations Number of Producers Government Restrictions

Elasticity Measures responsiveness to change in price Allows us to compare across markets & other goods Elastic = small P-change, large Q-Demanded change E (d) > 1 Inelastic = large P-change, small Q-Demanded change E (d) < 1

Coefficient of Price Elasticity To determine how elastic a product is or how demand for that product will be effected by a change in price, use following equation: E(d) = ( Δ QD/QD) / ( Δ P/P) Perfectly inelastic – QD is unresponsive to P-change Perfectly Elastic – QD is totally responsive to P-change (Buyers buy all they want)

Elasticity Demands Number of close substitutes Proportion of income spent on a good Time The lack of importance Luxury X Necessity Elastic Inelastic

Why should a business care about the elasticity of demand? One reason is that the elasticity determines what happens to revenue when price changes. Revenue = Price x Quantity When facing a inelastic demand, to bring in more revenue while selling fewer units, raise the price of the good.

What is Equilibrium? Is where the consumer and producer meet Occurs in market because it’s mutually beneficial Transaction costs in markets = the costs of time and information required for exchange The point at which quantity demanded equals quantity supplied

When the demand curve shifts to the right (left), the equilibrium price rises (falls) and the equilibrium quantity rises (falls).

When the Supply Curve shifts to the left (right), the equilibrium price rises (falls) and the equilibrium quantity falls (rises).

Surplus and Shortage= Happens when markets won’t compromise Surplus – when quantity supplied exceeds the quantity demanded Shortage – when there is an excess of quantity demanded compared to quantity supplied Thus, a surplus creates downward pressure on the price, and a shortage creates upward pressure on the price Price tends toward equilibrium

Price Floors & Price Ceilings Happens when the gov’t gets involved Price Floors = a legal minimum that can be charges for a good (results in a surplus) Ex: minimum wage, milk, sugar Price Ceilings = a legal maximum that can be charges for a good (results in shortage) Ex: rent controls, credit card interest rates, oil

But Ms. Rappoccio, so how does this apply to my life? Supply and Demand in YOUR Life