Supply and Demand

Bellwork When you go to the store how do you know what a fair price for a product is?

Supply and Demand The law of supply and demand is that what is supplied (produced) is determined by what is demanded (consumed). The law of supply states that businesses will produce more products when they can sell them at higher prices and fewer products when the prices are low. Supply: quantities that producers or sellers are willing and able to produce/sell at various prices. The law of demand states that buyers will demand a greater quantity of a good when its price is low. As the price rises, the quantity demanded falls. Demand: quantities that people are willing and able to buy at various prices. Business owners hope the supply and demand for a product will balance each other. Quantity demanded = quantity supplied

Supply Schedule The supply schedule is a table representing the quantity intended to sell or produce at a certain price level. These are assumptions about the seller’s sentiment toward the size of intended production of a good. These can be plotted on a supply curve.

Supply Curve The supply curve represents the relationship between price and quantity producers are willing to supply at that price. The curve represents all possible combinations of price and quantity of that market. Producers supply more at a higher price because of the higher potential revenue. There is a direct relationship between price and quantity supplied.

How supply can change: change in supply Change in supply means there is an increase or decrease in the amount producers want to supply. This can be due to a change in the cost of production. A change in supply can also be due to government taxes or subsidies.

Factors that Affect Supply A change in supply may be caused by market factors EXCEPT price. Cost of resources increases Too expensive = less supply; shift curve to the left Competition/out-selling Government action: taxation Government action: subsidy as a reward to produce more Productivity Technology

Factors that Affect Supply A change in supply may be caused by market factors EXCEPT price. Cost of resources increases Too expensive = less supply; shift curve to the left Competition/outselling Less supply; shift curve to the left Government action: taxation Shift curve left because less supply Government action: subsidy as a reward to produce more Shift curve to the right Productivity Greater supply if more productive; shift curve to right Technology Greater supply if can make faster; shift to right

Factors that affect supply When shift supply curve to the left Quantity: decrease in quantity Price: increase in price When shift supply curve to the right Quantity: increase in quantity Price: decrease in price

Change in quantity supplied A change in the quantity supplied will result from a change in price. Supply is greater when a price is higher Elasticity of supply is the responsiveness of producers to the change in price of their goods or services. Inelastic goods are goods where a shift in prices does not drastically change the supply because it is not something people are willing to go without; necessities. Ex: water, food, gasoline Elastic goods are goods where an increase in price was a noticeable impact on consumption; luxury items. Ex: movie tickets

How supply can change: change in quantity supplied Change in quantity supplied is based upon a change in price. Change in price does not shift the supply curve. The same supply curve is used, but there is change in amount supplied at that price.

Bellringer What are some factors that cause a change in demand? How does each effect the demand curve?

Demand Schedule A table representing the quantity intended to purchase a good at a certain price level. These are assumptions about the buyer's sentiment towards the number of intended purchases at different prices. The higher the price the less people will demand

Demand Curve The demand curve represents the relationship between the price and quantity demanded at that price. The curve represents possible relationships between price and demand in that market. As the price goes up, so does the opportunity cost. People will naturally avoid buying a product that will force them to forgo the consumption of something else There is an inverse relationship between price and quantity demanded.

How demand can change: change in demand Change in demand means consumer demand itself increases or decreases. Change in demand can be caused by consumers leaving/entering the market It can also be caused by people wanting to buy more or less of a product. It can also change through new advertisements.

Factors that affect demand A change in demand may be caused by market factors EXCEPT price. Income level Personal income: all money received by a household Disposable income: income left after paying taxes Increase in income = shift to the right Change in number of consumers Consumer expectations/tastes Advertising

Factors that affect demand A change in demand may be caused by market factors EXCEPT price. Income level Personal income: all money received by a household Disposable income: income left after paying taxes Change in number of consumers More consumers = shift to the right Less consumers = shift to the left Consumer expectations/tastes Greater Advertising

Factors that affect demand Price of related goods can cause a change in demand. Substitute goods: goods used in place of other goods (ex: Pepsi or Coca-Cola) When the price of a good goes up, demand for the substitute goes up. Complementary goods: goods that work together to fulfill certain needs (ex: Blu-ray and Blu-ray player) A good's demand is increased when the price of another good is decreased

Factors that affect demand When shift demand curve to the left Quantity: decrease in quantity Price: decrease in price When shift demand curve to the right Quantity: increase in quantity Price: increase in price

Change in quantity demanded A change in the quantity demanded will result from a change in price. Demand is greater when a price is lower Price elasticity of demand measures the responsiveness of demand to changes in price for a particular good. Inelastic goods are goods where a shift in prices does not drastically change the demanded Elastic goods are goods where an increase in price has a noticeable impact on quantity demanded

How demand can change: change in quantity demanded Change in quantity demanded is based upon change in price. The price of a good is not a demand shifter, meaning the curve does not shift left or right. A change in the prices moves us to a new point along the same demand curve.

Equilibrium Price The point of intersection of the supply curve and demand curve is equilibrium. Equilibrium is the point at which quantity supplied and quantity demanded are the same. Also called market price.

A change in quantity demanded/supplied A change in the quantity demanded or supplied will result from a change in price. Demand is greater when a price is lower Supply is greater when a price is higher Change in Quantity Demanded: Prices raised or decreased Change in Quantity Supplied: Supply is reduced or increased beyond producers control = prices raised or decreased

Why do prices go up and down? Inflation Higher prices Costs of production increases = increase in price Deflation Lower prices Costs of production decrease = decrease in price Interest Rate – amount of money paid to a lender to use that lender’s money. Higher interest rate = consumer save/prices lower Lower interest rate = consumer spend/higher prices

Shift effect on price and quantity As the supply or demand curve shifts, there will be a change in the equilibrium price and quantity. http://www.knowmia.com/watch/lesson/16625 http://www.youtube.com/watch?v=ulyVXa-u4wE

Bellwork What happens if a company or market does not have the equilibrium price?

What happens if prices are too high or low Surplus: when supply exceeds demand Too much a product for what people want to buy Price above equilibrium results in a surplus Too expensive = less demand Shortage: when supply falls short of demand Not enough of a product for what people want to buy Price below equilibrium price results in a shortage Cheaper price = greater demand

What does the government do to control prices? Minimum wage: legal minimum amount to pay workers Provides workers more money Raises productions costs for producers Subsidies are an attempt by the government to control behavior of individuals. Deficit spending: government cuts taxes and spends more to stimulate the economy; subsidizes businesses to increase production Supply side economics: government cuts taxes on corporations so businesses spend more on production, capital, and labor. Set price floors and price ceilings.

What does government do? Price floor: government sets minimum price for good or service. Ex: minimum wage Price ceiling: government sets maximum price for a good or service. Ex: rent control

Bellwork What is an example of a price floor and price ceiling? How does each example effect the market?