Supply, Demand, and Market Equilibrium

Mr. Clifford! Mr. Clifford

What is a Market? Definition = An interaction between buyers (demanders) and sellers (suppliers) for goods, services, or resources

Demand First A “schedule” or “curve” that shows the amount of products that consumers are willing and able to buy at a series of possible prices at a specific period of time Two things affect this: market demand and individual demand When we say “willing and able” we mean that you have to not only be willing to buy something but to have the necessary money to buy things

Law of Demand Definition: As prices fall, the quantity demanded rises. As prices rise, the quantity demanded falls. There is an inverse relationship between price and quantity demanded. Versus 1,220 erasers! $549 $0.45

Individual Demand Individual Demand P Qd $5 4 3 2 1 10 20 35 55 80 P D

Why Is It Inverse? Got money? Price is obviously the biggest determinant in purchasing an item. People buy more products at a lower price. Diminishing marginal utility 1st Big Mac = high MB, low MC. 2nd Big Mac = less MB, higher MC 3rd Big Mac = less MB, higher MC

Part 2 Income Effect Substitution Effect A lower price enables you to buy more of a product than you could when the price was higher Higher price of a product has the opposite effect Substitution Effect At a lower price, you have the incentive to substitute the less expensive product for similar products that are more expensive You’re getting a “better deal” with the lower price product As price increases for a good, demand for its cheaper substitute goes up as well

Individual Demand Individual Demand P Qd $5 4 3 2 1 10 20 35 55 80 6 5 4 3 2 1 Individual Demand P Qd Increase in Demand $5 4 3 2 1 10 20 35 55 80 Price (per bushel) D2 Decrease in Demand D1 D3 Q 2 4 6 8 10 12 14 16 18

Change in Individual Demand P 6 5 4 3 2 1 Change in Demand Individual Demand P Qd Change in Quantity Demanded $5 4 3 2 1 10 20 35 55 80 Price (per bushel) D2 Decrease in Demand D1 D3 Q 2 4 6 8 10 12 14 16 18 Quantity Demanded (bushels per week)

Non-price Determinants Preference: based on popularity or trends by consumers Income effect Population changes: how many consumers are in this market Expectations of consumers: what consumers “think” will happen in the future that affects their actions now

Part 2 Elasticity of demand: how much demand changes to respond to changes in price More elastic: when goods are luxuries (cars, yachts, diamonds) Less elastic: when goods are needed (medicine, soap) We still need goods like medicine and soap but less need for diamonds and sports cars

P.I.P.E.E.R. Preference of consumers Income of consumers Population of consumers Expectations for the future (what to do NOW) Elasticity (effect of price) Related goods (is a substitute available?)

Supply Supply is the amount of goods or services that producers are willing and able to sell The major determinant of supply is price Quantity: the amount of supply at each price Supply schedule: the amount of supply at each price is shown in a schedule

Example Price Quantity Supplied $1.75 25 $1.50 20 $1.25 17 $1.00 15 $0.75 10 $0.50 7 $0.25 5

Supply Curve

Upwards Curve Supply curve goes upwards because: Price and quantity supplied have a direct relation Price is an incentive to producers as they receive more revenue when more goods/services are sold

Law of Supply Supply varies directly with price If price goes up, quantity supplied goes up If price goes down, quantity supplied goes down

Non-price Determinants Cost of production: cost of producing goods and services Minimum wage for labor goes up Natural disasters make costs go up Expectations of producers: predictions on how consumers will act Resources can be used for different goods Grow corn or grow soybeans?

Part 2 Technology improvements increased production Taxes/subsidies: Pay more taxes which increases the costs of production or the government pays producers to produce (subsidies) # of suppliers in the market Tesla entered the car market recently and increased the supply of cars

C.E.R.T.T/S.S Cost of production Expectations of producers Resources Technology Taxes/Subsidies Suppliers

Shifts in Demand Curve Increase – shifts to the right Decrease – shifts to the left PRICE D 1 D 2 D 1 D 2 QUANTITY

Shifts in Supply Curve

Equilibrium Price The point where buyers and sellers are equally satisfied The point where the D & S curves intersect

Invisible Hand Adam Smith Invisible Hand Theory: Forces of supply & demand, competition and price make societies use resources efficiently Unintended social benefits resulting from individual actions

Surplus Supply is greater than demand at a specific price Must lower the price to reach equilibrium

Price Floors vs. Price Ceiling Government sets the limit Cannot go below a certain price Causes a surplus Example: minimum wage causes a surplus of workers at a set price Price ceiling: Government sets maximum price Cannot go above a certain price Causes a shortage Example: rent controls, price controls, utility rates set by the government

Part 2