Demand, Supply & Equilibrium Chapters 4-6

Demand Demand: the desire to own something and the ability to pay for it –Must be willing & able to pay set price The Law of Demand: Consumers buy –more of a good when price decreases –less when its price increases

Effects on Demand The Income Effect: when price rises, consumers buy less b/c feel cannot afford a product. The Substitution Effect: when prices of a good goes up, consumers buy less of that good and more of other goods. (Pizza vs. Hamburgers)

Elasticity vs. Inelastic: Elastic: demand that is very sensitive to a change in price Inelastic: demand that is not very sensitive to change in price

Normal vs. Inferior Goods Normal Goods: goods that consumers demand more of when their income increases, more elastic Inferior Goods: a good that consumers demand less of when their income increases, less elastic

Complements vs. Substitutes: Complements: Two goods that are bought and used together Substitutes: Goods that are used in place of one another

Shifts in Demand: Demand for one good can be affected by change in demand for another good, (complements & substitutes) Demand for normal goods increases when income increases Demand for inferior goods decreases when income increase

Shifts in Demand Current demand is related to expected future price Changes in size of population Advertising starting trends

Demand Demographics: description of person you are targeting with product –Age, race, ethnicity, religion, socio-economic status, geographic location, gender, occupation, beliefs, etc.

Advertising Logo(Nike Swoosh) Slogan(ATT: Raising the bar) Celebrity Endorsements (Athlete’s shoes) Glamorize(Female celebrities’ perfume) Sex Sells(Carls’ Jr. Ads)

Slogan Quiz 1. Snap into a _____. 2. We keep you moving. 3.The best a man can get. 4.Be the first to know. 5.Maybe she’s born with it. Maybe it’s ___. 6.Zoom Zoom. 7.Mmmmm Mmmmm Good! 8.The quilted, quicker picker upper, ________. 9.That’s the power of ________ baby. 10.Got _______? 11.Hungry? Why wait? 12.It keeps going, and going…. 13.Don’t leave home without it. 14.Easy, breezy, beautiful, ________. 15._______ take me away. 16.________ taste the rainbow. 17.Do the _________. 18.Life’s Good. 19.Can you hear me now? 20.We’ve got an app for that.

Supply Supply: The amount of goods available Law of Supply: The higher the price, the larger the quantity produced Price increases= supply increases Price falls = supply falls

Changes in Supply Quantity Supplied: amount supplier is willing & able to supply at specific price Rising prices = increase profits –cause new firms to enter market –further increases supply Technology lowers production costs & increases supply –Make things more efficiently & save money

Changes in Supply Government encourages/discourages supply by raising/lowering cost of producing goods –Reduce supply with excise tax, raises costs –Increase supply through grants, small business loans, subsidies, reduces cost Government regulation affects price, quantity, or quality of a good –Lead testing, FDA, Emissions regulations –Extra cost passed on to consumer

Changes in Supply Producers expectation of future prices affect output –Expect price to increase, supply will increase (Christmas) –Expect price to decrease, supply will decrease (fad or old technology) Supply increases with number of firms producing it –New technology

Changes in Supply Input costs affect supply (metal for cars, gas for trucking companies) –Rise in input cost = fall in supply –Fall in input cost = increase in supply International conflict –Oil prices spike with conflict in Middle East

Production Costs affect Supply Fixed Cost: cost that does not change, no matter how much of the good is produced –Mortgage/Rent, Salaried employee Variable Cost: cost that rises or falls depending on how much is produced –Input costs, hourly employees, utility bills Total Cost: Fixed costs plus variable costs

Equilibrium the point of balance between 1. Price (Price being asked equal to price willing to buy for) 2.Quantity of goods, market for a good is stable (Amount demanded equal to amount supplied)

Disequilibrium Either the 1. price or 2. quantity supplied is not equal b/c of Excess Demand: quantity demanded is more than quantity supplied, price increase, shortage Excess Supply: quantity supplied exceeds quantity demanded, price decrease Changes in Price: a fall in supply or shift in demand

Restrictions on Equilibrium Price Ceilings: Laws set a maximum price that sellers can charge for a good or service, often set by local & fed. Government, rent control, can decrease supply & cause poor conditions Price Floor: Governments set a minimum price that must be paid for a good or service, minimum wage or agricultural price supports

Moving Toward Equilibrium A market will gradually move toward equilibrium Shortage = low supply, high demand & high prices: price will rise, demand will fall and equilibrium will be reached Surplus = high supply, low demand & low prices: price will fall, supply will fall, and equilibrium will be reached

2 Factors that Cause Disequilibrium 1.Increase in Supply: technology, government taxes and subsidies, changes in prices of raw material and labor to produce good 2.Decrease Supply: price of input costs rise, higher wages for workers, new taxes 3.Increase in Demand: fad, advertising, result in temporary shortage 4.Decrease in demand: fad passes, technology, advertising

Advantages of Prices in Free Market Price is a Signal: what to produce or buy more or less of Flexibility:less shortages & rationing, market corrects itself Price System is Free: no bureaucracy of government involved, quick response

Advantages of Prices in Free Market Wide Choice of Goods: few shortages or rationing, less black market Efficient Resource Allocation: land, labor & capital used wisely to maximize profit for supplier or minimize cost to consumer Price & Profit Incentive: use resources to make most profit, or most savings