1. Chapter 7 Demand and Supply

2. Section 1 Demand

3. The Marketplace  Consumers influence the price of goods in a market economy  Demand is how people decide what to buy and at what price  Supply is how sellers decide how much to sell and what to charge  A market represents actions between buyers and sellers

4. DEMAND  Market economy – people act in their own best interests to answer What, How, For whom  Demand is created only when the customer is both willing and able to buy a product  Quantity demanded is the amount (quantity) of an item that consumers are willing and able to buy at a certain price

5. DEMAND  Before you can start a business, you have to know what the DEMAND is for your product!  If you open a pizza place, and there are 3 other pizza places in the neighborhood, the demand is different than if you’re the only one!!

6. Demand: Example Bicycle Shop  Ask: Where the demand is?  Set up where have a lot of bicycle riders and few shops  Ask: How do you measure demand?  Visit other shops to gauge reactions of consumers  Poll consumers (prices, determine demand)  Study past data  Gives you idea of desire, willingness, and ability for people to pay

7. Voluntary Exchange  A buyer and seller exercise their economic freedom by working toward satisfactory terms of an exchange.  Both have to believe they are better off after the exchange.

8. The Law of Demand  Consumers buy more of a good when its price decreases and less when its price increases.  As price goes up, quantity demanded goes down.  As price does down, quantity demanded goes up.

9. The Law of Demand  Quantity demanded and price move in opposite directions (inverse relationship) PRICE ↑ QUANITY DEMANDED ↓ PRICE ↑ QUANITY DEMANDED ↓ PRICE ↓ QUANITY DEMANDED ↑ PRICE ↓ QUANITY DEMANDED ↑

10. Discussion Question  How does the seesaw illustrate the relationship between price and quantity demanded? PriceQuantity

11. Income Effect # 1 = PRICE  This will effect the QUANTITY DEMANDED: A. Income Effect When people are limited by their income as to what they can purchase. If the price rises and their income stays the same, they cannot buy the same quantity of a product. Ex: When gas prices rise and your income does not. What happens when the price of gas goes down and your income remains the same?

12. Substitution Effect B. Substitution Effect When people can replace one product with another if it satisfies the same need. Ex: McDonald’s vs. Wendy’s

13. Practice  Write an example from personal experience of how price, real income, or the substitution effect changed your decision to buy a good or service.

14. Diminishing Marginal Utility  Utility: -used to describe the amount of usefulness or satisfaction that someone gets from the use of a product  Marginal utility: -the extra usefulness or satisfaction a person gets from acquiring or using one or more unit of a product

15. Diminishing marginal utility  The extra satisfaction we get from using additional quantities of the product begins to diminish  Not willing to pay as much for 2nd, 3rd, or 4th as we did the first  Ex. Cold drink

16.  Marginal utility < the price = STOP buying

17. Practice  Describe an instance in your own life when diminishing marginal utility caused you to decrease the quantity you demanded of a product or service  Imagine you sell popcorn at the local football stadium. How would diminishing marginal utility effect the prices of your popcorn after half-time?

18. Section 2 The Demand Curve and Elasticity of Demand

19. Demand Schedule  Demand schedule is a chart.  When the data is graphed, it forms a demand curve with a downward slope.

20. DEMAND SCHEDULE The numbers in the demand schedule to the right show that as the price per CD decreases, the quantity demanded increases. Note that at $16 each, a quantity of 500 million CDs will be demanded.

21. Graphing the Demand Curve Part B Plotting the Price– Find letter E. Note that it represents a number of CDs demanded (500 million) at a specific price ($16).

22. Graphing the Demand Curve Part C Demand Curve for CDs This line is the demand curve, which always falls from left to right (downward sloping) How many CDs will be demanded at a price of $12 each?

24. Change in Demand Increase in demand = curve will shift right Decrease in demand = curve will shift left

25. DETERMINANTS OF DEMAND  The other Determinants effect a Demand change – price stays the same, but people willing to buy different amounts of the product

26. DETERMINANTS OF DEMAND 1.Consumer income (rise in income, more $ to spend = greater demand; lower income, less $ to spend = less demand) 2.Consumer tastes 3.Related Products A. Substitutes B. Complements 4.Future Expectations (expected income of buyer, expected price, expected new technology) 5.Population (the total # of buyers in the market) – this is for the total market demand

27. Income Determinants of Demand Part B Change in Demand if Your Income Decreases The demand curve D1 represents CD demand before income decreased. The demand curve D2 represents CD demand after income decreased. If your income goes up, however, you may buy more CDs at all possible prices, which would shift the demand curve to the right.

28. Fad Determinants of Demand Part C Change in Demand if an Item Becomes a Fad When a product becomes a fad, more of it is demanded at all prices, and the entire demand curve shifts to the right. Notice how D1– representing demand for Beanie Babies™ before they became popular–becomes D2– demand after they became a fad.

29. DEMAND CHEAT SHEET! Demand is about the CONSUMER Demand is about the CONSUMER INVERSE RELATIONSHIP BETWEEN PRICE AND QUANTITY DEMANDED INVERSE RELATIONSHIP BETWEEN PRICE AND QUANTITY DEMANDED As price goes down, quantity demanded goes up As price goes down, quantity demanded goes up As price goes up, quantity demanded goes down Determinants shift the demand curve Determinants shift the demand curve –If we have more money to spend, our demand is higher –If a product is the hottest style/trend, our demand is higher –If a substitute is available, demand is lower for the original product; higher for the substitute Turn to pg. 175 and complete #1-3

30. Price Elasticity of Demand  Elasticity: measure how sensitive consumers are to price change  Demand Elasticity: how much consumers respond to a given change in price.

31.  Because some goods and services are affected by price more than others, we classify demand as either elastic or inelastic.

32. Elastic  Small price changes can make big changes in demand  Amount bought will go up when price goes down  You can wait to buy Inelastic Price changes don’t affect demandPrice changes don’t affect demand Lower price will NOT affect the amount boughtLower price will NOT affect the amount bought You can’t wait to buyYou can’t wait to buy

33. Elastic -Coca- Cola -CDs -Cars Inelastic  Milk  Gasoline  Electricity

34. Demand is elastic if you answer YES to the following questions:  Can the purchase be delayed?  Yes = elastic  No = inelastic  Are adequate substitutes available?  Yes = elastic  No = inelastic  Does the purchase use a large portion of your income?  Yes = elastic(Ex: car)  No = inelastic(Ex: salt)

35. Factors Affecting Elasticity  Existence of substitutes (insulin vs soda)  % of budget devoted to that good (salt vs cars)  Time consumers are given to adjust to price (electricity)

36. Section 3 The Law of Supply and the Supply Curve

37. The Law of Supply  As the price rises for a good, the quantity supplied generally rises.  As the price falls, the quantity supplied also falls.

38. Law of Supply  Quantity Supplied – the amount of a good or service that a producer is willing and able to supply at a specific price

39. Incentive of Greater Profits  Profit incentive motivates people in a market economy.  The higher price of a good, the greater the incentive for a producer to produce more.

40. Supply Curve

41. Change in Supply  Producers will supply more goods or fewer goods at every possible price.  A change in price does NOT cause this movement.

42. Determinants of Supply 1.If price of inputs drops, a producer can supply more at a lower production cost.  Which way does the curve shift?  If the cost of inputs increase, suppliers will offer fewer goods for sale at every price.  Which was does the curve shift?

43. Determinants of Supply 2. Number of businesses in the industry: as more firms enter the industry, greater quantities are supplied at every price – supply curve shifts to the right.

44. Determinants of Supply 3. Taxes: causes production costs to go up, supply goes down.  Shifts to the left

45. Determinants of Supply 4. Technology: Improvements in technology will increase supply.  New technology usually reduces the cost of production (automobiles)

46. Law of Diminishing Return  Total production keeps growing but the rate of increase is smaller  Each worker is still making a positive contribution to total output (but diminishing)

47. Example  10 machines, 10 workers.  Hire an 11th worker, production increases by 1,000 per week.  Hire 12th worker, increases by only 900.  Why?  There are not enough machines, and people might be getting in each other’s way.

49. Section 4 Putting Supply and Demand Together

50. Equilibrium Price  The price at which the quantity supplied by sellers is the same as the quantity demanded by buyers.

51. Where the two curves intersect is the equilibrium price

52. Prices as Signals  Rising prices signals producers to produce more and consumers to purchase less.  What do falling prices mean? Falling prices signals producers to produce less and consumers to purchase more.

53. Shortages  Occurs when the quantity demanded is greater than the quantity supplied

54. Surpluses  Suppliers produce more than consumers want to purchase in the marketplace.  Extra inventory  Prices will have to drop to reach equilibrium price

56. Price Controls  Price ceiling: government-set price maximum price that can be charged for a good or service.  Price floor: government-set minimum price that can be charged for a good or service.  Minimum wage

57. Rationing  Government limits items that are in short supply.  Determines everyone’s “fair” share  This is expensive because of high administrative cost  Black market