1. Chapter 7
Demand and Supply

2. Chapter 7 Section 1
Demand

3. The “Marketplace”
Consumers influence the price of goods in a market economy.
Demand: the amount of a good or service that consumers are able and willing to buy at various possible prices during a specified time period
Supply: the amount of a good or service that producers are able and willing to sell at various prices during a specified time period
A market represents actions between buyers and sellers.

4. Voluntary Exchange
The basis of activity in a market economy is the principle of voluntary exchange.
Voluntary Exchange: a transaction in which a buyer and seller exercise their economic freedom by working out their own terms of exchange
The seller sets the price and the buyer agrees to the product and price through the act of purchasing the product
Supply and demand analysis is a model of how buyers and sellers behave in the marketplace.

5. The Law of Demand
Demand is created only when the customer is both willing and able to buy the product.
The law of demand states:
As price goes up, quantity demanded goes down.
As price goes down, quantity demanded goes up.

6. The Law of Demand Real Income Effect Substitution Effect
People are limited by their income as to what they can purchase.
Real income effect forces people to make trade-offs.
Substitution Effect
People can replace one product with another if it satisfies the same need.
Amazon Prime Music vs. iTunes

7. The Law of Demand Diminishing Marginal Utility
People will purchase additional items until the satisfaction from the last unit is equal to the price.
The lessening of this satisfaction with each additional purchase is called diminishing marginal utility.
Utility: the ability of any good or service to satisfy consumer wants

8. The Demand Curve and Elasticity of Demand
Chapter 7 Section 2
The Demand Curve and Elasticity of Demand

9. Graphing the Demand Curve
Demand schedule: a table of prices and the quantity demanded at each price.
To draw a demand curve:
List the quantity demanded at each price.
The Curve will graph the quantity demanded of a good or service at each possible price.

10. Graphing the Demand Curve

11. Quantity Demanded vs. Demand
A change in quantity demanded is caused by a change in the price of a good.
If something other than price causes demand to increase or decrease, this is known as a change in demand and shifts the demand curve.

12. Quantity Demanded vs. Demand

13. Determinants of Demand
Population
When population increases, opportunities to buy and sell increase.
Demand for most products increases, shifting the curve to the right.
Income
An increased income allows consumers to buy more products or a greater quantity of a single product.
Tastes and preferences, including facts
Refers to what people like and prefer to choose.

14. Determinants of Demand
Substitutes
When a new competitor is added or an old competitor leaves the market.
Butter vs. Margarine
Complementary goods
Products that rely upon one another, demand for one affects demand for the other.
The decrease in the price of one product will cause an increase in demand for both products.
Cameras and film

15. The Price Elasticity of Demand
Elasticity: economic concept dealing with consumers’ responsiveness to an increase or decrease in price of a product
Price Elasticity of Demand: economic concept that deals with how much demand varies according to changes in price

16. The Price Elasticity of Demand
Elastic Demand
Occurs when the demand for some goods is greatly affected by the price.
One particular brand of coffee increases in price; consumers will purchase more of the other brands.
Inelastic Demand
Occurs when the demand for some goods is less affected by price.
Salt, pepper, and sugar are products consumers will purchase at almost any cost.

17. The Price Elasticity of Demand
What Determines Price Elasticity of Demand?
How many substitutes exist and how closely they provide the same quality and service.
Fewer or no substitutes make demand inelastic.
Percent of a personal budget spent on an item
The higher the percent of budget, the more elastic the demand.
How much consumers have to adjust to the new price.
More time makes for greater elasticity.

18. The Law of Supply and the Supply Curve
Chapter 7 Section 3
The Law of Supply and the Supply Curve

19. The Law of Supply
Supply is the willingness and ability to provide goods to the consumers.
The Law of Supply states:
As the price rises for a good the quantity supplied generally rises.
As the price falls, the quantity supplied also falls.
A direct relationship exists between price and quantity supplied.

20. The Incentive of Greater Profit
Increase in price and increase in production leads to an increase in profits.
Higher prices encourage more competition to join the market.
Higher prices turn potential suppliers into actual suppliers, adding to the total output.

21. The Supply Curve
As with demand, graphs and tables can explain the Law of Supply.
Supply schedule: shows the quantity supplied at each given price.
A supply curve graphs the quantities supplied at each possible price.
The relationship between quantity and price is direct and always moving in the same direction.

22. The Supply Curve

23. Quantity Supplied vs. Supply
A change in quantity supplied is caused by a change in price.
Something other than price can cause a change in supply as a whole to increase or decrease.

24. Quantity Supplied vs. Supply

25. Determinants of Supply
Price of Inputs
The price of inputs, or the costs of production- raw materials, wages, insurance, utilities, etc.- can cause an increase in supply.
Number of Firms in the Industry
Competition, or the number of companies in an industry, can cause an increase in supply

26. Determinants of Supply
Taxes
An increase in taxes can cause a decrease in supply.
If taxes increase, businesses will not be willing to supply as much as before because the cost of production will rise.
Technology
An improvement in technology can cause an increase in supply
Technology: the science used to develop new products or methods of production and distribution.

27. The Law of Diminishing Returns
Adding units to increase production increases total output for a limited time period.
The extra output for each additional unit will eventually decrease.
Businesses will continue to add units of a factor of production until doing so no longer increases revenue.

28. Putting Supply and Demand Together
Chapter 7 Section 4
Putting Supply and Demand Together

29. Equilibrium Price In the real world, demand and supply work together.
As the price of goods goes down, the quantity demanded rises and the quantity supplied falls.
As the price goes up, the quantity demanded falls and the quantity supplied rises.

30. Equilibrium Price
Sellers and buyers work together indirectly to place goods and the equilibrium price.
Equilibrium Price: the price at which the amount producers are willing to supply is equal to the amount consumers are willing to buy

31. Equilibrium Price

32. Shifts in Equilibrium Price
If the demand curve shifts due to something other than price, the equilibrium price will change.
If the supply curve shifts due to something other than price, the equilibrium price will change.

33. Prices Serve as Signals
Rising prices signal producers to make more and consumers to purchase less.
Falling prices signal producers to make less and consumers to purchase more.

34. Prices Serve as Signals
Types of Signals:
Shortages
Occurs when the quantity demanded (at equilibrium price) is greater than the quantity supplied.
Surpluses
Occurs when the quantity supplied (at equilibrium price) is grater than quantity demanded.
Market Forces
Can cause the prices to rise or fall to correct shortages and surpluses.

35. Price Controls
On occasion the government will get involved in setting prices.
If the government believes the market forces of supply and demand are unfair it may try to protect consumers and suppliers.
Special interest groups use pressure on elected officials to protect certain industries.

36. Price Controls Price Ceilings Price Floors
Price Ceilings: a maximum price set by the government to prevent prices from going above a certain level.
Items in short supply might be rationed.
Shortages can lead to a black market, or illegal places to purchase such products at exorbitant prices.
Price Floors
Price Floors: a minimum price set by the government to prevent prices from going below a certain level
Price floors set minimum wage levels and support agricultural prices.