1. Supply and Demand

2. Markets
A market brings together buyers and sellers of particular goods and services
Markets exists in many forms
They determine the price and quantity of a good or service transacted

3. Supply, Demand, Price and the Consumer
Video

4. A Lesson on Demand

5. Introduction to Demand
In the United States, the forces of supply and demand work together to set prices.
Demand is the desire, willingness, and ability to buy a good or service.

6. WILLING and ABLE willing and able to purchase are key words
How many of you would like that Bugatti we saw earlier in the course?
How many of you are able?
What’s the difference between willing and able?
Idea of time and place – at this time, you may be willing to buy a Bugatti, but are not able, therefore you do not have a “DEMAND”

7. The Law of Demand
The law of demand - as the price of a good or service rises, its quantity demanded falls.
The reverse is also true: as the price of a
good or service falls, its quantity demanded increases.

8. Law of Demand (cont.) Based on: Income effect 2. Substitution effect
3. Diminishing marginal utility
At a lower price, consumers can buy more of a product without giving up other goods (increased the purchasing power)
Consumers have the incentive to substitute the cheaper good for similar goods that are now relatively more expensive
States that successive units of a given product yield less and less extra satisfaction. Therefore, consumers will only buy more of a good if its price is reduced

9. Demand is demonstrated by demand schedule and demand curve

10. Demand Schedule
A table that lists at various prices of products and the number of items demanded at each price
Price per Widget ($)
Quantity Demanded of Widget per day $5 2 $4 4 $3 6 $2 8 $1 10

11. Demand Schedule
The demand schedule below shows the relationship between price and quantity
P QD
Complete the table in your notes with the information below
Price
Quantity of coffee beans demanded
(billions of pounds)
2.00
6.5
1.75
7.5
1.50
8.1
1.25
8.9
1.00 10
.75
12.5
.50 15

12. Demand Curve Demand Curve – the graphic representation of demand
Graphing a Demand Schedule:
The lower left quadrant is “0”
The vertical axis is price
The horizontal axis is quantity

13. Demand Curve for Coffee Beans
Now complete the demand curve using the information in the table

14. We buy products for their utility- the pleasure, usefulness, or satisfaction they give us.
What is your utility for the following products? (Measure your utility by the maximum amount you would be willing to pay for this product)
Do we have the same utility for these goods?

15. Change in Quantity Demanded vs. Change in Demand
Caused by change in own price of good
Movement along the curve
Change in Demand:
Caused by Change in determinant of demand
Shift to new demand curve

16. Demand Determinants Income
Normal Good - a good for which demand increases as consumer incomes rise (milk)
Inferior Good - A good for which demand decreases as consumer incomes rise (ground chuck, bus rides)
As income rises consumers tend to switch from consuming these inferior goods to consuming normal goods (ex. steak, car/plane)

17. Determinants con’t Preference/Taste Consumer Expectations
Likes and dislikes in consumption
Consumer Expectations
Change in future price of goods
Change in future income
Population Change
As the number of consumers in a market changes the demand will change

18. Determinants con’t Consumer Expectations
Change in future price of goods
Change in future income

19. Determinants con’t Population Change
As the number of consumers in a market changes the demand will change

20. Determinants con’t Prices of Related Goods
Substitutes: Goods that are related in such a way that an increase in the price of one leads to an increase in the demand for the other [goods that can be consumed in place of one another]
When the price of one goes down demand for the other goes down

21. Determinants con’t Prices of Related Goods
Compliments: Goods that are related in such a way that an increase in the price of one leads to a decrease in the demand for the other [goods that are normally consumed together] (hamburgers and french fries)

22. So how does this look in the real world…

23. What Makes A Producer Provide the Quantity of Goods & Services?
Law of Supply
What Makes A Producer Provide the Quantity of Goods & Services?

24. What is Supply?
Supply indicates how much a good producers are willing and able to offer for sale per period at each possible price, other things constant.

25. Law of Supply
As a good’s price increases (decreases), the quantity suppliers are willing and able to supply increases (decreases)
The quantity supplied is usually directly related to its price
P QS

26. Supply Schedule & Curves
A Supply Schedule displays the quantity of a product supplied at each price
Price
Bottles Supplied
2.00
11.6
1.75
11.5
1.50
11.2
1.25
10.7
1.00 10
.75
9.1
.50 8

27. A Supply Curve shows a graphic representation of the quantities of a good supplied at various prices
Graph the Supply curves using the Supply Schedule

28. Opportunity Cost of Supplying a Good
Supplier costs are opportunity costs
Suppliers choose among alternatives based on expected benefit/cost
Producers must pay to use resources
Resource price reflects its next-best alternative
$-value of a resources’ foregone opportunities is the cost of supplying good

29. Changes in Supply vs. Change in Quantity Supplied
Change in a good’s own price causes change in quantity supplied
Movement along the supply curve
Change in supply caused by change in determinant of supply
Shifts supply curve

30. Determinants of Supply
Technology
If more efficient technology is discovered production costs will fall
So suppliers will be more willing and able to supply more of the good at each price
Price of Relevant Resources
Those resources employed in the production of a good.

31. Determinants con’t Prices of Alternative Goods Producer Expectations
Price of good that use some of the same resources as used to produce the good in question
Producer Expectations
Shift production according to future prices
Number of Producers
# of Prod. Increases # of supply
Government Restrictions
Taxes, quotas, licenses, etc.

32. END