1. Supply, Demand, and Market Equilibrium

2. Mr. Clifford!
Mr. Clifford

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

4. 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

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

7. 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

8. 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

9. Individual Demand Individual Demand P Qd $5 4 3 2 1 10 20 35 55 806 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

10. Change in Individual DemandP 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
Quantity Demanded (bushels per week)

11. 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

12. 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

13. 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?)

14. 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

15. 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

16. Supply Curve

17. 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

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

19. 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?

20. 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

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

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

23. Shifts in Supply Curve

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

25. 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

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

27. 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

28. Part 2