1. Honors Civics and Economics
Supply and Demand
Honors Civics and Economics

2. Objectives
Explain the Law of Supply and how supply can be represented graphically.
Understand the factors that cause supply to shift and how they can affect the price of a good or service. 2

3. Supply Predict What happens to the quantity supplied as price goes UP?
What happens to the quantity supplied as the price goes DOWN? 3

4. Law of Supply As price increases, quantity supplied increases.
This is because producers would rather sell goods at a higher price
Quantity 4

5. Supply Schedule
Supply: measures how much producers are willing to make at various prices
Ex. Pizza Supply Schedule.
How many pizzas are supplied at $1.00?
As the price of pizza increased what happened to supply?
What do you think prevents a producer from selling goods at the high prices?
Price
Quantity
$.50 1 2
$1.00 5
$1.50
$2.00 7
$2.50 8 5

6. Law of Supply “The UP UP DOWN DOWN”
As price goes up quantity goes up
As price goes down quantity goes down
Producers make more goods/services at higher prices than they do at lower prices. 6

7. Illustration of Supply Shift
Increase in Supply = curve shifts to the right
Decrease in Supply = curve shifts to the left. S2 S1
Price S1
Price S2
Quantity
Quantity 7

8. Why does supply shift?
Supply can increase (move right) and Decrease (move left) depending on certain conditions in the market.
STOP and Think…if it reduces the cost of production (cheaper to produce), then supply of that good went ____. 8

9. Supply Factors Number of suppliers: more suppliers = more supply
Example: A new shopping plaza opened on SR 501 in Bahama. Did the # of suppliers increase or decrease? Did supply increase or decrease?

10. Supply Factors
2. Input costs: if the costs of inputs increases, the supply decreases (and vice versa).
Example: if the price of cocoa powder increases, the supply of chocolate cupcakes decreases. (Technology may also decrease costs, increasing supply.)

11. Supply Factors
3. Government Regulations: tighter government regulation of production makes it more expensive to supply goods→ decrease in supply
Example: Congress raised the minimum wage from $6.55 an hour to $ What is the impact for fast food restaurants? Did the supply of fast food increase or decrease?

12. Supply Factors
4. Taxes: Higher taxes raises business costs (supply decrease), lower taxes reduces them (supply increase)
Example: Congress cut taxes on US corporations to try and boost production in the United States. Did costs for corporations go up or down? Did supply increase or decrease?

13. Supply Factors
5. Subsidies: gov’t payment to an individual, business, or group to reduce the cost of production.
Example: Congress gave all corn producers a subsidy for each bushel of corn they produce. Did the cost of corn production go up or down? Did the supply of corn increase or decrease? Use of corn today?

14. Supply Factors
6. Producer Expectations: If producers think that consumer demand will drop, then they reduce supply. If they think demand will increase then they increase supply.
Example: The week after Halloween stores expect consumers will want want Christmas themed candy instead. Which supply will increase? Decrease?

15. Fun with Supply Shifts! 1. Scenario Supply Factor
Increase or Decrease?
Graph
Congress just voted to raise taxes on corporations to pay for entitlement programs 15

16. Fun with Supply Shifts! 2. Scenario Supply Factor
Price 2.
Scenario
Supply Factor
Increase or Decrease?
Graph
Congress just passed a bill giving all cotton producers $2 for every bushel of cotton produced

17. Fun with Supply Shifts! 3. Scenario Supply Factor
Increase or Decrease?
Graph
Congress requires all businesses to give male employees 1 month of paternity leave

18. Fun with Supply Shifts! 4. Scenario Supply Factor
Increase or Decrease?
Graph
A new industrial park was built in Durham County.

19. Fun with Supply Shifts! 5. Scenario Supply Factor
Increase or Decrease?
Graph
Producers think that demand is going to drop for Regular TVs when all TVs go to Hi-Def.

20. Demand
Predict
What happens to the quantity demanded as price goes UP?
What happens to the quantity demanded as the price goes DOWN?

21. Demand Curve

22. Demand Schedules

23. Individual vs. Market Demand
Demand Schedules
Individual Demand Schedule
Price of a slice of pizza
Quantity demanded per day
Market Demand Schedule
Price of a slice of pizza
Quantity demanded per day
$.50
$1.00
$1.50
$2.00
$2.50
$3.00 5 4 3 2 1
$.50
$1.00
$1.50
$2.00
$2.50
$3.00
300
250
200
150
100 50

24. Law of Demand “The UP and Down”
As price goes up quantity goes down
As price goes down quantity goes up
People buy less goods/services at higher prices than they do at lower prices.
If there was an increase in demand for DVDs what would that mean?
If there was an decrease in demand for DVDs what would that mean?

25. Law of Demand Why does demand work this way?
Substitution Effect:
consumers react to an increase in a good’s price by consuming less of that good and more of other goods
Income effect:
a change in consumption caused by a change in ‘real’ income
ie. prices changes lead to budget reevaluation
Diminishing Marginal Utility:
each additional unit provides less utility to consumer

26. Law of Demand: Why does demand work this way?
changes in quantity demanded = change in demand?
Demand schedules assume that all other economic factors are held constant

27. Law of Demand: Why does demand work this way?
changes in quantity demanded = change in demand?
Demand schedules assume that all other economic factors are held constant
price is the only variable that changes, if other variables were to change then the curve would move

29. Changes in Demand What causes the demand curve to shift? 5 variables
> Income: Normal vs. Inferior Goods
> Number of Consumers
> Consumer Expectations
> Consumer Tastes
> Related Goods: Compliments and Substitutes

32. Changes in Demand What causes the demand curve to shift? 5 variables
> Income: Normal vs. Inferior Goods
> Number of Consumers - more ppl = more demand
> Consumer Expectations - anticipated changes
> Consumer Tastes - peoples preferences
> Related Goods: Compliments and Substitutes

33. Elasticity of Demand
a measure of how drastically consumers react to a change in price
> Inelastic Demand:
describes demand that is not very sensitive to a change in price
> Elastic Demand:
describes that is very sensitive to changes in price

34. Elasticity of Demand
a measure of how drastically consumers react to a change in price
> Inelastic Demand:
describes demand that is not very sensitive to a change in price = slope is very steep
> Elastic Demand:
describes that is very sensitive to changes in price
= slope is not very steep ie. not steep at all

37. Elasticity of Demand Unitary Elastic:
If elasticity is exactly equal to 1, demand is called unitary elastic
ie. one more pizza slice will be demanded for each additional dollar price increases

38. Factors affecting Elasticity
•Several different factors can affect the elasticity of demand for a certain good.
1. Availability of Substitutes
If there are few substitutes for a good, the demand will not likely decrease as price increases (inelastic), the opposite (lots of substitutes) is also usually true (elastic)
Ex. Electricity has no substitutes- inelastic
McDonalds has many (Burger King, etc)- elastic

39. Factors affecting Elasticity
2. Relative Importance
Another factor determining elasticity of demand is how much of your budget you spend on the good.
Ex. Mortgage payment must be paid (inelastic)
Entertainment expenses (movies, etc.) are elastic

40. Factors affecting Elasticity
3. Necessities vs. Luxuries
Whether a person considers a good to be a necessity or luxury has a great impact on the good’s elasticity of demand for that person.
Ex. Food (inelastic)
Jewelry (elastic)