1. The United States Market System
Consumers and the Law of Demand; Firms and the Law of Supply, Market Equilibrium, and Market Structure

2. LAW OF DEMAND
Demand: The desire to have a good or service and the ability to pay for it; How much of a product consumers are both willing and able to purchase at each possible price during a given period
Law of Demand: the quantity demanded varies inversely with the price (When prices decrease, demand increases; When prices increase, demand decreases)
Individual Demand = demand of an individual consumer
Market Demand = total demand of all individual consumers in a market

3. Law of demand
Consumers try to maximize their utility, this affects demand: (unlimited wants, scarce resources)
Money Income v. Real Income - Use your money income to maximize real income
Substitution Effect: Change in prices of related goods can effect the demand
Law of Diminishing Marginal Utility: (Marginal Utility: satisfaction you derive from an additional unit of a product)
- The more of a good an individual consumes per period the smaller the marginal utility of each unit consumed (since each unit is worth less to you, you are therefore willing to pay less for it)
- first slice, second slice, third slice of pizza
- second ½ off, Buy 3 get the 4th free
All of this results in the quantity demanded varying inversely with the price

4. Demand Schedule and Curve
Shows the relationship between price and quantity demanded for a given period
Demand Schedule: Table showing quantity demanded at various price points
Demand Curve: Graph showing the relationship between quantity demanded and price

5. Demand Schedule Demand Curve
Price of Root Beer Amount John would buy per month
Demand Curve

6. Market Demand
Graph the demand curve of lbs. of beef per month of the following teachers at Aquinas High School:
Mrs. Caban Ms. Trapp Ms. Sherwood
Lbs Price Lbs. Price Lbs Price
$ $ $8
$ $ $6
$ $ $4
$ $ $2
Market
Demand
of Beef

7. Graph both the individual demands and market demands for Aquinas’ students demand of birthday balloons per school year.
Student A
# of Balloons Price $1
$1.50 $2
$2.50 $3
$3.50 $4
Student B
# of Balloons Price $1
$1.50 $2
$2.50 $3
$3.50 $4
Student C
# of Balloons Price $1
$1.50 $2
$2.50 $3
$3.50 $4
Student D
# of Balloons Price $1
$1.50 $2
$2.50 $3
$3.50 $4

8. Graph both the individual demands and market demand for gallons of gas per week.
Individual A
# of Gallons Price $2
$2.50 $3
$3.50 $4
$4.50 $5
Individual B
# of Gallons Price $2
$2.50 $3
$3.50 $4
$4.50 $5
Individual C
# of Gallons Price $2
$2.50 $3
$3.50 $4
$4.50 $5

9. Price Elasticity of Demand
Elasticity of Demand: describe how responsive consumers are to price changes in the market
Demand is Elastic when a change in price leads to a relatively larger change in quantity demanded
Demand in Inelastic when a change in price leads to a relatively smaller change in quantity demanded
If the demand is elastic, suppliers should change the price because revenue will increase
If the demand is inelastic suppliers should not change the price because revenue will fall

10. Elasticity of Demand Elasticity can depend on:
The availability of substitutes - more competition=more elastic – Dollar Menus
The cost of the item – the greater portion of a person’s income the object is the more elastic – When housing prices drop, demand increases dramatically
Necessities v. Luxuries (Needs v. Wants) – necessities tend to be inelastic, luxuries tend to be elastic

11. Law of Supply
Supply: The willingness and ability of producers to offer goods and services for sale
Law of Supply: the quantity supplied is usually directly related to the price (The higher the price, the larger quantity supplied)
Supply Schedules and Curves: Quantities of a particular good supplied at various prices during a given time period, Individual Supply v. Market Supply

12. Supply Schedule and Curve
Graph the supply curve for each of the following t-shirt companies. Then graph the market supply curve.
Tom’s Terrific T’s
Quantity Price $5 $6 $7 $8 $9
Tee-rriffic
Quantity Price $5 $6 $7 $8 $9
Tee-Time
Quantity Price $5 $6 $7 $8 $9

13. Law of Supply
Producers try to maximize profits (Profit= Total Revenue – Total Cost), in order to do so, they control the supply
Total Cost = Fixed Costs + Variable Costs
Fixed Cost = Costs that don’t change regardless of output
Variable Costs = Cost that increase with output
Firms will increase their supply as long as their marginal revenue for each unit sold is more than the marginal cost it takes to produce
Marginal Revenue = market value of the unit
Marginal Cost = Change in Total Cost/ Change in Quantity

14. Elasticity of Supply
- Elasticity of Supply: describes how responsive producers are to price changes
If supply is elastic the change in price leads to a relatively larger change in quantity supplied
If supply is inelastic the change in price leads to a relatively smaller quantity being supplied
Used to determine whether a company will respond to an increase in price by increasing supply
If supply is elastic, producers will increase production as a result of the change in price
If supply is inelastic they will not

15. Market Equilibrium
Consumers and Producers therefore work opposite one another (i.e. – if the price goes up, consumer demand decreases but producer supply increases ) Market forces resolve this conflict by working towards equilibrium (Adam Smith’s invisible hand)
Market Equilibrium =
The quantity that consumers are willing and able to buy equals the quantity that producers are willing and able to sell at a given price - there is no incentive for a change in quantity or price
Demand Curves and Supply Curves meet at an equilibrium point which leads to an equilibrium price and quantity

16. Equilibrium Price and Quantity
In order to reach equilibrium:
If prices are too high, it will create a surplus (at a given price, the amount supplied exceeds the quantity demanded). This will force prices down to the equilibrium.
If prices are too low, it will create a shortage (at a given price, the quantity demanded exceeds the amount supplied). This will force prices up to the equilibrium.

17. Equilibrium Price and quantity
Graph the supply and demand curve using the information below.
Quantity Demanded Price Quantity Supplied
What is the equilibrium price?
What is the equilibrium quantity?
What would happen if producers raised prices to $.50?
What would happen if producers lowered prices to $.10?

18. Equilibrium Price
Graph the supply and demand curve using the information below.
Quantity Demanded Price Quantity Supplied
$5 30
$10 60
$15 90 $ $ $
What is the equilibrium price?
What is the equilibrium quantity?

19. Shifts in Demand
Sometimes factors other than price and quantity affect demand. These factors can cause a shift in the demand curve:
Changes in consumer income – i.e. if income increases - increases demand for normal goods and decreases demand for inferior goods
Changes in the price of related goods –
If the price of substitutes drops, demand drops and vice versa
If the price of complements drop the demand increases and vice versa
Changes in the size or composition of the population
Changes in consumer expectations about future income and future prices
Changes in consumer tastes - trends

20. Increase in Demand = Rightward Shift in Demand Curve
Decrease in Demand = Leftward Shift in Demand Curve D2 D1 D1 D2

21. Shifts in Supply
Sometimes factors other than price and quantity affect supply. These factors can cause a shift in the supply curve:
The cost of the resources used to make the good (if the cost of resources drops, supply increases)
The price of other goods these resources can make
Changes in the technology used to make the good – if technology improves production, supply can be increased
Producer expectation about future shifts in prices
The number of producers in the market

22. Increase in Supply = Rightward Shift in Supply Curve
Decrease in Supply = Leftward Shift in Supply Curve S1 S2 S2 S1

23. Shifts in Demand Curve
When there are shifts in supply and demand, adjustments need to be made in the market in order to reach a new equilibrium point
If the demand increases (demand curve shifts rightwards) – a shortage is created and producers raise prices and quantities
If the demand decreases (leftwards)– a surplus is created and producers reduce prices and quantities

24. Shifts in Supply Curve
If the supply increases (supply curve shifts rightwards) - quantities increase causing a surplus, producers will reduce prices
If the supply decreases (leftwards) – quantities decrease causing a shortage, producers will increase prices

25. Market Structure
Market structure includes the number of buyers and sellers, the uniformity of the item, the ease of entry into the market, and the amount of competition between firms.
How much of a role the laws of supply and demand have over a specific market depends largely on the structure of the market.
Four market structures exist in the United States:
Perfect Competition
Monopoly
Monopolistic (Imperfect) Competition
Oligopoly
In order to encourage a competitive market, the US government has antitrust laws.

26. Market Structure Number of Buyers and Sellers Uniformity of Product
Ease of entry into Market
Control over prices and supply
Examples in the United States
Perfect Competition
Many buyers and sellers
Complete uniformity
No barriers to entry
No control- 1 firm tiny part of market
Farmers – Bushel of Wheat
Monopoly
One seller, many buyers
Unique product, no substitutes
Large barriers to entry- legal + financial
Complete control
Electric Company, Post Office
Monopolistic
(Imperfect) Competition
Some differentiation in products
Limited Control – Market Forces
Grocery Stores, Restaurants, Clothing
Oligopoly
Few sellers, many buyers
Substantial barriers to entry
Some Control
Automobiles, Electronics