2. Chapter 6: Demand, Supply & Markets

3. What is a Market? Any network that brings buyers and sellers together so they can exchange goods and services Doesn’t have to be a physical place, but can be done over the internet, phone or fax Exists wherever supply and demand determine the price and quantity of goods and services sold

4. Demand Is the quantities of a good or service that buyers are willing and able to purchase at various prices Demand schedule shows the various prices and quantity demanded at each price Chocolate Bar Auction

5. Demand Economists consistently will gather data and put it into a schedule and then to make it visually easier to understand put the schedule into graph form Law of Demand: An increase in price will cause a decrease in quantity demanded

6. The Demand Curve Price Quantity Demanded D P$P$ Q0

7. Application Questions # 1 – 3 pg. 119 Work in pairs Check answers with others at your table

8. Law of Diminishing Marginal Utility Law of Diminishing Marginal Utility Each additional unit of a good or service that is consumed brings less satisfaction or “utils” than the previous unit consumed This helps explain why the demand curve is downward sloping

9. Elasticity of Demand Shows the responsiveness of the quantity demanded to a change in price P x Qd = TR (Total Revenue) Elastic Demand –%Δ P < %Δ Qd (P   TR  ) Inelastic Demand –%ΔP > %ΔQd (P   TR  ) Unitary Demand - –%ΔP = %ΔQd (P -  TR -)

10. FACTORS EFFECTING ELASTICITY OF DEMAND –# of substitutes (e.g. margarine and butter) –small items in a budget (e.g. pepper, salt) –essential items (e.g. water, electricity, natural gas) –time (e.g. gasoline)

11. Applications of Elasticity of Demand the more inelastic an item the more heavily it can successfully be used to raise tax revenue (e.g. cigarettes, gas & alcohol) Applications #4, 6 pgs. 119 – 120 Work in pairs Check answers with others at your table

12. Effect of an Increase in Demand Price Level Quantity D Q 0 D1D1D1D1 P$P$

13. An Increase In the Demand for Melons Price Quantity Demanded (000’s) 0 $1.00 $0.50 15 $1.50 $2.00 $2.50 2025105 P $ Q D D1D1D1D1

14. Effect of a Decrease in Demand Price Level Quantity Demanded D Q 0 D0D0D0D0 P$P$

15. A decrease In the Demand for Melons Price Quantity Supplied (000’s) 0 $1.00 $0.50 15 $1.50 $2.00 $2.50 2025105 P $ Q D D0D0D0D0

16. Demand Shifts 1. Market Size 2. Income (Normal / Inferior Goods) 3. Price of Substitutes 4. “ “ Complements 5. Tastes 6. Consumer Expectations

17. Application Questions # 5 pg. 119 Work in pairs Check answers with others at your table

18. The Supply Curve Supply The quantities of a good or service that sellers are willing and able to sell at various prices Similar to demand, supply can be shown as a schedule and then as a graph

19. The Law of Supply Law of Supply Increase in price (P) will increase quantity supplied (Qs) Decrease in price (P) will decrease quantity supplied (Qs) Direct relationship between P and Qs

20. An Increase In the Supply of Melons Price Quantity Supplied (000’s) S 0 $1.00 $0.50 15 $1.50 $2.00 $2.50 2025105 P $ Q S1S1

21. An Increase In the Supply of Melons An increase in supply is represented by a shift in the supply curve to the right (S 1). At each price point, producers are willing to supply more goods. –For example, at $1.00, producers were supplying 10,000 units. Now producers are willing to supply 15,000 (an increase of 5,000 units)

22. A Decrease in the Supply of Melons Price Quantity Supplied (000’s) S 0 $1.00 $0.50 15 $1.50 $2.00 $2.50 2025105 P $ Q S0S0

23. Supply Shifts 1. Change in Nature 2. Resource Price 3. Technology 4. Labour Productivity 5. # of Producers 6. Producer Expectations

24. Application Questions #3 pgs. 134 – 135 Work in pairs Check answers with others at your table Supply – Demand Game

25. Demand & Supply Curve Shifts Demand Causes 1. Market Size 2. Income (Normal / Inferior Goods) 3. Price of Substitutes 4. “ “ Complements 5. Tastes 6. Consumer Expectations Supply Causes 1. Change in Nature 2. Resource Price 3. Technology 4. Labour Productivity 5. 5.# of Producers 6. 6.Producer Expectations

26. Market Equilibrium The point where the supply curve and the demand curve intersect At this point, Qd = Qs –(Quantity Demanded = Quantity Supplied)

27. Market Equilibrium Supply=Demand Price Quantity D P$P$ Q S 0

28. Equilibrium in the Market for Melons Price Quantity Supplied (000’s) 0 $1.00 $0.50 15 $1.50 $2.00 $2.50 2025105 P $ Q D S

29. D2 An Increase in the Demand for Computers Shortage of 100 5 300 (thousands) (Hundreds of dollars)

30. D0 A Decrease in the Demand for Computers Surplus of 100 3 200 (thousands) (Hundreds of dollars)

31. S2S2 An Increase in the Supply of Computers Surplus of 100 3 300 (thousands) (Hundreds of dollars)

32. S0S0 A Decrease in the Supply of Computers Shortage of 100 5 200 (thousands) (Hundreds of dollars)

33. Elasticity of Supply similar to Demand shows the responsiveness of the quantity supply to a change in price key factor effecting supply elasticity is time. –Given more time a producer can supply more of a product in response to higher prices

34. Elasticity of Supply Elastic Goods  stored easily, inexpensively & for long periods of time Inelastic Goods  more perishable

35. Gov’t Involvement in the Market at times the market system is unfair so in our mixed market system the government steps in to make the situation more fair if government feels the price is too high  make the price legally lower. called a ceiling price  problem is Qd > Qs –Excess Demand / Shortage

36. Gov’t Intervention in the Market If the government feels the price is too low then they make the price legally higher called a floor price  problem is Qs > Qd –Excess Supply / Surplus

37. Shortages & Surpluses

38. Application Questions #7 pg. 121 #1 – 2 pg. 134 #4 – 5 pg. 135 Work in pairs Check answers with others at your table