1. Demand & Supply
Unit II

2. What is DEMAND? Desire to have some good or service
Ability to pay for it
Inverse relationship to price

3. Law of Demand and visa versa!
an inverse relationship between the price of a good and the amount of it that buyers are willing and able to purchase.
the quantity demanded
decreases
Quantity demanded = Qd
As price increases-
Price = P
and visa versa!

4. Demand Schedule
shows various amounts of a product that an individual is willing and able to buy at each price during a specified time period- ceteris paribus (holding all other things constant).
Market Demand Schedule
Same representation for ALL consumers
Bathing suits have a different price and quantity demanded in summer vs. winter

5. Demand Curve
Graphic representation of the information in a demand schedule.
on a line graph

6. Demand Curve
line graph shows the amount of a product that will be purchased at each price
its inverse relationship with PRICE always results in a downward slope.
Demand can be shown on an individual’s curve or the market as a whole.

7. Changes in QUANTITY DEMANDED are shown by points along the curve

8. Why do consumers demand more goods and services at LOWER PRICES and FEWER at HIGHER PRICES?
Income effect
Substitution Effect

9. I feel richer already. I am gonna buy
Income Effect
Change in amount that consumers will buy because the purchasing power of their income changes
I feel richer already. I am gonna buy
me a car.

10. Substitution Effect Forget Cocoa Puffs. I’m going with Cocoa Magic
Change in amount that consumers will buy because they buy substitute goods

11. Changes In Demand
“Changes in quantity demanded” occur because of change in PRICE - ceteris paribus. (holding all other things constant)
Change in OVERALL LEVEL of demand is caused by reasons OTHER THAN PRICE. This is called “Change in Demand”
Occurs when something prompts consumers to buy different amounts at EVERY price.

12. A shift to the RIGHT = Increase in Demand
Changes in LEVEL OF DEMAND are represented by shifts in the whole curve.
A shift to the RIGHT = Increase in Demand
A shift to the LEFT = Decrease in Demand

13. 6 Factors can cause a CHANGE in Demand
Change in INCOME
Change in Number of Buyers
CONSUMER TASTES/PREFERENCES
Consumer EXPECTATIONS
SUBSTITUTE GOODS
COMPLEMENTARY GOODS

14. Income
increase in income USUALLY increases demand for something at every price level. Usually - NORMAL vs. INFERIOR GOODS!!
Inferior goods
Normal goods

15. Number of Buyers

16. Consumer Tastes

18. Consumer Expectations
What are these consumers expecting?

19. Substitute Goods
Substitute Goods- goods and services that can be used in place of each other

20. Complementary Goods

21. DETERMINANTS OF DEMAND
CHANGE IN INCOME -
CHANGE IN Number of Buyers (MARKET SIZE) - Baby Boomers are retiring...what effect does this have on certain markets?
CONSUMER TASTES/PREFERENCES - This includes TRENDS and ADVERTISING. Ex. Skinny Jeans vs. Boot Cut (SEASONALITY )- Certain goods are in higher demand based on the season. Ex. Bathing Suits, Coats, Ice Cream etc.
EXPECTATIONS - Farmers Almanac or Upcoming Sales
SUBSTITUTE GOODS - Goods that can be used in place of each other. Ex. Chicken and Pork
COMPLEMENTARY GOODS - Goods that are meant to work in tandem. Ex. Hotdogs and Buns, DVDs and DVD Players

22. Elasticity of Demand
measures how sensitive consumers are to price change.
3 measures: elastic, inelastic, unit elastic
Elasticity affects revenue and therefore profit.

23. Elasticity of Demand
Demand is elastic if a rise in price results in a large drop in demand and demand is inelastic if a rise in price results in a relatively small or no drop in demand

24. Estimating Elasticity
Are adequate substitutes available?
Does the purchase use a large portion of income?
Can the purchase be delayed?
If YES, ELASTIC
If NO, INELASTIC

25. Steak: Elastic or Inelastic ?
Why? People as a whole can do without steak and will substitute chicken or other protein for expensive steak

26. Milk: Elastic or Inelastic ?
Why?
The population as a whole can do without steak….but cannot do as easily without milk…especially families with children

27. Gasoline: Elastic or Inelastic ?

28. TOTAL REVENUE TEST Elastic = Price & TR opposite directions
TR = P X Q
Elastic = Price & TR opposite directions
Inelastic = Price & TR same direction
Unit = PRICE & TR equal
If aspirin sells $2/bottle and QD 8, TR = 16
If aspirin increases to $4 and QD 4, TR =$16

29. What Products are Subject to Elastic Demand ?
Luxury Items – Most customers want luxuries and will consider buying them if price drops
If Price Represents a Large Portion of Family Income
e.g. Mortgage Rates drop from 6.5 to 5.5% people will “refinance”
Availability of Substitute Items
e.g. Steak /chicken
Durable Goods
Computers, cars, washers, dryers will be in greater demand if the price drops

30. What Products are Subject to “Inelastic Demand”?
Necessities (milk, water)
Drugs
Legal (heart medicine, antibiotics)
Illegal
Products with no good substitute
insulin, cancer drugs, etc.
gasoline, salt, electricity

31. Why is Elasticity of Demand Important ?
What happens if a florist increases the price of roses 400% in October ? Will sales go up or down ?
A. Probably, down
What happens if a florist increases the price of roses on February 14th? Will sales go down or up?
A. Probably up Why? Frantic husbands and boyfriends will pay exorbitant prices for a dozen roses on Valentine’s Day – if they know what’s good for them ! !

32. Supply
Supply schedule shows how much of a good or service a producer is willing and able to offer for sale at each price in a market.
Law of Supply states that the quantity of a commodity supplied varies directly with its price: the number of goods and services offered for sale increases as the price increases.
WHY?
Because higher prices indicate the possibility of higher profits

33. Supply Curve
Supply Curve will always be upsloping. S

34. Remember………..
A change along the curve indicates a change in price and a change in quantity supplied
A change of the curve (right or left) indicates an across the board change in supply

35. Costs of Production
Fixed costs – expenses that owners of business must incur whether they produce nothing, a little or a lot

36. Variable Costs
business costs that vary as the level of production output changes

37. Total
Total cost – add fixed and variable together

38. Costs of Production Marginal Product
Change in Total Product that results from hiring 1 more worker
Why does hiring more workers allow Marginal Product to increase?
Because of specialization
Each worker can focus on a particular facet of production.

39. Marginal Product Schedule
Shows the relationship between input (labor) and output (marginal product).
# of
Workers
Total
Product 1 2 7 3 10 4 12 5 13 6
Marginal
Product 2 5 3 1 -3
Lawn mowing business
I cut 2 lawns a day
I hire 1 more worker
Now we cut 7 lawns a day.
Why?

40. Increasing Returns
Each new worker adds more to a total output than the last
# of
Workers
Total
Product
Marginal 1 2 7 5 3 10 4 12 13 6 -3

41. Law of Diminishing Marginal Utility
Marginal benefit of using each additional unit of product will decline.

42. Diminishing Returns Why?
Each new worker causes total output to grow but at a decreasing rate…
Why?
Employees may become less efficient, crowded, and operations become disorganized
# of
Workers
Total
Product
Marginal 1 2 7 5 3 10 4 12 13 6 -3

43. Marginal Cost The extra cost of producing one more unit
Divide CHANGE in total cost
by CHANGE in total product (marginal product)
With lawn mowing, change in total cost is 10
Now divide 10 by change in total product
# of
Workers
Total
Product
Marginal
Total Cost
Cost 1 2 10 7 5 20 3 30 4 12 40 13 50 6 60 -3 70
Marginal cost is with 1 worker= 5, 2 workers=2, 3 workers= 3 1/3 (diminishing returns) 4 workers [10/2 = 5] 5 workers [10/1 = 10]

44. Marginal Product Marginal COST CHANGE in TOTAL Product
Change in Total COST

45. Marginal Cost The added revenue per unit of output… the price
$10 per lawn (PRICE)
# of
Workers
Total
Product
Marginal
Total Cost
Revenue 20 1 2 30
$20 7 5 40
$50
$70 3 10 50
$30
$100 4 12 60
$120 13 70
$10
$130 6 80 -3 90
-$30

46. Profit = Total Revenue – Total cost
The added revenue per unit of output… the price
$10 per lawn (PRICE)
# of
Workers
Total
Product
Marginal
Total Cost
Revenue
PROFIT 20 1 2 30
$20
-10 7 5 40
$50
$70 3 10 50
$30
$100 4 12 60
$120 13 70
$10
$130 6 80 -3 90
-$30

47. “Determinants of Supply”
...and they are called
“Determinants of Supply”
Just as there are events that can cause demand “across the board” -at every price level to change….there are also events that can cause supply “across the board”- at every price level- to change !

48. Determinants of Supply
What could cause a huge increase or decrease in supply across the board ( and a change in price is not a factor !)
Resource prices ( raw materials)
Technology (produce more products faster & more efficiently
Taxes
Subsidies ( Gov’t grants)
Related Goods ( e.g corn, wheat)
Expectations
Number of Sellers in the Market

49. Elasticity of Supply Like Demand, Supply is subject to elasticity
If a change in price produces only a small change in supply, it is said to be inelastic
What goods are subject to supply elasticity?
Manufactured goods are more subject to elasticity of supply than goods produced by nature
Skateboard manufacturers can get employees to produce more skateboards, but farmers can’t force cows to produce more milk or trees to grow faster

50. Equilibrium Price
Equilibrium Price (also called the Market price) is the price at which goods and services may actually be bought and sold.
Equilibrium Price is where quantity demanded is equal to the quantity supplied
Market in Wheat Game

51. Equilibrium Price S
E P D

52. Market Disequilibrium
Price Ceilings and Price Floors cause market disequilibrium because they disrupt the natural dynamics of the marketplace (supply and demand)

53. Price Floors:
Price floors are prices below which it is illegal to buy or sell.
Federal Min Wage = $7.25/hr
CA State Min Wage= $8.00/hr
Dilemma: Some argue that minimum wage laws disrupt the equilibrium in the market and actually increase unemployment
Why? left to the forces of supply and demand more workers would be hired at LOWER wages, decreasing unemployment.
McDonald’s Worker and other fast food workers generally earn minimum wage

56. Price Ceilings: Prices above which it is illegal to buy or sell
Examples:
Rent controlled apartment buildings in cities
Certain goods and services during emergencies.
Dilemma: Since rents are frozen, many landlords cannot keep up with the rising costs of maintenance – which have not been frozen !
They stand in the way of market forces of supply and demand