Chapter 7: Demand and Supply

Chapter 7: Demand and Supply

Barter vs. monetary economyBarter – goods are traded directly for other

goodsProblems:

requires double coincidence of wants you want what they have, they want what you

have no match = needs not met!

large number of trading ratios costs more to get information on

goods/services available

Barter vs. monetary economyMonetary economy has lower transaction

and information costsMORE EFFICIENT!Value based on TRUST

It Really is Just Paper!

MarketsIn a market economy, the price of a good is

determined by the interaction of demand and supply

Seller & Buyer have to agree on a price for an exchange to take place

DemandA relationship

between price and quantity demanded

in a given time period

Demand scheduleWhat would this demand schedule look like on a graph?

Demand curve Notice the direction of the “curve” – a demand curve will ALWAYS resemble this!

Graphing Demand!Schedule Graphing1. Create a basic graph.2. Label the axis.3. Graph each point from the demand schedule.4. Draw the demand curve.Equation Graphing Qd = 40 – 2p Video Example3. Create a basic graph.4. Label the axis.5. Solve the equation to determine graph

values.6. Graph the demand curve.

Law of demandWhen price goes up, quantity demanded goes down

When price goes down, quantity demanded goes up

Change in quantity demanded vs. change in demandWhat is the difference?

Change in quantity demanded Change in demand

What is the difference?Change in quantity demanded Change in demand

Indicates HOW much

product is demanded at a given price! PRICE it the

KEY!

Indicates a change OTHER

than price. Such as a substitute, income, or fads

that change WHAT is

demanded. The ENTIRE demand

curve moves to the left.

Practice Graphing

**For each curve, is the curve elastic or inelastic? What information would be needed to better determine the answer?

#3 Demand EquationWIDGETS: Qd=60-2p

Market demand curveMarket demand is the horizontal summation of

individual consumer demand curves (THE TOTAL OF ALL INDIVIDUALS’ DEMAND CURVES)

PRICE ELASTICITY OF DEMANDHOW responsive are consumers to

price change?Changes in price have a great effect on consumer demand!SUCH AS: Crab Legs

Changes in price have little effect on consumer demand!SUCH AS: Sugar

Determinants of demandtastes and preferencesprices of related goods and

servicesincomenumber of consumersexpectations of future prices

and income

THIS IS REFERRING TO THE SHIFT TO THE LEFT OF THE ENTIRE DEMAND CURVE – NOT A PRICE EFFECT!

VS.

What determinants are being demonstrated in this comparison?

Tastes and preferencesEffect of fads: These are

not demanded due to change in FAD… among other reasons!!!

Prices of related goodssubstitute goods complementary

goods– an increase in the price of one results in an increase in the demand for the other.

– an increase in the price of one results in a decrease in the demand for the other

IN FUEL PRICE

=

DEMAND DEMAND

Change in the price of a substitute goodPrice of coffee rises:

Change in the price of a complementary good

Price of DVDs rises:

Income and demand: normal goods

A good is a normal good if an increase in income results in an increase in the demand for the good.

Income and demand: inferior goods

A good is an inferior good if an increase in income results in a reduction in the demand for the good.

Demand and the # of buyers

An increase in the number of buyers results in an increase in demand.

Expectations: How does this effect demand?

A higher expected future price will increase current demand.

A lower expected future price will decrease current demand.

A higher expected future income will increase the demand for all normal goods.

A lower expected future income will reduce the demand for all normal goods.

International effectsexchange rate – the rate at which one

currency is exchanged for another.currency appreciation – an increase in the

value of a currency relative to other currencies.

currency depreciation – a decrease in the value of a currency relative to other currencies.

International effects (continued)Domestic currency appreciation causes domestically

produced goods and services to become more expensive in foreign countries.$ goes up = price of US goods up internationally

An increase in the exchange value of the U.S. dollar results in a reduction in the demand for U.S. goods and services.DEMAND for US goods goes DOWN

The demand for U.S. goods and services will rise if the U.S. dollar depreciates.$ worth decreases = INCREASE in DEMAND for US goods

12

40

28

19

55

Graph all 3 demand schedules. Schedules 2 & 3 will be on the same graph. Is one more elastic than the other? Support your answer.** Complete Section 7.1-2 GR and do the 7.2 section assessment on page 185.