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WarmUp
How would you describe supply and demand?
Unit II: How Markets Work
Part I – Supply and Demand
Demand
The desire, willingness and ability to buy a good or service
Affective Demand
Must want to buyMust be willing to buyMust have the resources to buy
What is market demand?
The total amount of demand created by all consumers for a product
Demand Schedule
A table that lists the various quantities of a product that will be bought at different prices
$50
$40
$30
$20
$10
$5
Demand Curve
A graph that shows the amount of a product that will be bought at all possible prices
Direction of the Demand Curve
Downward Slope
What does the law of demand state?
As price goes UP demand goes DOWN and visa versa
What does utility refer to?
Satisfaction
Diminishing Marginal Utility
Principle that additional satisfaction goes down as we consume more of a product
Determinants of Demandchanges in:
Buyers (#of) – changes in population
Income – people earn more they spend more
Tastes – change in popularity or fads
Expectations – feelings of the future
Related goods Substitutes – goods that can replace others Compliments – goods that go along with another
Decrease in demand at every price will produce a Left shift in demand
curve
An increase in demand at every price will produce a right shift in
demand curve
Demand Elasticity
How much demand for a product is affected by a change in price
Factors affecting elasticity
Percentage of IncomeAvailability of substitutesNecessity or LuxuryLength of time
Warmup
What is the law of demand?
What is supply?
The various amounts of a good or service that producers will supply at different prices
The Law of Supply
Suppliers will generally offer more for sale at higher prices and less at lower prices.
What does a Supply Schedule illustrate?
How much will be supplied at different prices
Supply Schedule for Video Games
Price Per Video Game Quantity Supplied
$50 200
$40 190
$30 170
$20 130
$10 100
$05 10
What does a supply curve illustrate?
The amount of a good or service that will be supplied at different prices
In what direction does the supply curve slope reading from left to
right?
Upward
What can cause a shift in supply at every price?
The Cost of Resources
The materials used to produce
Productivity
How efficient the work force is
Technology
The methods used to make goods and services
Then…. …..and Now
Government Policies
Gov regulations increase costs of production
Taxes
Higher taxes = higher costsLower taxes = lower costs
Subsidies
Government payment to help do something (decreases costs)
Expectations
What owners believe demand will be
Number of Suppliers
More suppliers = more supplyLess suppliers = less supply
Shift in Supply
Price of Video Games
Original Q Supplied
Change in Q Supplied
$50 200 300
$40 190 290
$30 170 270
$20 130 230
$10 100 200
$05 10 110
When market supply increases at every price the supply curve shifts
to the
Right
Now suppose the government increases taxes on the industry.
It will decreaseLabel this on the graph assuming that 100
less will supplied label it S3
What does supply elasticity mean?
How much supply is affected by a change in price
Elastic Supply – quantity changes a great deal when price changes
Inelastic Supply – quantity changes little when price changes
What affects the elasticity of supply?
How quickly a company can change how much it produces
Equilibrium Price
The price at which the amount demanded is equal to the amount supplied
Pe
Qe
What is the equilibrium price of video games in our market?
$25
What is a surplus?
When there is more supply than demand
What is a shortage?
When there is greater demand than supply
If price was set at $40 in our video game market what would exist?
Surplus
What about $10?
Shortage
What impact will a shortage have on price?
Prices will go up
Surplus?
Prices go down
What are price controls?
When the government sets the price of goods and services because they feel forces of supply and demand are unfair
Price Ceiling
Maximum price that can be charged set by government
Example = Rent Control
Price Floor
Government set minimum priceExample = minimum wage
Price as Signals
Determine What to produce by telling producers what they can make a profit off of
Determine How to produce – least costly means more profit
Determines Who gets what
Advantages of Price
Prices are Neutral – they do not favor producer or consumer
Prices are Flexible – they can adjust to changes in the market quickly
Prices provide Freedom of Choice – a variety of products at different prices allows consumers to choose
Prices are Familiar – they are easily understood
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