DemandDemand

DemandDemand• Demand:

o the desire to own something and the ability to pay for it

• The Law of Demand states that as prices decrease people are willing to buy more. As price increases people are willing to buy less o (inverse relationship)

DemandDemand• Market Demand Curves • Show how people’s buying habits will change at

certain prices ONLY• Show a specific market only • Assume no other factors change (just price)

Why Would There Be a Why Would There Be a

Shift in Demand?Shift in Demand?1. Consumer’s income changes

• As income increases, demand increases.

2. Consumer Expectations: if shortage is

expected, demand increases

3. Population Size: Population increases,

demand increases

4. Consumer Taste: If a good becomes popular,

demand increases

Why Would There Be a Why Would There Be a

Shift in Demand?Shift in Demand?5. Change in Price of Related Goods:

• Compliments: goods bought together (ex. PB&J)

• Compliment good price increases, the good’s

demand decreases

• Substitutes: goods used in place of one another

(ex. skis and snowboards)

• If a substitute price increases, the good’s demand

increases

DemandDemand• ELASTICITY of DEMAND:

o How much the quantity demanded will change if the price rises or falls.

DemandDemand• ELASTIC DEMAND: demand that is very

sensitive to a change in priceo goods that one might stop buying or cut back on as price increased

(SUVs, Luxury items)**on a graph this demand curve will be FLAT

DemandDemand• INELASTIC DEMAND: demand that is not very

sensitive to a change in priceo goods that you would buy at any price; there are few if any substitutes

for these goods. o Examples: milk, gas, prescription drugs

• on a graph this demand curve would be very steep.

SupplySupply

SupplySupply• Supply:

o is the amount of goods or services available

• The Law of Supply states the higher the price, the larger the quantity produced (think like a producer now; at a higher price, firms earn additional revenue and more firms will have incentive to enter the market)

SupplySupply• Supply Schedule:

o show only how price of goods changes the quantity supplied (all other factors remain constant)

• Elasticity of Supply o is a measure of the way suppliers respond to a change in price

SupplySupply• Inelastic Supply

o a small increase in price has a small effect on supply (orange farmers – suppliers must plant more trees every 2 years to produce more fruit and supply doesn’t change in the short term)

Why Would There Be a Why Would There Be a

Shift in Supply?Shift in Supply?1. Change in the Price of an Input:

• Rise in input cost means decrease in supply because it is too expensive to make, and a fall in input cost will increase supply at all price levels.

2. Technology – • lowers cost and increases supply.

3. Government subsidy: • payment by the gov’t that supports a business

or market. Subsidies increase supply.

4. Increase or Decrease in taxes: 1. increasing taxes decreases supply, decreasing

taxes increases supply

Why Would There Be a Why Would There Be a

Shift in Supply?Shift in Supply?5. Government Regulation:

• (emission control on cars, FDA nutritional codes on food products) Usually increases cost of production

6. Future expectation of Prices: • expect the price to go up the supplier will

store goods to sell more in future

7. Number of suppliers: • as more suppliers enter a market to produce

a good the market supply of the good will rise (and the opposite)

Supply & Supply & DemandDemand

Together Forever.

A Fully labeled Supply & A Fully labeled Supply &

Demand GraphDemand Graph

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Equilibrium Price: the price at which the amount producers are willing to supply is equal to the amount consumers are

willing to buy

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Market Clearing Price

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Orange Orange JuiceJuice

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PRICE ____

QUANTITY____

BECAUSE OF A CHANGE IN

SUPPLY

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Coca-ColaCoca-ColaP

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PRICE ____

QUANTITY____

BECAUSE OF A CHANGE IN

DEMAND

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Video Video GamesGames

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PRICE ____

QUANTITY____

BECAUSE OF A CHANGE IN

DEMAND

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D2

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ClothingClothingP

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PRICE ____

QUANTITY____

BECAUSE OF A CHANGE IN

SUPPLY

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E2

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Price CeilingPrice Ceiling

• An artificial barrier that creates a maximum price for a good/service

• Tries to keep prices low but creates shortage

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Price Ceiling

Example: Price Example: Price CeilingCeiling

• 1) In New York City the government controlled the rent on some apartments so that they could not be more than $1000 a month. This made everyone want those cheap apartments, but there wasn’t enough of them for everyone who wanted one.o What is this called?_________________

The quick way to The quick way to rememberremember

• Ceiling = max price = shortage

Price FloorPrice Floor

• An artificial barrier that creates a minimum price for a good/service

• Tries to keep businesses happy but creates surplus

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Price Floor

Example: Price FloorExample: Price Floor• 1) In July the minimum wage in North Carolina will

go up to $7.25. It will be illegal to pay someone less than that for any type of job. But many businesses can’t afford to pay their workers $7.25 an hour. This will mean people are going to lose their jobs. o What will happen to the available supply of labor?_________________o What is this called? __________________

The quick way to The quick way to rememberremember

• Floor = min price = surplus

Floor or Ceiling? Floor or Ceiling? Remember… Floor = Remember… Floor =

minimum priceminimum priceCeiling = maximum priceCeiling = maximum price

1. The Congress wanted to help America’s 3 big car companies (Ford, GM & Chrysler) make more profit. They said that new cars could not be sold for less than $30,000. o Is this a price floor or a price ceiling?o What will happen to the supply of cars?

Floor or Ceiling? Remember… Floor = Floor or Ceiling? Remember… Floor = minimum priceminimum price

Ceiling = maximum priceCeiling = maximum price2. The Congress wanted people to be able to afford

gas this summer so they said that no gas could be sold above $1.25 a gallon. But during the summer the demand for gas is always higher because people travel more. o Is this a price floor or a price ceiling?o What will happen to the supply of gasoline?