Supply & Demand: Market Competition

Demand: the desire, ability, and willingness to buy a product

Demand ScheduleiTunes Downloads

Price Quantity Demanded

$5

$2

.99

.50

.10

Law of Demand

The quantity demanded of a good or service varies inversely with its price.

P QDP QD

Think of your favorite food…

Law of diminishing marginal utility

Change in quantity demanded v. change in demand

Change in quantity demanded

What causes a change in quantity demanded?

PRICE

PRICE

PRICE

Change in Demand

People/consumers are now willing to buy different amounts of a product at the same price.

What makes this happen?

Consumer Income

Consumer taste

Price of related goodsSubstitute goods

Complementary goods

Expectations

Number of consumers

1) Consumer Income

When your income increases you can afford to buy more goods at the same price.

When your income decreases you can afford to buy less at the same price.

2) Consumer Tastes

MarketingPopularityFashion trendsNews reportsIntroduction of

new productsChanges in

season

3) Substitute Goods

A change in the price of a related product can cause a change in demand

Butter/Margarine example

Seinfeld Substitute Goods

netflix

4) Complementary Goods

If the quantity demanded for one good increases, then the demand will increase for complementary goods (and vice versa)

5) Change in expectations

Expectations in technological advancements

Expectation of shortages

6) Number of Consumers

An increase or decrease in the number of consumers of a given good changes demand

Analyze the relationship b/w price and quantity demanded

Study the two graphs attached. What information can we gain from the graphs? What trends do you notice?

What do we know about the relationship between price and quantity demanded?

Do you notice any discrepancies between the Law of Demand and the information about US gas consumption and price? What are they?

What do you think might explain this inconsistency?

Elasticity

The extent to which a change in price causes a change in the quantity demanded.

In other words…if the price of a good increases, how much will the quantity demanded decrease?

Elastic DemandA change in price

creates a generally larger change in quantity demanded

Inelastic DemandA change in price

does not create substantial change in quantity demanded

Elastic or Inelastic?

How did you decide?

Can the purchase be delayed?

Are there adequate substitutes available?

Does the purchase use a large portion of income?

The other half of the equation…Supply.

Supply: the amount of a product that would be offered for sale at all possible prices.

The Law of SupplyThe principle that

suppliers will normally offer more for sale at high prices and less at low prices

PQSPQS

Change in quantity supplied vs. change in supply

Change in Quantity Supplied

A change in the amount offered for sale in response to a change in price

Change in Supply

A situation where suppliers offer different amounts of products for sale at all possible prices in the market

What makes this happen?

Cost of InputsProductivityTechnologyTaxes and

SubsidiesExpectationsGovernment

regulationsNumber of sellers

Cost of Inputs

Labor, packaging, shipping, energy costs, etc…

Productivity

Unmotivated, untrained, unhappy employees decreases productivity and vice versa

Google Productivity

Technology

Introduction of a new machine, chemical, or industrial process.

Taxes and Subsidies

Taxes increase cost of production

Subsidies decrease cost of production

Expectations

Expectations about the future price of a product can change supply…if sellers think that the price of their product will go up, they will withhold some of the supply

Government Regulations

Increased government regulations restrict supply

Relaxed regulations increase supply

Number of Sellers

As more businesses and firms enter the economy the number of sellers increases as does supply

Supply Elasticity

Measures the way in which quantity supplied responds to price

Do these goods have elastic or inelastic supply?