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