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Supply and Demand
Unit 4: Microeconomics
I. Demand
A. Description
1. Demand is the desire to own something and the ability to pay for it.
2. Law of demand:PRICE
As price goes down…
DEMANDQuantity
demanded goes up.
PRICEAs price goes
up…
DEMANDQuantity
demanded goes down.
B. Changes in Demand1. Substitution Effect: $ , the demand will
be effected by substitutes available.
2. Substitutes are goods used in place of another.
3. Income effect: Income rises, the demand will be effected in two different ways:
a. Normal goods: If wealthier, they will buy more of.
b. Inferior goods: If wealthier, they will buy less of.
4. Consumer expectations: Customers know there is a sale, they will not buy this week.
5. Population: Population changes in age, goods demanded change.
6. Tastes and advertising: Waves of popularity & advertising will
impact demand.
7. Related goods: Complements are goods that are bought together.
C. Extreme Demand
1. Supply shock is when there is a severe shortage.
2. Government may intervene with rationing
a. WWII is an example of high demand, rationing rubber, fuel,
nylon, etc.
b. 1970’s: Gasoline rationing.
II. Supply
A. Description1. Production
2. Law of Supply:
Prices go up…
Supply goes up.
Prices goes down…
Supply goes down.
B. Changes in Supply
1. Rising Costs: Costs of production will cause a decrease in supply.
2. Technology: Efficiency in production will increase production and supply.
3. Subsidy: Government financial assistance for producers.
4. Excise tax: Tax on the production, distribution, sale of
product.
5. Regulation: Limits on the production will decrease supply.
III. Supply and Demand Together
A. Equilibrium
Equilibrium Price
Surplus
Shortage
DemandSupply
Price Floor : Minimum Wage
Price Ceiling: Rent Control
B. Elasticity
1. Elasticity of demand: Sensitivity of demand of consumers to price change.
1. Elastic: Items that are highly sensitive to price change.
2. Inelastic: Items that are not sensitive to price.
3. Elasticity of supply: Sensitivity of suppliers to price change.
a. Elastic: Suppliers will be able to produce more or less of a product
due to changes of prices in the market.
b. Inelastic: Suppliers will not be able to produce more or less of a
product.
C. Companies and Pricing
• Suppliers must take into account, the bills they have when producing:
1. Fixed Costs : Same monthly.
2. Variable Costs: Varies monthly.
3. Fixed + Variable = Total
4. Adding labor (more workers is not always good):
a. At first, each additional worker increases output more. (Increasing
Marginal Returns)
b. Eventually output will still increase, but more slowly.
(Diminishing marginal returns).
c. Soon, production will drop with each worker added. (Negative
marginal returns).
IV. Market Structure
A. Organizational Chart
BusinessOrganization
Number of Firms
Variety of Goods
Barriers to Entry
ControlOverPrices
Example
Perfect Competition
Monopoly
Monopolistic Competition
Oligopoly
Business Organization Number of Firms
Variety of Goods Barriers to Entry Control Over Prices
Example
Perfect Competition Many
Monopoly
Monopolistic Competition
Oligopoly
Business Organization Number of Firms
Variety of Goods Barriers to Entry Control Over Prices
Example
Perfect Competition Many None,Identical
Monopoly
Monopolistic Competition
Oligopoly
Business Organization Number of Firms
Variety of Goods Barriers to Entry Control Over Prices
Example
Perfect Competition Many None,Identical
None,Easy to start
Monopoly
Monopolistic Competition
Oligopoly
Business Organization Number of Firms
Variety of Goods Barriers to Entry Control Over Prices
Example
Perfect Competition Many None,Identical
None,Easy to start
None,Supply &Demand
Monopoly
Monopolistic Competition
Oligopoly
Business Organization Number of Firms
Variety of Goods Barriers to Entry Control Over Prices
Example
Perfect Competition Many None,Identical
None,Easy to start
None,Supply &Demand
Farms,Stocks
Monopoly
Monopolistic Competition
Oligopoly
Business Organization Number of Firms
Variety of Goods Barriers to Entry Control Over Prices
Example
Perfect Competition Many None,Identical
None,Easy to start
None,Supply &Demand
Farms,Stocks
Monopoly One
Monopolistic Competition
Oligopoly
Business Organization Number of Firms
Variety of Goods Barriers to Entry Control Over Prices
Example
Perfect Competition Many None,Identical
None,Easy to start
None,Supply &Demand
Farms,Stocks
Monopoly One UniqueGood
Monopolistic Competition
Oligopoly
Business Organization Number of Firms
Variety of Goods Barriers to Entry Control Over Prices
Example
Perfect Competition Many None,Identical
None,Easy to start
None,Supply &Demand
Farms,Stocks
Monopoly One UniqueGood
DifficultTo Start&Hold
Monopolistic Competition
Oligopoly
Business Organization Number of Firms
Variety of Goods Barriers to Entry Control Over Prices
Example
Perfect Competition Many None,Identical
None,Easy to start
None,Supply &Demand
Farms,Stocks
Monopoly One UniqueGood
DifficultTo Start&Hold
FullControl
Monopolistic Competition
Oligopoly
Business Organization Number of Firms
Variety of Goods Barriers to Entry Control Over Prices
Example
Perfect Competition Many None,Identical
None,Easy to start
None,Supply &Demand
Farms,Stocks
Monopoly One UniqueGood
DifficultTo Start&Hold
FullControl
City Sewage
Monopolistic Competition
Oligopoly
Business Organization Number of Firms
Variety of Goods Barriers to Entry Control Over Prices
Example
Perfect Competition Many None,Identical
None,Easy to start
None,Supply &Demand
Farms,Stocks
Monopoly One UniqueGood
DifficultTo Start&Hold
FullControl
City Sewage
Monopolistic Competition Many
Oligopoly
Business Organization Number of Firms
Variety of Goods Barriers to Entry Control Over Prices
Example
Perfect Competition Many None,Identical
None,Easy to start
None,Supply &Demand
Farms,Stocks
Monopoly One UniqueGood
DifficultTo Start&Hold
FullControl
City Sewage
Monopolistic Competition Many Similar,
Sub-stitutes
Oligopoly
Business Organization Number of Firms
Variety of Goods Barriers to Entry Control Over Prices
Example
Perfect Competition Many None,Identical
None,Easy to start
None,Supply &Demand
Farms,Stocks
Monopoly One UniqueGood
DifficultTo Start&Hold
FullControl
City Sewage
Monopolistic Competition Many Similar,
Sub-stitutes
Few
Oligopoly
Business Organization Number of Firms
Variety of Goods Barriers to Entry Control Over Prices
Example
Perfect Competition Many None,Identical
None,Easy to start
None,Supply &Demand
Farms,Stocks
Monopoly One UniqueGood
DifficultTo Start&Hold
FullControl
City Sewage
Monopolistic Competition Many Similar,
Sub-stitutes
Few Some
Oligopoly
Business Organization Number of Firms
Variety of Goods Barriers to Entry Control Over Prices
Example
Perfect Competition Many None,Identical
None,Easy to start
None,Supply &Demand
Farms,Stocks
Monopoly One UniqueGood
DifficultTo Start&Hold
FullControl
City Sewage
Monopolistic Competition Many Similar,
Sub-stitutes
Few Some Clothing,Barbers
Oligopoly
Business Organization Number of Firms
Variety of Goods Barriers to Entry Control Over Prices
Example
Perfect Competition Many None,Identical
None,Easy to start
None,Supply &Demand
Farms,Stocks
Monopoly One UniqueGood
DifficultTo Start&Hold
FullControl
City Sewage
Monopolistic Competition Many Similar,
Sub-stitutes
Few Some Clothing,Barbers
Oligopoly Few
Business Organization Number of Firms
Variety of Goods Barriers to Entry Control Over Prices
Example
Perfect Competition Many None,Identical
None,Easy to start
None,Supply &Demand
Farms,Stocks
Monopoly One UniqueGood
DifficultTo Start&Hold
FullControl
City Sewage
Monopolistic Competition Many Similar,
Sub-stitutes
Few Some Clothing,Barbers
Oligopoly Few Similar,Sub-stitutes
Business Organization Number of Firms
Variety of Goods Barriers to Entry Control Over Prices
Example
Perfect Competition Many None,Identical
None,Easy to start
None,Supply &Demand
Farms,Stocks
Monopoly One UniqueGood
DifficultTo Start&Hold
FullControl
City Sewage
Monopolistic Competition Many Similar,
Sub-stitutes
Few Some Clothing,Barbers
Oligopoly Few Similar,Sub-stitutes
Many,Ex-pensive
Business Organization Number of Firms
Variety of Goods Barriers to Entry Control Over Prices
Example
Perfect Competition Many None,Identical
None,Easy to start
None,Supply &Demand
Farms,Stocks
Monopoly One UniqueGood
DifficultTo Start&Hold
FullControl
City Sewage
Monopolistic Competition Many Similar,
Sub-stitutes
Few Some Clothing,Barbers
Oligopoly Few Similar,Sub-stitutes
Many,Ex-pensive
Some
Business Organization Number of Firms
Variety of Goods Barriers to Entry Control Over Prices
Example
Perfect Competition Many None,Identical
None,Easy to start
None,Supply &Demand
Farms,Stocks
Monopoly One UniqueGood
DifficultTo Start&Hold
FullControl
City Sewage
Monopolistic Competition Many Similar,
Sub-stitutes
Few Some Clothing,Barbers
Oligopoly Few Similar,Sub-stitutes
Many,Ex-pensive
Some Auto,Cereal
D. Perfect and Monopolistic Competition
1. Perfect competition is tough market
2. Farmers are example, make little profit
3. Monopolistic competition fare better due unique twist they have on product.
E. Monopolies and Oligopoly
1. Monopolies virtually banned by Anti-trust Laws
2. Natural Monopolies still exista. Geographic – last gas station for milesb. Governmental – only cable company
allowed in townc. Technological – patents for new products
3. Oligopoly companies are forbidden from cooperating with each other (collusion)
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