How Do Demand and Price Interact? What are we willing and able to buy at various prices? (This...

How Do Demand and Price Interact?

How Do Demand and Price Interact?

What are we willing and able to buy at various prices? (This defines what?)

What are we willing and able to buy at various prices? (This defines what?)

DEMANDDEMAND

Willingness and ability are two conditions that buyers must meet in order for there to be DEMAND.

Willingness and ability are two conditions that buyers must meet in order for there to be DEMAND.

Law of DemandLaw of Demand

As price increases , the quantity demanded decreases .

As price increases , the quantity demanded decreases .

What Can Cause Demand to Change?

What Can Cause Demand to Change?

1.CHANGE IN INCOME- As income increases, people have more money

and will increase their demand for goods and services.

1.CHANGE IN INCOME- As income increases, people have more money

and will increase their demand for goods and services.

2. Changes in number of Consumers

2. Changes in number of Consumers

As the number of consumers increases, more people will buy goods and services and demand will increase.

As the number of consumers increases, more people will buy goods and services and demand will increase.

3. Changing Consumer Tastes and Preferences.

3. Changing Consumer Tastes and Preferences.

As consumer tastes and preferences for a particular good or service increases, demand for that good or service will increase.

As consumer tastes and preferences for a particular good or service increases, demand for that good or service will increase.

4. Changes in Consumer Expectations.

4. Changes in Consumer Expectations.

If consumers expect a future increase in the price of a good or service, current demand for that good or service will increase.

If consumers expect a future increase in the price of a good or service, current demand for that good or service will increase.

5. Changes in Price of Substitute Goods

5. Changes in Price of Substitute Goods

As the price of a particular good or service increases, demand for that good will decrease. But demand for its substitute will increase, as it will be cheaper in comparison.

As the price of a particular good or service increases, demand for that good will decrease. But demand for its substitute will increase, as it will be cheaper in comparison.

6. Changes in Price of Complementary goods.6. Changes in Price of Complementary goods.

As the price of a particular good or service increases, demand for that good will decrease. Since people tend to buy complementary goods together, demand for any complementary good will also decrease.

As the price of a particular good or service increases, demand for that good will decrease. Since people tend to buy complementary goods together, demand for any complementary good will also decrease.

Supply: How do supply and price interact?

Supply: How do supply and price interact?

SUPPLY: willingness and ability are the two conditions that must be met for there to be a supply of products.

SUPPLY: willingness and ability are the two conditions that must be met for there to be a supply of products.

Law of SupplyLaw of Supply

The higher the price, the more quantity is produced (increase supply)

The higher the price, the more quantity is produced (increase supply)

What can cause supply to change?

What can cause supply to change?

SUPPLY SHIFTERS: 1) Changes in the costs of inputs

Any change in the cost of the factors of production will result in a change in market supply Lower costs = more supply Higher costs = less supply

SUPPLY SHIFTERS: 1) Changes in the costs of inputs

Any change in the cost of the factors of production will result in a change in market supply Lower costs = more supply Higher costs = less supply

Supply Shifters cont…Supply Shifters cont…

2) Changes in the number of producers # of producers affect the amount of supply

More producers, more supply

3) Changes in conditions due to natural disasters or international events Weather and other events (war, etc.) can

influence the amount of supply available

2) Changes in the number of producers # of producers affect the amount of supply

More producers, more supply

3) Changes in conditions due to natural disasters or international events Weather and other events (war, etc.) can

influence the amount of supply available

Supply Shifters cont…Supply Shifters cont…

4) Changes in technology: better technology can reduce factors of

production, making goods cheaper to produce (ex. robot)

5) Changes in producer expectations: Producers make decisions based on the

expectation that prices will rise or fall (wheat, cattle industry, etc.)

4) Changes in technology: better technology can reduce factors of

production, making goods cheaper to produce (ex. robot)

5) Changes in producer expectations: Producers make decisions based on the

expectation that prices will rise or fall (wheat, cattle industry, etc.)

Supply Shifters cont…Supply Shifters cont…

6) Changes in government policy Governments affect in two ways: subsidy (cash

payment aimed at helping a producer to continue to operate), and excise tax (tax on the manufacture or sale of a good).

6) Changes in government policy Governments affect in two ways: subsidy (cash

payment aimed at helping a producer to continue to operate), and excise tax (tax on the manufacture or sale of a good).

ElasticityElasticity

Elasticity: refers to the degree to which a quantity demanded or supplied changes in response to a change in price

Think of the stretchiness of a rubber band—the more it stretches the more elastic the supply or demand

Elasticity: refers to the degree to which a quantity demanded or supplied changes in response to a change in price

Think of the stretchiness of a rubber band—the more it stretches the more elastic the supply or demand

Demand ElasticityDemand Elasticity

Elasticity of Demand: is a measure of how sensitive consumers are to a change in price

Inelastic: demand responds only slightly to a change in price (goods that usually have inelastic demands are gas, soap, etc.)

Elastic: demand responds actively to a change in price (bag of chips, pops, etc.)

Elasticity of Demand: is a measure of how sensitive consumers are to a change in price

Inelastic: demand responds only slightly to a change in price (goods that usually have inelastic demands are gas, soap, etc.)

Elastic: demand responds actively to a change in price (bag of chips, pops, etc.)

Demand ElasticityDemand Elasticity

The equation for demand elasticity is…

Demand elasticity= % change in quantity demanded divided by % change in price

For an example, lets look at page 89 of our book

The equation for demand elasticity is…

Demand elasticity= % change in quantity demanded divided by % change in price

For an example, lets look at page 89 of our book

Total Revenue TestTotal Revenue Test

Total Revenue Test: used by producers to guage the impact prices will have on their revenue

Revenue Table: lists the possible prices and the corresponding amount demanded at each price

Total Revenue: (price)x(quantity sold)=total revenue

Let’s take a look at the example on page 90

Total Revenue Test: used by producers to guage the impact prices will have on their revenue

Revenue Table: lists the possible prices and the corresponding amount demanded at each price

Total Revenue: (price)x(quantity sold)=total revenue

Let’s take a look at the example on page 90

Elasticity of SupplyElasticity of Supply

Elasticity of Supply: a measure of producers’ sensitivity to a change in price

It’s how much more a producer will make in response to higher prices, or vice versa

Calculation: supply elasticity = (% change in quantity) / (% change in price)

Elasticity of Supply: a measure of producers’ sensitivity to a change in price

It’s how much more a producer will make in response to higher prices, or vice versa

Calculation: supply elasticity = (% change in quantity) / (% change in price)

Elasticity of SupplyElasticity of Supply

Several things affect the elasticity of supply Availability of inputs Mobility of inputs Storage capacity Time needed to adjust

Several things affect the elasticity of supply Availability of inputs Mobility of inputs Storage capacity Time needed to adjust

Exit WorkExit Work

What factors play into a shifting supply? What factors play into a shifting demand? What is considered when looking at a totoal

revenue test? Describe elasticity in economic terms.

Include supply elasticity and demand elasticity.

What factors play into a shifting supply? What factors play into a shifting demand? What is considered when looking at a totoal

revenue test? Describe elasticity in economic terms.

Include supply elasticity and demand elasticity.