CHAPTER 7: DEMAND AND SUPPLY

Economics Per. 6

The “Marketplace”

Demand: All consumers have influence on the price of goods and

services How people in the marketplace decide what to buy and

at what price Supply:

How the people who are selling those things decide how much to sell and at what price

Market: Freely chosen actions between buyers and sellers of

goods and services Individuals decide the answers to WHAT? HOW? And for

WHOM?

Voluntary Exchange

A buyer and seller use their economic freedom to decide on terms and conditions of an exchange

Supply and Demand is a model of how buyers and sellers operate in the market

Cause and Effect in relation to price

Law of Demand

All the different quantities of goods and services that consumers will purchase at different prices

Willingness and ability “As price goes up, quantity demanded

goes down” “As price goes down, quantity demanded

goes up” Inverse relationship between quantity

demanded and price

Con’t.

3 Factors are: 1. Real Income Effect 2. Substitution Effect 3. Diminishing Marginal Utility

What does each factor mean and how does it effect the relationship between the quantity demanded and the price of a good or service?

The Demand Curve and Elasticity of Demand

Price per CD Quantity Demanded (millions)

$20 100

$19 200

$18 300

$17 400

$16 500

$15 600

$14 700

$13 800

$12 900

$11 1000

$10 1100

Con’t.

Demand Schedule: Table of prices and quantity demanded at that price

Plotting Quantity Demanded: On horizontal axis is the quantity demanded and on the vertical axis is the price Plot the quantity demanded based on the

price in the demand schedule Demand Curve: The downward sloping

line that connects the plotted points from the demand schedule

Determinants of Demand

Group Work: You will be divided into 5 groups. Each group will be assigned one of the five determinants of demand: 1. Change in population 2. Change in income 3. Changes in tastes and preferences 4. Substitutes 5. Complementary goods

Each group will tell us what their determinant means and then one member will come up and draw on the board how their determinant will effect the demand curve based on an example you choose.

Price Elasticity of Demand

How much consumers respond to a given change in price Ex. Certain brand of cereal increases in price,

consumer will probably buy another brand that is comparable

Inelastic Demand When a price change does not effect the quantity

demanded 3 factors: substitutes, % of a persons total

budget devoted to that good, and time consumers are give to adjust to price change Examples please?

Elastic versus Inelastic

Law of Supply and Supply Curve Supply: willingness and ability of producers to

provide goods and services at different prices in the market

“As the price rises for a good, the quantity supplied generally rises”

“As the price falls, the quantity supplied also falls” Direct relationship between price and quantity

supplied The higher the price the greater the incentive for

the producer to produce more Turns higher profits and covers the costs of producing

more

Supply Curve

Price per CD Quantity Supplied (millions)

$10 100

$11 200

$12 300

$13 400

$14 500

$15 600

$16 700

$17 800

$18 900

$19 1000

$20 1100

Con’t.

Supply Schedule: Table that shows that as the price increases so does the quantity supplied

Plotting Quantity Supplied: On horizontal axis is the quantity supplied and on the vertical axis is the price Plot the quantity supplied based on the price in

the supply schedule Supply Curve: The upward sloping line that

connects the plotted points from the supply schedule

Determinants of Supply

Group Work: You will be divided into 4 groups. Each group will be assigned one of the four determinants of supply: 1. Price of Inputs 2. Number of firms in the industry 3. Taxes 4. Technology

Each group will tell us what their determinant means and then one member will come up and draw on the board how their determinant will effect the supply curve based on an example of your choice. You may choose if the supply increases or decreases and you only have to demonstrate one.

Law of Diminishing Returns

Adding units of one factor of production to all other factors of production increases total output

But after a certain point, extra output for each additional unit will begin decrease

Ex. If you hire one or two more people to do a job you will increase your output, but adding anymore might begin to decrease your output

Supply and Demand Together Demand and Supply work together

As the price of a good goes down, quantity demanded rises and quantity supplied goes down

Equilibrium price Where the quantity supplied and thee

quantity demanded meet

Graph of Equilibrium Price

Shift in Equilibrium Price

Prices Serve as Signals

Rising prices signal producers to produce more and consumers to consume less, falling prices signal producers to produce less and consumers to purchase more

Shortages: at the current price, quantity demanded is greater than quantity supplied

Surpluses: at prices above the equilibrium price, suppliers produce more than consumers want to purchase

Market Forces: when operating without restriction, it eliminates shortages and surpluses

Price Control

Government gets involved in setting prices when it believes that the market forces of supply and demand are operating unfairly

Price Ceiling: a government set maximum that can be charged for goods and services (ex. Rent in NY City) What role does rationing and the black market

play in the economy when the gov’t sets ceilings? Price floors: a government set minimum that

can be charged for goods and services (ex. Minimum wage

Price Ceiling

Price Floor