Chapter 7Chapter 7Supply & DemandSupply & Demand

The MarketplaceThe MarketplaceDemand is amount of g/s

consumers are willing/able to buy at various prices during specific time frame

Supply is amount of g/s producers are willing/able to sell at various prices during specific time frame

The MarketplaceThe MarketplaceMarket is process of freely

exchanging g/s between buyer & sellers◦Local◦National◦International

With your neighbor, come up w/ as many examples of markets as you can think of in a minute◦Classify as local, national or international

The MarketplaceThe MarketplaceVoluntary exchange – transaction

that buyers & sellers work out on their own terms

What are some factors that buyers consider?

What are some factors that sellers consider?

In a market economy prices are set by voluntary exchange

Which are markets?Which are markets?GapMcDonaldsOverstock.comHair SalonConcert

DentistMovie theatreEbayShopko

Law of DemandLaw of DemandAs price goes up, quantity goes

down and vice versa

Example: Dark Knight DVD

Law of DemandLaw of DemandCharacteristics of Demand

(Factors Affecting Quantity Demanded)

1.Real income effect2.Substitutes3.Diminishing marginal utility

Law of DemandLaw of DemandReal Income Effect

◦States we cannot keep buying same quantity of products if price rises while our income stays the same Forces us to make tradeoffs

◦Real income is purchasing power

Law of DemandLaw of DemandSubstitution Effect

◦States have if have 2 similar items and the price of one rises, people will buy more of the other item

Examples?????

Law of DemandLaw of DemandUtility is power that a g/s has to

satisfy a wantMarginal utility is the additional

amount of satisfactionLaw of diminishing marginal utility

says that the additional satasfaction a consumer gets from buying one more unit will lessen w/ each additional one purchased

Example: Peanuts at bball game

Read the BusinessWeek Read the BusinessWeek spotlightspotlight

Graphing the Demand Graphing the Demand CurveCurveDemand curve shows

relationship between price & quantity demanded◦Downward sloping line (falls from left

to right)Demand schedule is table of

quantities at difference prices

Graphing the Demand Graphing the Demand CurveCurve

Determinants of DemandChange in demand for an items

shifts the demand curve to the left or right

Determinants of DemandChange in populationChange in incomeChange in taste/preferenceSubstitutesComplementary goods

Determinants of DemandChange in

population◦ Naturally if

increases so does demand b/c there are more opportunities to buy/sell Increases shifts

demand curve to right

Decreases shifts to left

Determinants of DemandChange in

income◦ Demand for g/s

depends on your income Income increase,

demand curve shifts to right

If decreases, shifts to left

Determinants of DemandChange in

taste/preference◦ When a fad is hot

or not affects demand If fad hot, shifts

curve to right When fad is over,

shifts back to left

Determinants of DemandSubstitutes

Determinants of DemandComplementary

goods◦ Produces used w/

another product

Price Elasticity of DemandPrice Elasticity of DemandElasticity measures how much the

quantity demanded changes when price goes up/down◦If prices lower, we buy more◦But how much lower should they be

for us to buyPrice elasticity of demand is how

much demand varies according to changes in price

Elastic DemandElastic DemandRise/fall in price affects the

amount we are willing to buy◦Flexible about buying or not◦Luxury items◦Item has many substitutes

Inelastic DemandInelastic DemandPrice has little impact on quantity

demanded◦Consumers not flexible (purchase

not matter what)◦Staple items (milk, bread, salt, etc.)◦Necessities

What affects demand What affects demand elasticityelasticityAvailability of substitutesHow much you have (budget)Amount of time you have to

adjust to change in price

Law of SupplyLaw of SupplyAs price goes up, quantity

supplied goes up and vice versa

Law of SupplyLaw of SupplyProfit incentive motivated people

in market economy◦At higher prices, greater incentive to

produce more

Law of SupplyLaw of SupplySupply schedule is table showing

quantities supplied at different prices

Supply curve is graph showing relationship between price & quantity supplied

Supply CurveSupply CurveSupply curve is an upward sloping line

showing quantities supplies at possible prices

Supply curveSupply curveChange in supply causes entire

curve to shift to left/right

Determinates of SupplyDeterminates of SupplyPrice of inputsNumber of firms in industryTaxesTechnology

Price of InputsPrice of InputsItems needed to

make product◦If price of inputs

drops (raw materials, wages) producers can supply more at lower production costs – (shifts curve to right)

Number of Firms in Number of Firms in IndustryIndustryAs more enter

industry, greater quantities of product/service, which would cause a shift to right

TaxesTaxesIf gov’t imposes

taxes on production of certain items, businesses will NOT supply as much b/c production costs are higher◦ Causes shift to

left

TechnologyTechnologyNew products &

new methods of producing increase supply◦ Allows to produce

more goods at lower cost

◦ Shift to right

Law of Diminishing Law of Diminishing ReturnsReturnsAdding units of

one factor of production increases total output, however, after a certain point output continues to increase but at a diminishing rate

Equilibrium PriceEquilibrium PricePrice where amount producers

are willing to supply is equal to the amount consumers are willing to buy

Prices as signalsPrices as signalsPrice communicates information

and coordinates activities of producers and consumers

Prices as SignalsPrices as SignalsShortage – quantity demanded is

greater than quantity supplied at current price

Surplus – quantity supplied is greater than demanded at current price

Price ControlsPrice ControlsIn certain circumstances, gov’t

set price limits

Price ControlsPrice ControlsPrice ceiling – legal maximum

price that can be charged for g/sPrice floors – legal minimum price

that can be charged for g/s