Demand and Supply

Ms. Trimels12th grade Economics

DemandHow much of a good or service people are willing and able to buy at various prices.

Law of Demand: the inverse relationship between price and quantity demanded of a good or service.

- As prices fall, more people want it. As prices rise, people will do without.

* Demand Schedule - Ex. 1 (p. 54)

Demand vs. Quantity DemandedDemand: The amount of demand possible at all prices at a given period.

- It refers to the entire relationship between prices and the quantity of this product or service at various prices.

- the willingness of buyer and his affordability to pay the price for the economic good or service → what he can afford at each price

Quantity demanded: The amount demanded at a particular price - It refers to one particular point on the demand curve; how much is

demanded at a specific priceA change in price is a change in quantity demanded

Shift in [Total] DemandShift Right = Increase

- Looks like “up”

Shift Left = Decrease- Looks like “down”

What Changes Demand?1. Income

a. Changes in price affect the purchasing power of a consumer’s income. (AKA, the amount of something you can get w/each dollar)

$1000/month $100/month

2. Taste / Preferencesa. What you like affects what you’ll buy. b. Advertisements, diets, health warnings, etc.

I

3. Substitutesa. Changes in price motivate consumers to buy the cheaper

substitute

P↑ → D↑ (for substitute)

I like oranges.

$2 $5

Nvm I like apples.

4. Complimentsa. Proportional demand for related goods

i. Ex: cookies and milk, hotdogs and buns

D↑ = D↑ (for compliment)

P↑ = D ↓ (for compliment)

$10

I don’t need milk if I don’t want cookies

D ↓

5. Expectationsa. If consumers expect something to be different in the future, they

will consume at a different level today6. Population

a. A sudden, large influx of people would change the demandi. Ex: immigration, baby boom

Law of Diminishing Marginal Utility:As you continue to consume a given product, you will eventually get less additional utility from each unit you consume.

In other words, the more you get something, the less value it has to you.

*For the AP ExamYou will need to read the test questions carefully to determine if something is a normal good or an inferior good.

Normal goods: Income and demand are directly related

Inferior goods: Income and demand are inversely related

Ex: Bus passes, McDonald’s, Ramen noodles

SupplyThe specific quantity of a good or service that suppliers are willing and able to provide at different prices.

Law of Supply: There is a direct relationship between price and quantity supplied.

- As prices rise, producers make more to increase profit

*Supply Schedule - Ex. 3 (p. 56)

What changes supply?1. Technology

a. Advances → efficiency→ more supply bc means of acquiring it become cheaper

2. Price of Resources or Raw Materialsa. An increase in the price of a key resource will decrease the supply

because there will be less of it, and vice versa.

$6 Owner of Cheese Shop: I can’t make

as much cheese.

3. Price of other goodsa. If a producer sees something else make more money, he/she may

switch to selling that good/service

4. Number of Producersa. A change in the number of people producing a good or

service

5. Taxes and Subsidiesa. Taxes decrease supply; subsidies increase supply

↓ ↓Taxes = producer has to spend more Subsidies = producer gets paid more

6. Expectationsa. Same as demand. A producer’s projections might affect how much

he/she supplies

Market EquilibriumWhen the quantity demanded is equal to the quantity supplied.

Surplus and ShortageSurplus: When there is more supplied than demanded at the market price.Shortage: When there is more demanded than supplied at the market price.

“At the market price” is the key. - This does not mean that the resources itself are in a

shortage or a surplus, it just means that people don’t have the purchasing power for said material.