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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.
