SUPPLY & DEMAND

Mr. Barnett

University High School

2012-2013

AUCTION TIME!Nobody “sets” a price Nobody “sets” a quantity Prices determined through interactions between people

Everybody places their own value on goods and servicesThus, prices and values are separate concepts

If people & countries all valued items the same there would be NO trade!

Why sell my bobblehead if I value it at $10 and so did everybody else?Everybody has their own valuations and thus bid amount

INDIVIDUAL VALUATIONS Let’s graph our auction to see DEMAND

Every point on curve represents a person and their valuation of the good or serviceThese points are the quantities demanded

at various prices

THE DEMAND CURVEMind your P’s and Q’s

Price on y-axisQuantity on x-axis

Downward sloping from left to rightInverse relationship between price and quantity

As price goes down, quantity demanded goes upAs price goes up, quantity demanded goes down

I DEMAND IT! Quantity Demanded – the amount of a

good that buyers are wiling and able to purchase

The Law of Demand:The quantity demanded of a good falls

when the price of the good rises, ceteris paribus

The quantity demanded of a good rises when the price of the good falls, ceteris paribus

THE DEMAND CURVEHUGE difference between quantity demanded and demand

At $____, the quantity demanded is _____ unitsIf price drops from $____ to $______, the quantity demanded goes from _____ units to ____units.

However, demand stays the sameDemand is the entire curveQuantity demanded represented by each point

A change in price ONLY causes movement along the curve!

THE DEMAND CURVETherefore, when prices change you go from one point to another on the demand curve

But, change in price DOES NOT change demandDemand is represented by the ENTIRE curve

Think about this statement

If price changes from $_____ to $______, demand goes from ______to ______ units.

LET’S GO TO THE MARKET So what is a market exactly….

Market – a group of buyers and sellers of a particular good or service

Competitive Market – a market in which there are many buyers and many sellers so that each has a negligible impact on the market price

LET’S GO TO THE MARKET The entire demand curve can also be

understood as a market demand curveAt any given price, the market demand is

the sum of individual quantities demandedSum of horizontal individual demand curves

The total quantity demand for Kit-Kat bars At $3 Cara wants 5 at $3, Chexi wants 2 at $3 Cara’s quantity demanded at $3 + Chenxi’s

quantity demanded at $35+2 = 7 Kit-Kat bars…..market demand curve

will have total quantity demanded point at 7 Kit-Kat bars for $3

DOWNWARD SLOPEThere are three reasons why the demand curve is downward sloping

Income EffectEverybody has limited resources to purchase goods and services

Even the millionaires…just ask Mike Tyson or MC HammerThus, we all budget a certain amount of our income for our wants and needsHow much would you be willing to spend on homework passes?

Budget did not changePrice of good changed

As price fell, quantity demanded increasedAs price rose, quantity demanded decreased

Substitution Effect

Diminishing Marginal Utility

DOWNWARD SLOPEThere are three reasons why the demand curve is downward sloping

Substitution EffectAs the price rises for a particular good or service relative to the price of another good, than the quantity demanded falls for that particular good Vice versa, as the price drops for a particular good or service relative the price of another good, then the quantity demanded rises for that particular goodPeople will always substitute a higher priced good for a lower one if they are comparable and their income stays the same

Real Nominal Principle What matters to people is the real value of money

or income -its purchasing power-not its “face” value

DOWNWARD SLOPEDiminishing Marginal Utility

Marginal – Additional Utility – Satisfaction So, diminishing marginal utility is the additional satisfaction one gets from consuming a good or service

In consumption: Eating too many Twinkies make you sick and your enjoyment from the Twinkies diminishes

In production: Too many workers but not enough machines generate idle workers and diminished returns

The only way a firm can convince you to purchase/consume more and more of a good or service is to lower the price Hostess wants you to eat 1 more Twinkie! So they will lower

the price

SUMMARYThe demand curve is an illustration of the quantity demanded at various prices.

A change in price changes quantity demanded and not demand

TIME TO INCORPORATE