SUPPLY DEMAND Economics DEMAND The desire ability and

SUPPLY & DEMAND Economics

DEMAND The desire, ability, and willingness to buy a product or service

Do You Demand These? Desire? Ability? Willingness?

Demand Schedule Price Per CD # of CDs Demanded $1 300 $2 162 $3 94 $4 58 $5 37 $6 25 $10 18 $15 13 $20 10 A listing that shows the quantity demanded at all prices.

Demand Schedule Example Price Per CD # of CDs Demanded $27 10 $24 13 $21 18 $18 25 $15 37 $12 58 $9 94 $6 162 $3 300 30 25 20 15 10 5 0 0 100 200 300

Law of Demand P= Price QD= Quantity Demanded P QD Item on sale, price mark up, etc.

Price The Law of Demand Graph Quantity Demanded

Price Change in Quantity Demanded

Price Q: What causes a shift in Demand? A: Non-price determinants Decrease in demand Increase in demand Quantity Demanded

Non-Price Determinants of Demand 1) 2) 3) 4) 5) 6) Buyer’s Income Price of Substitutes Market Size Consumer Tastes Consumer Expectations Complement Goods

1) Buyer’s Income Demand Examples: - Minimum wage increases - Economic Recession - The Great Depression

2) Price of Substitute Goods or services that can be used instead of other goods or services, causing a change in demand.

3) Market Size Demand Examples: Immigration Detroit after collapse of auto industry

4) Consumer Tastes The popularity of a good or service has a strong effect on the demand for it, and in the marketplace, popularity can change quickly.

5) Consumer Expectations What you expect prices to do in the future can influence your buying habits today. Examples: HD TV’s PS 3 Gasoline Homes Automobiles

6) Complement Goods When the use of one product increases the use of another product.

Supply The desire, ability, and willingness to offer products for sale *Anyone who offers an economic product for sale is a supplier *When you work at your job, you are offering your services for sale. Your economic product is labor. You would probably supply more for a higher wage.

Law of Supply P= Price QS= Quantity Supplied P QS Super bowl commercial

Price The Law of Supply Graph Quantity Supplied

Price Q: What causes a change in quantity supplied? A: Price Quantity Supplied

Price Q: What causes a shift in supply? A: Non Price Determinants of Supply Decrease in supply Increase in supply Quantity Supplied

Non-Price Determinants of Supply 1) 2) 3) 4) 5) 6) 7) Number of Products Input Costs Labor Productivity Technology Government Action # of sellers Producer Expectations

1) Number of Products A successful new product or service always brings out competitors who initially raise overall supply.

2) Input Costs Input costs, the collective price of resources that go into producing a good or service, affect supply directly Examples Minimum Wage increases Cost of cotton increases, supply of t-shirts decreases

3) Labor Productivity Better trained or more-skilled workers are usually more productive. Increased productivity decreases costs and increases supply.

4) Technology By applying scientific advances to the production process, producers have learned to generate their goods or services more efficiently.

5) Government Action Government actions, such as taxes or subsidies, can have a positive or negative effect on production costs.

6) # of Sellers # of sellers increases, supply increases # of sellers decreases, supply decreases Examples: Mc. Donald’s Plans to Open 1, 000 new stores in 2010 All Circuit City stores in America went out of business

7) Producer Expectations The amount of a product that producers are willing and able to supply may be influenced by whether they believe prices will go up or down.

Price SUPPLY (The entire line -ALL Prices & ALL Quantities) Quantity Supplied

Price QUANTITY Supplied (POSITIVE SLOPE) Quantity Supplied

Change in QUANTITY Supplied Price MOVEMENT Quantity Supplied

Price Change in SUPPLY SHIFT Quantity Supplied

Shift in the Supply Curve For an given rental price, quantity supplied is now lower than before.

Market Equilibrium Situation in which prices are relatively stable and the quantity of goods or services supplied is equal to the quantity demanded. QS = QD Equilibrium Price – the price that “clears the market. ” No Shortage or Surplus.

Equilibrium Price Equilibrium Quantity Price 10 9 8 7 6 5 4 3 2 1 0 0 500 1000 Quantity 1500 2000

Surplus Situation in which the quantity supplied is greater than the quantity demanded at a given price. QS > QD P Note: If there is a surplus, prices generally fall

Price At $8 there is a surplus of 700 Surplus of 700 10 9 8 7 6 5 4 3 2 1 0 0 500 1000 Quantity 1500 2000

Shortage The situation in which the quantity demanded is greater than the quantity supplied. QD > QS P Note: If there is a shortage, prices generally rise

Price A price of $3 causes a shortage of 900 units. 10 9 8 7 6 5 4 3 2 1 0 Shortage of 900 0 500 1000 Quantity 1500 2000

Equilibrium After a Demand Shift The shift in the demand curve moves the market equilibrium from point A to point B, resulting in a higher price and higher quantity.

Equilibrium After a Supply Shift The shift in the supply curve moves the market equilibrium from point A to point B, resulting in a higher price and lower quantity.

Demand Elasticity A term used to indicate the extent to which changes in price cause changes in quantity demanded.

Elastic Demand Occurs when a relatively small change in price causes a relatively large change in the quantity demanded.

Inelastic Demand Occurs when a change in price causes a relatively smaller change in the quantity demanded.

Estimating Elasticity of Demand Yes = Elastic No = Inelastic Can purchase be delayed? Are there adequate substitutes? Does purchase use a large portion of income? 2 or more yes’s = elastic 2 or more no’s = inelastic

Elastic or Inelastic?

Necessity The more necessary a good is, the lower the elasticity, as people will attempt to buy it no matter the price, such as the case of insulin for those that need it.