Download - Chapter 7 Supply & Demand
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