Supply & Demand

Economics

The quantity of a good or service that

producers are willing and able to offer for sale at various prices Aka-the amount of stuff available for purchase

What is Supply?

An economic law stating that as the price of a

good or service increases, the quantity supplied increases, and vice versa. Generally producers are happier to offer goods and services at higher prices that at lower prices.

What is the law of supply?

Demand is the willingness and ability to buy specific quantities of a good or service at various prices

What is demand?

The law of demand states that as the price of

a good or service increases, the quality demanded decreases and vice versa. Generally consumers are happier to buy goods and services at lower prices than at higher prices.

What is the Law of Demand?

Factors (other than the price of the good or service) which can influence supply are called determinants and include: ∆ In cost of production ∆ In Technology ∆ in government policy ∆ in the # of suppliers ∆ in expectations of producers/businesses Calamity/Disaster

What are the determinants of supply?

Factors (other than the price of the good or service) which can influence demand are called determinants. ∆ in consumers’ incomes ∆ in consumers’ preferences ∆ in the prices of related goods or services

(complements or substitutes) ∆ in the number of consumers in a market ∆ in the expectations of buyers.

What are the determinants of demand?

Complementary good-a product that is

used/consumed jointly with another product. Ex. Creamer and coffee, hamburgers and buns These goods usually have more value paired with its compliment than when used separately.

Substitute good- a product that satisfies the same basic want as another product. Substitute goods maybe used in place of one another. Flip flops and sandals, coke and pepsi

The interaction of supply and demand

determine price

Determining Price

Equilibrium

The equilibrium price of a good or service is the one price at which quantity supplied equals quantity demanded.

Price Tyler Amber Kaitlyn Luis Market.50 11 10 11 13 451.00 9 9 8 11 371.50 7 7 6 10 302.00 5 6 5 7 232.50 3 4 4 6 173.00 1 3 4 5 13

Tico’s Taco Truck

If the price is above the equilibrium price, buyers

will purchase less than is available, and suppliers will offer more, creating a surplus. When a surplus exists, prices will decrease until they

reach the equilibrium price. If the price is below the equilibrium price, buyers

will want to buy more than is available, and suppliers will want to supply less, creating a shortage. When a shortage exists, buyers will bid the price up

until it reaches equilibrium price.

How is Equilibrium Reached?

When one of the determinants of demand

changes, the demand curve will shift, resulting in a new equilibrium price and quantity.

When one of the determinants of supply changes, the supply curve will shift, resulting in a new equilibrium price and quantity.

Equilibrium For All

Prices provide a signal to both buyers and sellers.

For example, rising oil prices provide an incentive for consumers to drive less or buy more efficient cars and an incentive to producers to find more oil.

Rising prices for labor provide an incentive for employers to substitute robots or other technology for labor.

How does a price change affect incentives for buyers and sellers?

Elasticity describes the degree to which buyers and sellers respond to price changes. The more elastic supply or demand, the more

responsive consumers and producers are to price changes (e.g., prices go up 10% and quantity demand goes down by 20%).

The more inelastic supply or demand, the less responsive producers are to price changes.

Price inelasticity means that consumers or producers are not very responsive to price changes (e.g., prices go up by 10% and quantity demanded goes down by 2%).

What is elasticity?

Determined by: Availability of the raw materials needed for

production Available production capacity Time period required to produce more of the

good or service. For example, the supply of seats in a football

stadium is fixed; thus the supply is inelastic (higher prices offered for tickets will not produce more seats in the short run).

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Elasticity of Supply

Elastic if more people will be willing to supply the

service at a higher price. Ex: more people will be willing to mow lawns if they get

paid a lot of money

Inelastic if there is an increase in the price and the supply does not increase. Ex: an increase in the price of strawberries, farmers

cannot increase their production immediately

Supply will be

Formula

Typical for goods that: Are Necessary – if a good is necessary for

human life, comfort or luxury then the demand is constant or inelastic (** people will pay what they can – if they need / want it)

Have No Good Substitutes – has no reasonable substitutes, and/or

Are inexpensive relative to one’s income (example: insulin, electricity, salt)

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Elasticity of Demand

Elastic-% change in Q demanded is greater than

the % change in price Inelastic-% change in Q demanded is less than

the % change in price Unitary elastic-% change in Q demanded is

equal to the % change in price Perfectly elastic-% change in Q demanded is

infinite in relation to the % change in price Perfectly inelastic- Q demanded does not

change as the price changes

Types of elasticity

% change in quantity demanded

% change in price

Formula

A price ceiling sets the highest price that can

be charged for a good or service. The price is generally set below the equilibrium price and results in a shortage. Rent control is an example of setting a price ceiling. Some

cities instituted rent controls when housing prices were rising rapidly and current city residents could no longer afford rent. Rent controls have resulted in a shortage of apartments because they require owners to accept a price that is lower than the equilibrium price. Rather than accept the low price, owners often convert the apartments to condominiums and sell them, thus decreasing the supply of available apartments.

What are government-enforced price ceilings?

A price floor sets the lowest price at which one can buy a good or service. Price floors are generally set above the equilibrium price and result in a surplus

Milk support pricing is an example of setting a price floor. Government wanted to be sure that dairy farmers would be guaranteed a price high enough to keep them in business.

Since the price is higher than the equilibrium price, consumers buy less milk and dairy farmers supply more milk, creating a surplus of milk

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What are the effects of government-enforced price floors?