Unit 5 Supply and Demand

1. Unit 5 Supply and Demand

3. Quantity Demanded • Two characteristics of demand for consumers; willingness to buy and ability to buy • How much would you pay for a certain item? • If you buy one phone at $500; that is your quantity demanded • Quantity demanded-the amount of a good or service that consumers are willing and able to pay at a specific price • The quantity demanded is a specific spot on the demand curve • Example: if 10 people each buy one phone@ $500 then that is the quantity demanded for that item; 10 @$500

4. Demand • Demand is expressed in terms of a time frame • When all the quantities demanded at all the different prices are combined, the result is the demand • Demand- the amount of a good or service that consumers are willing to buy at all prices in a given time period • Example; 1,000 phones were sold in seven days is the demand for that phone

5. Demand Schedule/Demand Curve • Price is a huge factor in determining demand • A demand schedule is a chart that shows the quantities of a good that one person will purchase depending on the price • A demand curve is an economic model that shows the relationship between price and quantity; it shows how price influences the quantity demanded • Page 77 in your textbook

7. Market Demand • Market demand- the sum of all quantities demanded in a market • When economists refer to demand; they usually mean market demand

8. Law of Demand • Law of demand states that as the price of goods increase the quantity demanded decreases and vice versa • Three factors affect consumers’ spending behavior: • Law of diminishing marginal utility- consumers will weigh the “utility” they will receive from each additional unit before purchasing • Income effect- because of scarcity people’s incomes are limited and they must make choices (trade-offs) when deciding what to purchase • Substitution effect- sometimes two different goods can satisfy the same want. These products are considered substitute goods.

9. List three examples of substitute goods: • Sandals/Flip-flops • 1. • 2. • 3. • All three factors cause consumers to react in predictable ways to a change in price up or down • This moves the quantity demanded along the demand curve; what economists call a change in quantity demanded • Only a change in price will effect quantity demanded

10. Change in Demand • Sometimes a factor other than price will cause a change in demand • Change in demand- occurs when quantities demanded increase or decrease at all prices • An increase shifts the demand curve to the right-decrease to the left

11. Demand Shifters • Demand shifters- things that will change demand independent of price • Changes in income • Changes in the number of consumers, ex. Beach town shops • Changes in consumer tastes and preferences, ex. Sushi, organic foods • Changes in consumer expectations, ex. Upcoming sales • Changes in the price of substitute goods • Changes in the price of a complementary good- a product that is consumed along with some other product, ex. Tennis balls and tennis rackets

13. Supply • Quantity supplied- the amount of a good or service that producers are willing and able to offer for sale at a specific price • Supply- the amount of a good or service that producers are willing to and able to offer for sale at all prices in a given time period • Supply schedule- a table that shows the quantities supplied at different prices in a market • Supply curve- shows the relationship between price and quantity supplied

14. Supply • Market supply- the sum of all the individual quantities supplied • Law of supply- direct relationship between price and quantity supplied; as the price goes up the quantity supplied goes up • Revenue- the amount of money received in the course of doing business • The only factor that changes quantity supplied is price

15. Change in supply • Variables other than price can cause a change in supply- a change in market supply at all prices • Factors that lead to a change in supply • Change in the cost of inputs • Changes in the number of producers • Changes in conditions due to natural disasters or international events, ex. Wars • Changes in technology • Changes in producer expectations

16. Changes in government policy- governments can directly affect supply in two ways • Subsidy- a cash payment aimed at helping a producer to continue to operate • Excise tax- a tax on the manufacture or sale of a good http://minnesota.cbslocal.com/2011/05/12/good-question-why-does-big-oil-get-taxpayer-subsidies/ http://www.liveleak.com/view?i=9ea_1331337881 http://live.huffingtonpost.com/r/segment/new-farm-bill-hurts-the-poor/51af65a002a7607788000065 http://www.glennbeck.com/2012/03/09/american-taxpayers-subsidizing-50-light-bulbs/

17. Elasticity • Elasticity- a measure of the degree to which a quantity demanded or a quantity supplied changes in response to a change in the price • Elasticity of demand- a measure of consumer’s sensitivity to a change in price • Elasticity of supply- a measure of the sensitivity of producers to a change in price • Unitary elastic supply or demand- when the % change in price is = to the % change in quantity supplied or demanded • Inelastic- items that do not show a change in demand no matter the price, necessities Demand elasticity= % change in quantity demanded /% change in price

18. Total Revenue • Economists can also use the total revenue test to measure elasticity of demand • Total revenue is calculated by multiplying the quantity of a good sold by the price of a good Turn to page 90 in your text

19. Factors that Influence Elasticity of Demand • Availability of substitutes • Price relative to income-consumers notice changes to “big ticket” items more than lower priced items • Necessities vs. luxuries • Time needed to adjust to a price change

20. Factors that Influence Elasticity of Supply • Supply chain- the network of people, organizations, and activities involved in supplying goods and services to consumers • Availability of Inputs • Mobility of Inputs • Storage capacity • Time needed to adjust to a price change • Turn to page 94 in your text