Demand, Supply and Markets

1. Demand, Supply and Markets Joudrey

2. The Market • A market is any network that keeps buyers and sellers in contact with one another so they can exchange goods and services. • Can have a physical setting or can be done over the phone or computer. • Exists wherever the forces of supply and demand meet to create an exchange. • In a market, the total number of sellers make up supply and the total number of buyers make up demand.

3. The Market System • Market consists of: • Consumers - create a demand for a product • Demand • the amount consumers desire to purchase at various prices • Not what they will buy, but what they would like to buy! • Effective demand – must be willing AND able to pay

4. Individual and Market Demand • Market demand – consists of the sum of all individual demand schedules (a table showing the quantity demanded at a particular price)in the market • Represented by a demand curve • At higher prices, consumers generally willing to purchase less than at lower prices • Demand curve – negative slope, downward sloping from left to right

5. The Demand Curve Slopes downwards from left to right (a negative slope) - an inverse relationship between price and quantity demanded. Quantity demanded higher at lower prices. As price falls, quantity demanded rises. As price rises, quantity demanded falls. Price ($) $10 $5 Demand 100 150 Quantity Demanded (000s)

6. Demand • Demand refers to the quantities of a good or service that buyers are willing and able to buy at various prices in a particular time period. • A demand schedule is a list of prices and the number of items that would be bought at each price. • Ability to pay is the ultimate determining factor.

7. Demand Curve • A demand curve is just like a demand schedule. It shows the quantities of a good or service that buyers would be willing and able to buy at various times, on a graph. • The graph always represents the relationship between quantity and price.

8. The Law of Demand • States that when the price of a good is raised (and there are no other changes) less of it will be demanded. If a large amount of a good is put on the market (and there are no other changes) then it can only be sold at a lower price.

9. The Law of Diminishing Marginal Utility • Utility means satisfaction. • The law states that each additional unit of a good consumed at any given time yields less satisfaction than the one previously consumed. This law helps explain why the demand curve slopes down to the right. People usually would only be willing to buy more of a good if the price was reduced.

10. Elasticity of demand refers to the responsiveness of the quantity demanded to a change in price. If there is an increase or decrease in demand with a change in price, demand is elastic if the percentage change in demand is greater than the percentage change in price. Demand is inelastic if it stays the same with a change in price. The percentage change in demand is less than the percentage change in price. (gas) Unitary elasticity means a change in price brings about an exactly proportionate change in quantity demanded. Elasticity Of Demand

11. Factors That Determine Elasticity Of Demand • 1. Substitutes or alternatives available • 2. Small items are inelastic, big items are elastic. • 3. Essential items are inelastic, luxuries are elastic. • 4. Over time all goods are elastic.

12. Normal Good vs. Inferior Good • Normal good – goods we purchase when times are good. • Inferior good – goods we buy when times are tough

13. Shifts In Demand • Shifts occur when there is a change in the quantity of a product demanded for reasons other than a price change. • A shift to the right means there has been an increase in the quantity demanded at a particular price. • A shift to the left means a decrease. • This applies to supply as well.

14. Supply • Supply refers to the quantity of goods and services producers are willing and able to produce at a particular price. • A supply schedule is a table which shows the quantities of a good or service that sellers are willing and able to sell at various prices. This data can then be used to draw a supply curve, showing the relationship between price and quantity supplied.

15. Equilibrium Price • The point at which a demand and supply curve intersect is referred to as the Equilibrium Price, the price at which buyers and sellers agree or the price at which the quantity supplied and the quantity demanded are equal. • It is also referred to as the market clearing price, where the market is cleared of a product, thus using resources efficiently.

16. Surplus vs. Shortage • A surplus occurs when supply is greater than demand and more of a good is supplied than is demanded. This causes an increase in competition and prices fall. • A shortage occurs when demand is greater than supply and less of a good is supplied than demanded. This increase in demand causes prices to rise.

17. Shifts In Supply • All things remaining equal, a supply curve shows how quantity supplied changes at various prices. • Changes such as new technology, higher prices for supplies, weather and production costs can cause the supply curve to shift. • A shift to the right means an increase in the quantity supplied at various prices. A shift to the left means a decrease in quantity supplied at various prices.

18. Market Equilibrium • This is seldom reached because so many factors continuously influence the supply and demand of goods and services. • Problems such as shortages and surpluses are usually worked out as supply and demand work toward equilibrium. • Scarcity forces us to make decisions, price being an important deciding factor. That is why the dynamic of the interaction of supply and demand in the marketplace determines what is produced, how it is produced and who gets how much (the three essential questions).

19. Elasticity of Supply • Supply is elastic if the percentage change in the quantity supplied is greater than the percentage change in price. For example, if price goes down 10%, but suppliers produce 20% less, then supply is elastic. • Supply is inelastic if the percentage change in quantity supplied is less than the percentage change in price.

20. Supply Determinants • Many factors influence elasticity of supply, but time is most important!! Over time, suppliers can react better to price changes, taking advantage of an increase in price by producing more, or less if the price decreases. • Supply of goods that can be stored easily, inexpensively and for a long period of time, will be more elastic than products that spoil easily and are difficult to store. (fresh fish)

21. The Price System • The answers to the three major questions are arrived at automatically through the price system. The price system……… • Acts as a guide to owners of resources about where they can get the best deal for their labor, land and capital. • Signal opportunities to entrepreneurs and provides incentive to adjust production to meet the opportunities. • Inform consumers as to how to best deal with their scarce resources. • Signal shortages and surpluses. • Bring order to the marketplace as supply and demand move toward equilibrium

22. Government Price Fixing • Ceiling Price – highest price that can be charged legally for a good or service. • Floor Price – minimum price below which it is illegal to buy or sell a good or service.

23. Government Intervention • Subsidies – grant of money (result in lower prices for consumers and more revenue for the business) • Drawbacks: tax payers pay for this and it could keep inefficient business running. • Quotas– restriction placed on the amount of products that producers are allowed to produce. (ex. Milk, meat, vegetables) • Rent control • Minimum wage

24. Activity #1 • In your own words tell me (include examples for each): • What factors make the demand elastic • What factors make the demand inelastic • What factors make the supply elastic • What factors make the supply inelastic

25. Activity #2 • Draw the following curves separately and explain what makes the graph more vertical or horizontal by using an example: • Inelastic demand • Elastic demand • Unitary demand curve • Inelastic supply • Elastic supply • Unitary supply curve

26. Activity #3 • Explain marginal utility using your own example • Explain why we get a bargain on almost everything we buy by relating purchases to marginal utility and the demand curve. • Read think like an economist case. Answer the related question 1 on page 99-101.