Chapter 7 Supply & Demand

1. Chapter 7Supply & Demand

2. The Marketplace • Demand 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

3. The Marketplace • Market 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

4. The Marketplace • Voluntary 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

5. Which are markets? • Gap • McDonalds • Overstock.com • Hair Salon • Concert • Dentist • Movie theatre • Ebay • Shopko

6. Law of Demand • As price goes up, quantity goes down and vice versa • Example: Dark Knight DVD

7. Law of Demand • Characteristics of Demand(Factors Affecting Quantity Demanded) • Real income effect • Substitutes • Diminishing marginal utility

8. Law of Demand • Real 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

9. Law of Demand • Substitution Effect • States have if have 2 similar items and the price of one rises, people will buy more of the other item • Examples?????

10. Law of Demand • Utility is power that a g/s has to satisfy a want • Marginal utility is the additional amount of satisfaction • Law 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

11. Read the BusinessWeek spotlight

12. Graphing the Demand Curve • Demand curve shows relationship between price & quantity demanded • Downward sloping line (falls from left to right) • Demand schedule is table of quantities at difference prices

13. Graphing the Demand Curve

14. Determinants of Demand • Change in demand for an items shifts the demand curve to the left or right

15. Determinants of Demand • Change in population • Change in income • Change in taste/preference • Substitutes • Complementary goods

16. Determinants of Demand • Change 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

17. Determinants of Demand • Change in income • Demand for g/s depends on your income • Income increase, demand curve shifts to right • If decreases, shifts to left

18. Determinants of Demand • Change 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

19. Determinants of Demand • Substitutes

20. Determinants of Demand • Complementary goods • Produces used w/ another product

21. Price Elasticity of Demand • Elasticity 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 buy • Price elasticity of demand is how much demand varies according to changes in price

22. Elastic Demand • Rise/fall in price affects the amount we are willing to buy • Flexible about buying or not • Luxury items • Item has many substitutes

23. Inelastic Demand • Price has little impact on quantity demanded • Consumers not flexible (purchase not matter what) • Staple items (milk, bread, salt, etc.) • Necessities

24. What affects demand elasticity • Availability of substitutes • How much you have (budget) • Amount of time you have to adjust to change in price

25. Law of Supply • As price goes up, quantity supplied goes up and vice versa

26. Law of Supply • Profit incentive motivated people in market economy • At higher prices, greater incentive to produce more

27. Law of Supply • Supply schedule is table showing quantities supplied at different prices • Supply curve is graph showing relationship between price & quantity supplied

28. Supply Curve • Supply curve is an upward sloping line showing quantities supplies at possible prices

29. Supply curve • Change in supply causes entire curve to shift to left/right

30. Determinates of Supply • Price of inputs • Number of firms in industry • Taxes • Technology

31. Price of Inputs • Items needed to make product • If price of inputs drops (raw materials, wages) producers can supply more at lower production costs – (shifts curve to right)

32. Number of Firms in Industry • As more enter industry, greater quantities of product/service, which would cause a shift to right

33. Taxes • If 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

34. Technology • New products & new methods of producing increase supply • Allows to produce more goods at lower cost • Shift to right

35. Law of Diminishing Returns • Adding units of one factor of production increases total output, however, after a certain point output continues to increase but at a diminishing rate

36. Equilibrium Price • Price where amount producers are willing to supply is equal to the amount consumers are willing to buy

37. Prices as signals • Price communicates information and coordinates activities of producers and consumers

38. Prices as Signals • Shortage – quantity demanded is greater than quantity supplied at current price • Surplus – quantity supplied is greater than demanded at current price

39. Price Controls • In certain circumstances, gov’t set price limits

40. Price Controls • Price ceiling – legal maximum price that can be charged for g/s • Price floors – legal minimum price that can be charged for g/s