Supply and Demand. Demand is always present in any market economy…. What is demand?. Demand is more than simply having the desire to own a certain product!. Demand is the desire, ability, and willingness to pay for a certain product!.
Demand is always present in any market economy… What is demand? Demand is more than simply having the desire to own a certain product! Demand is the desire, ability, and willingness to pay for a certain product! Demand is just one principle of Microeconomics that helps to explain how prices are determined and how economic decisions are made
Demand Remember: in a market economy, people and companies act in their own best interest to answer the what, how, and for whom questions One way companies are successful in this endeavor is by being knowledgeable of demand Can you think of any examples?
Demand When creating a company or product, entrepreneurs must consider demand What type of business would it make sense to become involved in? What type of business would it make sense to avoid?
Demand There are several ways in which demand can be demonstrated Individual Demand Curve A graph showing the quantity demanded at each and every price that may occur in the market
Individual Demand Curve
The Law of Demand The previous graph should have illustrated an important point in demand: Law of Demand The quantity demanded of a good or service varies inversely with its price What the heck does that mean? When the price goes up, the demand goes down and vice versa
The Law of Demand Why can economists consider this idea to be a law? Think of price as an obstacle. If the price is higher, the obstacle is more difficult to navigate. If the price is lower, the obstacle is easier for everyone to get around Do more people go to the mall when there are sales?
Market Demand Curve This demand curve will be similar to the individual demand curve except, you guessed it, this curve will include everyone that is interested in buying a certain product
Demand and Marginal Utility What is utility? The amount of usefulness and satisfaction that someone gets from the use of a product Marginal Utility The extra usefulness or satisfaction a person gets from acquiring or use more of a product Diminishing Marginal Utility Over time, the extra satisfaction we get from buying additional items diminishes
Demand and Marginal Utility Diminishing Marginal Utility If you take a look at the demand curve, diminishing marginal utility explains why the curve slopes downward As you buy more CDs, you as a consumer won’t pay as much for more CDs
Demand and Marginal Utility What are some ways in which companies and producers combat diminishing marginal utility?
Changes in Quantity Demanded Look back at the Individual Demand Curve… Movement along the demand curve is a reflection of a change in the quantity demanded The change happens in relation to the price!
Changes in Quantity Demanded The “Income” Effect The change in quantity demanded because of a change in price that alters consumers’ real income For example Joe buys 6 DVDs at $15 a piece = $90 During a sale, Joe could buy 6 DVDs for $10 a piece What does he do with the $30? What would he do if the opposite happens?
Change in Quantity Demanded The Substitution Effect When similar alternatives are cheaper than the desired product Joe buys a spindle of blank DVDs for $30 and only buys real copies of DVDs he really likes This is not a change in the price of the actual product, but a change in relative price of the product
Change in Demand Change in Quantity Demanded Reflect movements along the demand curve Change in Demand Shift in the demand curve itself Why would this happen?
Change in Demand
Change in Demand Why would demand change? Consumer Income Consumer Tastes Substitutes Compliments Change in Expectations Number of Consumers
Change in Demand Consumer Income This is pretty simple: When your income goes up, you can afford to buy more products and services Let’s suppose Joe gets a raise at work He would be able to buy more DVDs which would mean his individual demand curve would shift to the right
Change in Demand Consumer Tastes Many things can influence consumer taste For example… K-Mart GEICO Consumer Goods
Change in Demand Complements Complementary products are products whose use goes hand in hand with the desired product Examples? Computers and software If computers go down in price, people buy more computers AND more software The increase in the price of a product leads to the decrease in the demand for its compliment
Change in Demand Substitutes A product that is similar enough to be used instead of another product Examples? In general, the demand for a product tends to increase if the price of its substitute goes up
Change in Demand Change in Expectations What might happen in the future …That new game system …That new style of shoe …That really popular band
Change in Demand Number of Consumers More people equals more purchases This effects just the market demand curve
Elasticity of Demand Economics, like other social sciences, is concerned with cause and effect An important cause-and-effect relationship in economics is elasticity Elasticity is a way economists measure the response of a dependent variable such as quantity and an independent variable such as price
Elastic Demand How does this translate to you? This type of elasticity is typical of the demand for products like green beans, corn, tomatoes, or other fresh garden vegetables Because prices are lower in the summer, consumers increase the amount they purchase
Inelastic Demand For other products, demand may be largely inelastic This means that a given change in price causes a relatively smaller change in the quantity demanded Examples?
Elastic or Inelastic? Can purchase be delayed? Are adequate substitutes available? Does purchase use a large portion of income?
Supply What is supply? Formal Definition The amount of a product that would be offered for sale at all possible prices that could prevail in the market Actual Definition
Supply Law of Supply The general idea is that producers will offer more for sale at higher prices and less for sale at lower prices Why?
Supply Why would the amount a producer supplied change? Cost of Inputs Productivity Technology Taxes and Subsidies What is a subsidy? A government payment to a producer to protect a certain economic activity Expectations Government Regulations Number of Sellers
What is Supply Elasticity? Supply Elasticity This concept is very similar to demand elasticity Demand elasticity involves buying things at a market Supply elasticity involves sellers bringing things to market Supply elasticity is simply a measure of the way quantity adjusts to a change in price
Supply Elasticity Simply put, anything that requires a lot of capital and labor to produce is going to be inelastic, or take awhile to change Anything that is cheaper and easier to produce will most likely be elastic, or change quickly
So…? What is the relationship between supply and demand? How is price a response to supply and demand?