Ch. 3 – Demand and Supply By:J.A.SACCO
Demand and Supply What is meant by demand and supply? • What are the basic elements that determine the price of anything? • How are prices determined by the seller? • What influence do you have on the determination of price? • Why can you buy many things at a lower price in a supermarket than in a local general store? • You all have had experience as a buyer---- Have you had experience as a seller? How are the goals different? Why?
DEMAND Quantity demanded • The amount of a good, service, or resource that people or a group are willing and able to purchase at various prices during a specified point in time all other things being constant
DEMAND • Law of Demand • Other things remaining the same, • If the price of the good/service rises, the quantity demanded of that good decreases. • If the price of the good/service falls, the quantity demanded of that good increases. Why is there an inverse relationship between price and the quantity demanded?
Demand • There are THREE economic concepts that explain the Law of Demand and these concepts account for the inverse relationship that changes in the price of goods/services have on the quantity demanded: • Income/ Purchasing Power Effect • Substitution Effect • Diminishing Marginal Utility
Income/Purchasing Power Effect • Amount of money a person has to spend on goods/services called purchasing power. • It is not a change in a person’s income but a change in purchasing power (real income) because of a change in the good/service. Pr. Pur.Pwr. QD QD Pur.Pwr. Pr.
Substitution Effect • To substitute a lower priced product/service (generic) for a normal product/service that is more expensive. Price A (NORMAL) If there is a substitute than the quantity demanded of that normal good will decrease. QD What happens if there is not a substitute?
Diminishing Marginal Utility • What is UTILITY? • The usefulness of a good/service or the satisfaction one gets from that good/service. • As the price of a good/service decreases, the quantity demanded increases, but for each successive decrease in price, the quantity demanded will increase but at a smaller rate. • You will get to a point where the quantity demanded will reach zero- at that point you have no more utility for that good/service. D.M.U.
Demand Schedule and Demand Curve • Now that we know why there is an inverse relationship between price and quantity demanded, lets look at an economic model of the law of demand.
DEMAND Demand schedule This is a numerical representation of the inverse relationship between specific relative prices and quantity demanded. Demand curve This is a graphic representation of the demand schedule. A negatively sloped line showing the inverse relationship between relative price and quantity demanded.
DEMAND • Individual Demand and Market Demand • Market demand • The sum of the demands of all the buyers in a market. • The market demand curve is the horizontal sum of the demand curves of all buyers in the market. • The greater number of individuals in a market demand curve the more accurate the curve.
A Change in Demand Review- Change in the Quantity of Demand A CHANGE IN PRICE! Income Effect Diminishing Marginal Utility Substitution Effect *Just a SNAPSHOT- ONLY PRICE MATTERS- Ceteris Paribus
A Change in Demand • Change in demand • A change in the quantity that people plan to buy when any influence other than the price of the good changes. • A change in demand means that there is a new demand schedule and a new demand curve. • This shift in the demand curve causes an overall change in the level (quantity) of demand at each and every price.
Change in Demand Figure shows changes in demand. 1. When demand decreases, the demand curve shifts leftward from D0 to D1. • 2. When demand increases, the demand curve shifts rightward from D0 to D2.
Change in Demand There are many influences that effect the change in demand. These influences are called NON- PRICE DETERMINANTS of DEMAND.
Non-Price Determinants of Demand Consumer Taste and Preferences When taste/preferenceschange, the demand for one item increases and the demand for another item (or items) decreases. • Seasonal • Style • Fads • Location • Age
Non-Price Determinants of Demand Market Size • Population- Pop. increases/demand increases. Pop. Decreases/demand decreases. • Technology- Must have it! • Advertisement • Gov’t Decisions- Gov’t involvement in other countries shrinks/expands market– embargo, tariffs • Social/Economic Changes
Non-Price Determinants of Demand Change in Income This is an ACTUAL change in your income! Not the Income Effect!! Normal good(Beef steak) • A good for which the demand increasesif income increases and demand decreases if income decreases. Inferior good(Beef hot dogs)- not a substitute! • A good for which the demand decreasesif income increases and demand increases if income decreases.
Non-Price Determinants of Demand Change in Consumer Expectations Expected Future Income? Expected Future Price of Good/Service? Expected Good/Service Availability?
Non-Price Determinants of Demand Prices of Related Goods Substitute (not generics) A good that can be consumed in place of another good. For example, Coca Cola and Pepsi Cola. The demand for a good increases, if the price of one of its substitutes rises. The demand for a good decreases, if the price of one of its substitutes falls.
Non-Price Determinants of Demand Complements A good that is consumed with another good. For example, peanut butter and jelly. The demand for a good increases, if the price of one of its complements falls. The demand for a good decreases, if the price of one of its complements rises.
Change in Quantity Demand vs. Change in Demand Change in Quantity Demanded Versus Change in Demand • Change in the quantity demanded • A change in the quantity of a good that people plan to buy that results from a change in the price of the good. • Change in demand • A change in the quantity that people plan to buy when any influence other than the price of the good changes.