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Demand and Supply

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  1. Demand and Supply What are demand and supply, and what factors influence them?

  2. What Would You Pay?

  3. Demand • For there to be a demand for a good or service, two conditions must be met… • People must be willing to buy it.

  4. Demand • For there to be a demand for a good or service, two conditions must be met… • People must be able to buy it.

  5. Demand quantity demanded – the amount of a good or service that consumers are willing and able to buy at a specific price Demand – the amount of a good or service that consumers are willing and able to buy at all prices in a given period demand curve – shows the relationship between price and the quantity that buyers are willing and able to buy

  6. Individual Demand

  7. Market Demand

  8. The Law of Demand • The Law of Demand as price increases, quantity demanded decreases, and vice versa • Why do price and quantity demanded move in opposite directions?

  9. Diminishing Marginal Utility • As people consume more and more of something, they gain less satisfaction from it. This means that for people to continue buying larger quantities of something, the price has to be low enough.

  10. The Income Effect • People’s incomes are limited. They only have so much to spend. If the price of a good or service goes up, people will not be able to buy as much of it as before.

  11. The Substitution Effect • Sometimes two different goods can satisfy the same want. These are known as substitute goods. If the price of one goes up, people will buy the cheaper one instead.

  12. Quantity Demanded Change • As consumers buy more in response to a decrease in price (or less in response to an increase in price), the quantity demanded “moves along the demand curve.” • Only a change in price can cause a change in quantity demanded.

  13. Supply and Demand • Opposite every consumer in a market exchange is a producer. Producers supply the goods and services that consumers demand. • How do producers decide what to make, and how much of it to make? • Price has a lot to do with how much of something a producer is willing to make.

  14. Supply • Let’s say that you are good at crafting furniture. You purchase the raw wood, tools, hardware, glue and other supplies. You also invest your time into the task. All together, to craft one rocking chair, it costs about $100.

  15. Supply • How many of you would be willing to sell these chairs for $100? • What about $110? • What about $150?

  16. Supply • Producers take into account the profit they will earn. That is, the money they will have left over from selling their good or service, after covering the cost of the inputs (materials, labor, etc.). • The higher the price of something, the more profit a producer will earn, and the more of that thing the producer will be willing to produce.

  17. Supply • supply is the amount of a good or service that producers are willing and able to offer for sale at all prices in a given period • quantity supplied is the amount of a good or service that producers are willing and able to offer for sale at a specific price.

  18. Supply • Let’s take Jasmine’s business, for example:

  19. Market Supply

  20. The Law of Supply • The Law of Supply states that as the price increases, the quantity supplied increases, and vice versa. • Why is this the case?

  21. The Law of Supply • Firstly, when prices increase, existing businesses bring in more revenue (the amount of money received in the course of doing business). • Bringing in more revenue is likely to increase profits, thus producers increase production.

  22. The Law of Supply • Secondly, if prices rise, new firms may enter the market seeing the potential for profit. • Conversely, if prices fall, some firms may exit the market because of reduced profits.

  23. Elasticity

  24. Economic Elasticity • Economists define elasticity as the degree to which a quantity demanded or a quantity supplied changes in response to a change in price. • An elastic good or service is one in which the quantity supplied or demanded changes greatly in response to a change in price. • An inelastic good or service is one in which the quantity supplied or demanded changes little in response to a change in price.

  25. Elasticity of Demand • Elasticity of demand is a measure of consumers’ sensitivity to a change in price. • Goods or services with an elastic demand experience big changes in quantity demanded if the price changes.

  26. Elasticity of Demand • Goods or services with an inelastic demand experience small changes in quantity demanded if the price changes. • People need gasoline, and will generally pay for it at almost any price – with more or less grumbling.

  27. Elasticity of Demand

  28. Elasticity of Demand • Calculating Demand Elasticity • <1 is inelastic • >1 is elastic • =1 is “unitary elastic demand”

  29. Elasticity of Demand

  30. Elasticity of Demand

  31. Demand Elasticity Influences • Availability of substitutes.

  32. Demand Elasticity Influences • Price relative to income.

  33. Demand Elasticity Influences • Necessities versus luxuries.

  34. Demand Elasticity Influences • Time needed to adjust to a price change. 2008 Fixed!...

  35. Elasticity of Supply • Elasticity of supply is a measure of the sensitivity of producers to a change in price. • Goods or services with an elasticsupply experience big changes in quantity supplied if the price changes.

  36. Elasticity of Supply • Goods or services with an inelasticsupply experience small changes in quantity supplied if the price changes. • To grow more bananas takes time – it requires clearing more land, planting more trees, and waiting.

  37. Elasticity of Supply

  38. Elasticity of Supply • Calculating Supply Elasticity • <1 is inelastic • >1 is elastic • =1 is “unitary elastic demand”

  39. Supply Elasticity Influences • Availability of inputs.

  40. Supply Elasticity Influences • Mobility of inputs.

  41. Supply Elasticity Influences • Storage capacity.

  42. Supply Elasticity Influences • Time needed to adjust to a price change.