Supply and Demand Ch. 20
Demand • What Determines Demand? • Changes in population- higher pop. Means high demand • Why Population Changes- immigration, migration, higher birthrate, lower death rate are examples • Changes in Income- healthy economy means higher wages and usually more demand • Changes in taste- fading popularity (people do not normally stock up on Christmas items during the summer) • Changes in Expectations- shortages (ex. Gas) cause demand to rise, new inventions cause current items used to have lower demand (transition from CD’s to iPod)
Demand • Product Related Changes • Demand can be influenced by the quality or price of a related good • Substitutes- items that are competing products because you can use one or the other (coffee vs. tea). • If coffee’s price rises, more people would buy tea • Complements- items that are used together (coffee pots and filters). When prices go up for coffee pots, demand decreases for filters
Demand • Demand Elasticity- the extent to which a change in price causes a change in quantity demanded • This usually occurs when there are attractive substitutes • Inelastic Demand- prices have little effect on quantity demanded (turkey for Thanksgiving, electricity)
Supply • Law of Supply- suppliers will normally offer more for sale at higher prices and less at lower prices • Every producer has a profit motive. They produce more as long as the incentive to make a profit is there. • Market supply- combine all the supply schedules of all the businesses that provide the same good or service
Supply Curve • Typically, a supply curve will slope upward. This reflects that fact that businesses will prefer to sell more at higher prices • If supply curve shifts to the left, then quantity supplied is less. • If the supply curve shifts to the right, then there is more supply.
Why Does Supply Change? • Cost of Resources- when resources cost less, supply will be high • Productivity- when workers are more productive, more products are produced at every price • Technology- new methods can speed things up and create more product • Government Policies- Usually, policies limit supply (higher min. wage means high costs and less supply) • Taxes- Generally, higher taxes mean higher costs an less supply
Why Does Supply Change? • Subsidies- a subsidy is a government payment to an individual or business for certain actions. They can help lower cost of production • Expectations- If businesses do not think there will be very high demand in the near future, supply will go down • Number of suppliers- more suppliers=more supply
Supply Elasticity • Supply Elasticity- measure of how the quantity supplied of a good or service changes in response to changes in price • Things that are quick to create (candy for example) are elastic. Quantity supplied will change a great deal if prices go up or down • Oil is supply inelastic. It takes a long time to dig a pipeline, build a refinery and hire workers.
Markets and Prices • Surplus- amount by which quantity supplied is higher than quantity demanded • Surplus signals that a price is too high • Shortage- amount by which quantity demanded is higher than quantity supplied • Signals that a price is too low • Equilibrium Price- Point where there is neither a surplus nor a shortage
Price Controls • Price Ceiling- Maximum price set by the government that can be charged for goods and services ( a city may set the maximum price on what landlords charge for rent) • Price floor- the minimum price charged for goods and services. This prevents prices from dropping too low (min. wage)
Prices • Prices tell us what, how and for whom to produce • Prices will be set where a profit can be made and still attract as high of demand as possible • If costs are greater than price set, the business will need to find less costly ways of producing