SUPPLY AND DEMAND

1. SUPPLY AND DEMAND

2. Demand • Demand – the willingness and ability of people to buy a product at a certain price • Law of Demand – people buy more of a product at a lower price • As price goes up, willingness to buy goes down • Demand and price have an INVERSE relationship PRICE DEMAND

3. Proving the Law of Demand • Diminishing marginal utility • Income Effect • Substitution Effect

4. Diminishing Marginal Utility • What is marginal utility? • The satisfaction one gets from one more unit of a product • With every additional unit consumed in a certain time period, additional satisfaction decreases More units Satisfaction

5. Income Effect The effect that increasing or decreasing prices have on income. • As price goes up, your buying power goes down • As price goes down, buying power increases

6. Substitution Effect The change in the mix of goods purchased as a result of increasing and decreasing relative prices. • Price of OJ goes up, consumers substitute with apple juice • Price of beef falls, consumers substitute beef for chicken or pork

7. Demand Schedule • Shows how much (QUANTITY) of a product people will buy at a certain price

8. Graphing Demand Use the demand schedule to create a demand graph Demand for Bikes • Always title graph • Always label axis • X axis = always quantity • Y axis = always price • Accurate scale • Plot points & connect • Label curve 350 Demand curve is always NEGATIVE 300 PRICE 250 200 150 D 100 5 10 15 20 25 30 35 40 QUANTITY

9. Determinants of Demand What causes demand to change? • Consumer Incomes • Consumer Attitudes • Complementary Goods • products that are used together – gas & cars • Substitute Goods • Goods that can take the place of other goods – Butter & Margarine ; name brand & generic

10. Shifting Demand on a graph • Increase in demand = line shifts up to the right • Decrease in demand = line shifts down to the left 350 300 PRICE 250 D1 200 150 D 100 D2 5 10 15 20 25 30 35 40 QUANTITY

11. SUPPLY • Supply – the quantity of products that a firm is willing & able to make available for sale at different prices • Law of Supply – the quantity of goods supplied will be greater at a higher price than at a lower price • As price goes up, production goes up • Price & supply have a DIRECT relationship PRICE SUPPLY

12. Supply Schedule • Shows the quantity of a product producers are willing to supply at different prices • Using your demand schedule, invert your numbers for quantity, keeping price the same • Using an X/Y graph, plot this new schedule; Be sure to title, label axis, and provide accurate scale

13. Graphing Supply Supply of Bikes 350 S 300 PRICE 250 200 Supply curve is always POSITIVE 150 100 5 10 15 20 25 30 35 40 QUANTITY

14. Shifting Supply • Increase in supply = line shifts down to the right • Decrease in supply = line shifts up to the left S2 350 300 PRICE S 250 S1 200 150 100 5 10 15 20 25 30 35 40 QUANTITY

15. Finding Equilibrium • Equilibrium occurs where Supply & Demand intersect • When S=D, you found E • Equilibrium also known as market clearing price • What is the market clearing price in this example? 350 S 300 PRICE 250 E 200 150 D 100 5 10 15 20 25 30 35 40 QUANTITY

16. Shortagesquantity demanded > quantity supplied = Shortage • Results when a seller charges less than the equilibrium price • All points below E would result in a shortage • Upward pressure on price • When there are shortages, prices go up S PRICE E Price D QUANTITY

17. SURPLUSquantity demanded < quantity supplied = surplus Price • Results when a seller charges more than the equilibrium price • All points above E would result in a surplus • Downward pressure on price • When there are surpluses, prices go down S PRICE E D QUANTITY