Supply and Demand

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 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

0 1 2 3 4 5 6 7 8 90

5

10

15

20

25

30

35

Demand for CDs

Demand for CDs

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?

Inelastic Demand

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?