Supply and Demand Supply and Demand Objective 8.04 Objective 8.04
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Supply and DemandSupply and DemandObjective 8.04Objective 8.04
Supply and DemandSupply and Demand
Pages 258Pages 258--259259 copy bold terms and give copy bold terms and give a definition or description of each.a definition or description of each. Page 261Page 261 Copy the questionsCopy the questions
Worksheet AWorksheet A--221.1. SurplusSurplus
•• When the amount supplied exceeds the demandWhen the amount supplied exceeds the demand
2.2. ShortageShortage•• When the amount demanded exceeds the supplyWhen the amount demanded exceeds the supply
3.3. UtilityUtility•• The power to satisfy your wants and needsThe power to satisfy your wants and needs
4.4. Law of Diminishing Marginal UtilityLaw of Diminishing Marginal Utility•• The more of something you get, the less it The more of something you get, the less it
satisfies yousatisfies you
Worksheet AWorksheet A--225.5. SupplySupply
•• Quantity that producers will provide at each priceQuantity that producers will provide at each price6.6. DemandDemand
•• Quantity that consumers will buy at each priceQuantity that consumers will buy at each price7.7. Equilibrium PriceEquilibrium Price
•• Price at which the quantity demanded and supplied Price at which the quantity demanded and supplied will be equalwill be equal
8.8. ElasticityElasticity•• The degree to which there will be a change in The degree to which there will be a change in
quantity demanded or supplied when there is a quantity demanded or supplied when there is a change in pricechange in price
Laws of Supply and DemandLaws of Supply and DemandSupplySupply
•• Quantity that producers will provide at each priceQuantity that producers will provide at each priceDemandDemand
•• Quantity that consumers will buy at each priceQuantity that consumers will buy at each price
Law of SupplyLaw of Supply As Price goes up producers will be willing to produce more of As Price goes up producers will be willing to produce more of
a good or service a good or service
Law of DemandLaw of Demand As Price goes up consumers will be unable or unwilling to buy As Price goes up consumers will be unable or unwilling to buy
as much as much
ElasticityElasticity
Elastic Demand: Elastic Demand: When there is a change in price there will be a large When there is a change in price there will be a large
change in the quantity demanded.change in the quantity demanded. Tends to be a more horizontal demand curve.Tends to be a more horizontal demand curve. Tends to be goods / services that are wantsTends to be goods / services that are wants
Inelastic DemandInelastic Demand When there is a change in price there will be a small When there is a change in price there will be a small
change in the quantity demanded.change in the quantity demanded. Tends to be a more vertical demand curve.Tends to be a more vertical demand curve. Tends to be goods / services that are needsTends to be goods / services that are needs
ElasticityElasticity A more horizontal A more horizontal
demand curvedemand curve A more vertical A more vertical
demand curvedemand curve
Means a more Means a more elastic good or elastic good or serviceservice
Means a less Means a less elastic good or elastic good or serviceservice
BIG small
Price Change
Demand ScheduleDemand Schedule
$2.00$2.00$1.75$1.75$1.50$1.50$1.25$1.25$1.00$1.00
.75 cents.75 cents
.50 cents.50 cents
.25 cents.25 centsQUANTITYQUANTITYPRICEPRICE
Labeling the Demand Curve GraphLabeling the Demand Curve Graph
Price
Quantity
05 15 2010 25
$1.25
$1.50
$.75
$.25
$.50
$1.75
$2.00
$1.00
Substitutes and ComplementsSubstitutes and Complements
Substitutes (Substitute Goods)Substitutes (Substitute Goods) goods that can be used in place of each other, goods that can be used in place of each other,
because they satisfy the same needbecause they satisfy the same need Compliments (Complementary Goods)Compliments (Complementary Goods)
goods that are typically used or bought with goods that are typically used or bought with certain other goodscertain other goods
Substitution EffectSubstitution Effect when two goods satisfy the same need or want, when two goods satisfy the same need or want,
people will tend to buy the cheaper of the twopeople will tend to buy the cheaper of the two
Markets and ElasticityMarkets and Elasticity Market DemandMarket Demand
Total demand of all consumers for a specific good or serviceTotal demand of all consumers for a specific good or service Market SupplyMarket Supply
Total produced by all suppliers of a specific good or serviceTotal produced by all suppliers of a specific good or service Demand ElasticityDemand Elasticity
The extent (how much) demand will change when there is a The extent (how much) demand will change when there is a change in pricechange in price
Supply ElasticitySupply Elasticity The extent (how much) supply will change when there is a The extent (how much) supply will change when there is a
change in pricechange in price ProfitProfit
The money a business has left over from total sales after it hasThe money a business has left over from total sales after it haspaid all of its costs (total costs) paid all of its costs (total costs)
$Total Sales $Total Sales -- $Total Costs = Profit$Total Costs = Profit
Factors that Influence DemandFactors that Influence Demand PopulationPopulation
Number of Consumers in the areaNumber of Consumers in the area ConsumerConsumer’’s Expectationss Expectations
How consumers perceive (think about) the futureHow consumers perceive (think about) the future Tastes and PreferencesTastes and Preferences
Popularity of a product, likes and dislikesPopularity of a product, likes and dislikes ConsumerConsumer’’s Incomes Income
How much money do consumers have to spend?How much money do consumers have to spend? SubstitutesSubstitutes
How available and expensive are competing products?How available and expensive are competing products? ComplementsComplements
How available and expensive are the goods that are used with How available and expensive are the goods that are used with this product?this product?
Factors that Influence SupplyFactors that Influence Supply Cost of ResourcesCost of Resources
Costs of the resources to produce the good or serviceCosts of the resources to produce the good or service ProductivityProductivity
How much wood would a wood chuck How much wood would a wood chuck chuckchuck, if a wood chuck , if a wood chuck could chuck wood?could chuck wood?
TaxesTaxes How high are taxes on this business?How high are taxes on this business?
Government Regulation (laws)Government Regulation (laws) Subsidies: Government payments for certain actionsSubsidies: Government payments for certain actions Policies: Minimum wage increase, (Policies: Minimum wage increase, (de)regulationsde)regulations, restrictions, restrictions
TechnologyTechnology New cheaper and better ways of productionNew cheaper and better ways of production
ExpectationsExpectations Looking at the futureLooking at the future…… ““Will consumer demand be higher in a Will consumer demand be higher in a
year?year?”” Number of SuppliersNumber of Suppliers
How many businesses produce the same good or service?How many businesses produce the same good or service?
Demand and Supply SchedulesDemand and Supply Schedules
12 Million12 Million$8.00$8.003 Million3 Million$8.00$8.00
9 Million9 Million$6.00$6.006 Million6 Million$6.00$6.00
6 Million6 Million$4.00$4.009 Million9 Million$4.00$4.00
3 Million3 Million$2.00$2.0012 Million12 Million$2.00$2.00
QuantityQuantitySuppliedSupplied
PricePriceQuantityQuantityDemandedDemanded
PricePrice
Demand and Supply CurvesDemand and Supply Curves
$0$1$2$3$4$5$6$7$8$9
$10
3 6 9 12
Surplus
Shortage
Supply Curve
Demand Curve
Price in Dollars
Quantity in Millions
Equilibrium Point
Equilibrium Price
The relationship of Supply and The relationship of Supply and DemandDemand……
A match made in heaven???A match made in heaven???
Demand and SupplyDemand and Supply
Things to rememberThings to remember Supply and Demand are oppositesSupply and Demand are opposites As prices change they react opposite to each As prices change they react opposite to each
otherother As demand changes, surpluses or shortages As demand changes, surpluses or shortages
may be created.may be created. A surplus or shortage may force suppliers to A surplus or shortage may force suppliers to
make changes in consumer pricesmake changes in consumer prices
So what happens if thereSo what happens if there’’s a surplus?s a surplus?
This means that the quantity supplied is This means that the quantity supplied is more than the quantity demandedmore than the quantity demanded
Where is the price on the supply and Where is the price on the supply and demand curve?demand curve? Is it below or above the equilibrium price?Is it below or above the equilibrium price?
Equilibrium
Demand Curve
Supply Curve
Prices
Quantity
WhatWhat’’s going on here?s going on here?
What does he not understand? What can we say about demand and supply? What happens if demand increases?
Putting it all togetherPutting it all together
If you are charging $50 for a new video If you are charging $50 for a new video game, and your company manufactured 2 game, and your company manufactured 2 million units, and sold 1.5 million in the first million units, and sold 1.5 million in the first and second quarter (November 1and second quarter (November 1--April 30)April 30)
What can be said about supply and What can be said about supply and demand?demand?
AnswersAnswersWe have a surplus of goods (500,000).We have a surplus of goods (500,000). Our price is higher than the equilibrium Our price is higher than the equilibrium
price.price. Factors that influence demand are at work.Factors that influence demand are at work.
Which ones? What might be happening?Which ones? What might be happening?•• PopulationPopulation•• ConsumerConsumer’’s Expectationss Expectations•• Tastes and PreferencesTastes and Preferences•• ConsumerConsumer’’s Incomes Income•• SubstitutesSubstitutes•• ComplementsComplements
Scarcity or ShortageScarcity or Shortage
What are you experiencing whenWhat are you experiencing when…… Your little brother eats all the cookiesYour little brother eats all the cookies You lose your lunch moneyYou lose your lunch money The DVD you want is sold out at The DVD you want is sold out at WalmartWalmart You canYou can’’t make your oatmeal for breakfast t make your oatmeal for breakfast
cause the box is emptycause the box is empty
HomeworkHomework
Draw and label the supply and demand Draw and label the supply and demand curve on your worksheet including:curve on your worksheet including:The X and Y axis (price & quantity)The X and Y axis (price & quantity)Price in Dollars / Quantity in MillionsPrice in Dollars / Quantity in MillionsThe Supply CurveThe Supply CurveThe Demand CurveThe Demand CurveThe Equilibrium PointThe Equilibrium PointWhere Surpluses and Shortages occur.Where Surpluses and Shortages occur.
HomeworkHomework
300 mil.300 mil.$10$10
210 mil.210 mil.$20$20
160 mil.160 mil.$30$30
130 mil.130 mil.$40$40
100 mil.100 mil.$50$50
QuantityQuantityDemandedDemanded
PricePriceIn DollarsIn Dollars
50 mil.50 mil.$10$10
100 mil.100 mil.$20$20
180 mil.180 mil.$30$30
210 mil.210 mil.$40$40
250 mil.250 mil.$50$50
QuantityQuantitySuppliedSupplied
PricePriceIn DollarsIn Dollars
ElasticityElasticityEQ: What role does substitution EQ: What role does substitution
play in elasticity in deciding price?play in elasticity in deciding price?
Law of SupplyLaw of Supply
•Remember the Law of Supply?
•The law of supply states that as price increases the Producer has an incentive to
produce more.
•If price decreases, the producer has an incentive to produce less.
Law of DemandLaw of Demand
Remember the Remember the Law of DemandLaw of Demand??
The law of demand states that as the price The law of demand states that as the price of a product increases, more people will of a product increases, more people will be be unwilling or unableunwilling or unable to purchase the to purchase the
product.product.When the price of the product decreases, When the price of the product decreases,
more people will be more people will be willing and ablewilling and able to to purchase the product.purchase the product.
Demand and Supply CurvesDemand and Supply Curves
$0$1$2$3$4$5$6$7$8$9
$10
3 6 9 12
Surplus
Shortage
Supply Curve
Demand Curve
Price in Dollars
Quantity in Millions
Equilibrium Point
Equilibrium Price
Increases in SupplyIncreases in Supply
2 4 6 8 10
2
4
6
8
10
Supply
Demand
New Equilibrium Point
Quantity Demanded
Pric
e
Surplus
Original Equilibrium Point
Decrease In SupplyDecrease In Supply
2 4 6 8 10
2
4
6
8
10
Quantity Demanded
Pric
e
Supply
Demand
New Supply
Curve
New Equilibrium Point
Shortage Original Equilibrium Point
Surplus
Decrease in DemandDecrease in Demand
2 4 6 8 10
2
4
6
8
10
Quantity Demanded
Pric
e
Demand
Supply
Demand
New Equilibrium Point
Original Equilibrium Point
Increase in DemandIncrease in Demand
Demand
2 4 6 8 10
2
4
6
8
10
Supply
Quantity Demanded
Pric
e
Demand
Original Equilibrium Point
New Equilibrium Point
Shortage
3 Major Factors affecting Elastic 3 Major Factors affecting Elastic DemandDemand
The substitution effect The substitution effect The greater the number of substitutes for a The greater the number of substitutes for a
good, the greater the elasticity.good, the greater the elasticity. Degree of necessityDegree of necessity
If a product is absolutely necessary, it will be If a product is absolutely necessary, it will be less elastic.less elastic.
If a product is a luxury, it will be more elastic.If a product is a luxury, it will be more elastic. Proportion of incomeProportion of income
The greater the proportion of income the good The greater the proportion of income the good requires, the more elastic it will be.requires, the more elastic it will be.
Determining ElasticityDetermining Elasticity What is a good that has many substitutes?What is a good that has many substitutes? When the price of one good goes up, what When the price of one good goes up, what
happens to the demand of the others?happens to the demand of the others? What would happen to the demand curve of the What would happen to the demand curve of the
original good?original good? What would happen to the demand curve of the What would happen to the demand curve of the
substitute good?substitute good? What are some examples of an inelastic good that What are some examples of an inelastic good that
is a necessity?is a necessity? What is an inelastic good that is not a necessity?What is an inelastic good that is not a necessity?
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