Supply & Demand: Market Competition
Jan 20, 2016
Supply & Demand: Market Competition
Demand: the desire, ability, and willingness to buy a product
Demand ScheduleiTunes Downloads
Price Quantity Demanded
$5
$2
.99
.50
.10
Law of Demand
The quantity demanded of a good or service varies inversely with its price.
P QDP QD
Think of your favorite food…
Law of diminishing marginal utility
Change in quantity demanded v. change in demand
Change in quantity demanded
What causes a change in quantity demanded?
PRICE
PRICE
PRICE
Change in Demand
People/consumers are now willing to buy different amounts of a product at the same price.
What makes this happen?
Consumer Income
Consumer taste
Price of related goodsSubstitute goods
Complementary goods
Expectations
Number of consumers
1) Consumer Income
When your income increases you can afford to buy more goods at the same price.
When your income decreases you can afford to buy less at the same price.
2) Consumer Tastes
MarketingPopularityFashion trendsNews reportsIntroduction of
new productsChanges in
season
3) Substitute Goods
A change in the price of a related product can cause a change in demand
Butter/Margarine example
Seinfeld Substitute Goods
netflix
4) Complementary Goods
If the quantity demanded for one good increases, then the demand will increase for complementary goods (and vice versa)
5) Change in expectations
Expectations in technological advancements
Expectation of shortages
6) Number of Consumers
An increase or decrease in the number of consumers of a given good changes demand
Analyze the relationship b/w price and quantity demanded
Study the two graphs attached. What information can we gain from the graphs? What trends do you notice?
What do we know about the relationship between price and quantity demanded?
Do you notice any discrepancies between the Law of Demand and the information about US gas consumption and price? What are they?
What do you think might explain this inconsistency?
Elasticity
The extent to which a change in price causes a change in the quantity demanded.
In other words…if the price of a good increases, how much will the quantity demanded decrease?
Elastic DemandA change in price
creates a generally larger change in quantity demanded
Inelastic DemandA change in price
does not create substantial change in quantity demanded
Elastic or Inelastic?
How did you decide?
Can the purchase be delayed?
Are there adequate substitutes available?
Does the purchase use a large portion of income?
The other half of the equation…Supply.
Supply: the amount of a product that would be offered for sale at all possible prices.
The Law of SupplyThe principle that
suppliers will normally offer more for sale at high prices and less at low prices
PQSPQS
Change in quantity supplied vs. change in supply
Change in Quantity Supplied
A change in the amount offered for sale in response to a change in price
Change in Supply
A situation where suppliers offer different amounts of products for sale at all possible prices in the market
What makes this happen?
Cost of InputsProductivityTechnologyTaxes and
SubsidiesExpectationsGovernment
regulationsNumber of sellers
Cost of Inputs
Labor, packaging, shipping, energy costs, etc…
Productivity
Unmotivated, untrained, unhappy employees decreases productivity and vice versa
Google Productivity
Technology
Introduction of a new machine, chemical, or industrial process.
Taxes and Subsidies
Taxes increase cost of production
Subsidies decrease cost of production
Expectations
Expectations about the future price of a product can change supply…if sellers think that the price of their product will go up, they will withhold some of the supply
Government Regulations
Increased government regulations restrict supply
Relaxed regulations increase supply
Number of Sellers
As more businesses and firms enter the economy the number of sellers increases as does supply
Supply Elasticity
Measures the way in which quantity supplied responds to price
Do these goods have elastic or inelastic supply?