Transcript Supply and Demand

Teach a parrot the terms "supply and demand" and
you've got an economist.”Thomas Carlyle
Microeconomics
 Looks at how individuals and small companies act and
make decisions.
Demand
 Demand is the different amounts people will purchase
at all prices.
 There are three elements needed in order for demand
to take place:
 A person must want to purchase the product.
 A person must have the money or ability to purchase the
product.
 A person must be willing to spend money on the
product.
Price
Number of
drinks
demanded
$.50
1,000
$.75
800
$1.00
600
$1.25
400
$1.50
200
Demand Schedule
Demand schedules show prices and quantities
demanded at each price.
Demand Curves
 Illustrates the information contained in the demand
schedule.
 Demand curves slope downward from left to right.
 Demand curves show the quantity demanded for a
certain product by an individual.
 Market Demand curves show the quantity demanded
for everyone interested in buying the product.
Law of Demand
 An Economic principle that states as the price drops
consumers purchase more, as the price rises,
consumers purchase less.
Change in Quantity Demanded
 A change in quantity demanded occurs when there is a
change in price.
 The demand curve does not move, the amount
demanded moves along the demand curve.
Change in quantity demanded
There are two basic causes for a change in quantity
demanded:
1.
Income Effect-a change in price that alters real
income. Example:
2. Substitution Effect-relative price of the product.
Example:
Change in Demand
Sometimes something other than price causes demand
as a whole to increase or decrease.
A change in demand results in a new demand curve
shifted right or left.
shift to right demand increases
shift to left demand decreases
D3
D1
D2
Five factors affect product demand
1. Consumer income
normal vs. inferior goods
2. Consumer tastes
3. Substitute /complimentary goods
4. Change in expectations
5. Number of consumers
Utility/marginal utility
 When a person purchases a product, the person thinks
about how much use or satisfaction (utility) he/she
will get out of the product.
 Marginal Utility-extra usefulness satisfaction one gets
from one more unit of the good. Example:
 Diminishing marginal Utility-the more units of a good
one has, the less eager they are to buy more. Example:
Elasticity-The measure
of how much a change
in the price will affect
how much a person will
purchase.
Elastic Demand-a small
change in price causes a
large demand change.
Example:
Inelastic Demandpeople want the same
amount at higher or
lower prices.
Example:
.
Determinants of Demand Elasticity
 Can the purchase be delayed? Is it necessary right
now?
 Are substitutes available?
 Is a large portion of income used?
Exceptions to the Law of Demand
Paradoxical Demand
Consumers demand more
when its price rises,
and lower in demand
when the price falls.
This applies to consumer
who consider the good
“essential.”
 As its price increases, the
consumers have to spend a
greater portion of their
income to maintain the
same level of consumption.
Since they cannot now
afford the more expensive
substitutes, they end up
buying more of the same
good. The opposite
happens when its price
falls
Exceptions to the Law of Demand
 Personalization Fallacy—Someone will purchase the
items even if you won’t.
Time Period Misunderstanding
 Items were cheaper
in 1970 than today.
But, you must
compare the
percent of income
spent on the item
or convert to
current dollars.
Cost of a new home: $26,600.00
Median Household
Income: $8,734.00
Cost of a first-class stamp: $0.06
Adjusted for inflation-$.33
Cost of a gallon of regular gas: $0.36
Adjusted for inflation-$1.98
Cost of a dozen eggs: $0.62
Adjusted for inflation -$3.40
Cost of a gallon of Milk: 1.15
Adjusted for inflation-$3.41
Exceptions to the Law of Demand
 Prestige purchases
 Demand stays the same no matter what the price.
These items are rarely if ever on sale.
 Example: Rolex Watches
Say’s Law
 Say's law states that supply creates its own demand
and over-production is impossible.
Supply
Supply is the amount of a product produced at all prices.
We are now shifting focus and looking at the producers
or the supply side of the economy.
Law of Supply
A microeconomic law stating that, all other factors being equal, as
the price of a good or service increases, the quantity of goods or
services offered by suppliers increases and vice versa.
Producers supply more at a higher price because selling a higher
quantity at a higher price increases revenue.
Time is a factor. So it is important to try and determine whether a
price change that is caused by demand will be temporary or
permanent.
Supply Schedule
 A Supply Schedule
is a list of different
amounts of a
product that the
manufacturer
supplies at all prices
that are possible.
Price
Number of drinks
supplied
$.50
200
$.75
400
$1.00
600
$1.25
800
$1.50
1000
Supply Curve
A supply curve is a graphic
representation of supply.
Supply curves slope upward
from left to right.
Supply Curve
S1
Change in Quantity Supplied
This occurs when a change in price brings a change in
the quantity offered for sale.
The supply curve does not move, the price changes along
the curve.
Change in supply
This occurs when the supply curve shifts left or right.
S3
S1
S2
Factors causing a change in supply
Cost of imputs(materials)-changes in cost of land,
labor and capital.
2. Productivity of workers   --are workers happy or
unhappy?
3. Technology-new technology increases production.
4. Number of sellers
1.
More increase supply
2. Less decrease supply
1.
Factors causing a change in supply
5. Taxes and subsidies-money is diverted to taxes can
increase or decrease supply.
6. Expectations-companies stockpile goods, can
increase prices. Sudden demand can decrease supply
and cause shortages.
7. Government regulations-more regulations can
decrease supply as time/money is diverted to meet
regulatory requirements.
8. Unforseen or acts of nature-hurricanes, fire,
flooding, war can impact supply. These are beyond
the control of business.
Elasticity of Supply
 Elasticity measures how quantity supplied responds to
small price changes.
Elastic supply-producers can increase output without a
rise in cost or a time delay
Inelastic-firms find it hard to change production in a
given time period
Elasticity of Supply
 Stocks in a warehouse –
businesses with plentiful
stocks can supply quickly and
easily onto the market when
demand changes
An empty restaurant –
plenty of spare
capacity to meet any rise
in demand!
Supply and Demand
Price
Number of drinks
demanded
Number of drinks
supplied
$.50
1,000
200
$.75
800
400
$1.00
600
600
$1.25
400
800
$1.50
200
1,000
Supply and Demand determine
prices
 Market Equilibrium is the
situation where quantity
demanded=quantity
supplied.
 Shortages occur when
quantity supplied is less than
quantity demanded.
 Surpluses occur when
quantity supplied is greater
than quantity demanded.
 The equilibrium or market
clearing price reflects neither
a surplus or shortage.
 Market equilibrium
Theory of Production
 Theory of production relates the factors of production
to goods and services produced.
Short Run-brief production period.
Example: Easter Candy production
Long Run-long enough to adjust to resource availability.
Example: Imported raw materials for chocolate is
more expensive for Hershey.
Business Costs
 Fixed costs are what a
 Variable costs can change
business has to pay monthly,
ususally the fluctuate very
little monthly
 Examples include rent.
monthly.
 Examples include utilities,
raw materials, shipping costs.
Business Costs
 Expansion costs change as the
 Sunk costs are unrecoverable
amount of locations increase.
 Example- a factory expansion
to another city.
past expenditures.
 Example-new computer
software, new computers.
E-commerce
Doing business over the
internet creates lower fixed
costs for businesses.
This does not mean that all
costs are cheaper.
Break even point
 Total revenue(TR)=total costs(TC)
The point above the break even point is when a business
will start to show a profit.
Prices as signals
 Price is the value of a product
in money. Prices are flexible
as they react to the market.
 Rationing is an alternative to
pricing. Persons receive
coupons for a set amount of a
good.
 A rebate is a price reduction
in the form of a coupon,
refund of purchase price.
Pricing
 Price Ceiling is the maximum legal price.
 Price Floor is the lowest legal price.
 Loss Leader is an item priced below cost to attract
customers.
 Target price is a price floor for farm products.
Review- Supply and demand
 Shifting curves
 Market equilibrium