Transcript Chapter 21- Demand and Supply

Chapter 21
Law of
Supply and Demand
Demand
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Demand- The desire, willingness, and the
ability to buy a product
Demand Schedule- A table that lists the
various quantities of a product or service
someone is willing to buy over a range of
prices
Demand Curve- A graph that shows the
amount of the product that would be bought
at all possible prices on the market
D
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D
Demand
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Law of Demand- As price increases,
demand decreases or as price decreases,
demand increases
Utility- The pleasure, usefulness, or
satisfaction from a product
Diminishing Utility- Additional utility
decreases the more we get
Factors Affecting Demand
1) When there is a change in the number of
consumers…
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More consumers increases demand
Less consumers means less demand
Affected by birthrate, disease, war, migration,
and immigration
Factors Affecting Demand
2) Changes in consumers’ income…
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Increases in income leads to an increase in
demand
Less income means less demand
Factors Affecting Demand
3) Changes in consumers’ taste…
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More popular a product the more demand
The “must buy” of a season
Advertising is the key
Factors Affecting Demand
4) Changes in consumers’ expectations…
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If afraid the economy will decline, demand
decreases
If the economy is good, people buy more
Demand is affected when people wait for new
technology
If people expect shortages, they stock up
increasing demand
Weather issues can affect demand
Factors Affecting Demand
5) Changes in Substitutes…
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A substitute is a competing product
If price for the competition drops, demand for
that product will also drop
Newer or better competition will also lower
demand
Factors Affecting Demand
6) Changes in complements…
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A complement is a product that is used with
another product
Ex: game systems and games, peanut butter
and jelly
If the demand for one increases, the demand for
the other also increases
Demand Elasticity
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Demand Elasticity-The extent to which a
change in the price of a product causes a
change in the demand
Elastic Demand-A change in price causes a
large change in the demand
 Ex: a sale on a car will cause a large change in
demand
 Happens when there is an attractive substitute
 Expensive items
 When the purchase can be put off till later
Demand Elasticity
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Inelastic Demand-A change in price has little
effect on demand
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Demand for turkey at Thanksgiving
Occurs when there are few substitutes ex:
medicine
Inexpensive item also have inelastic demand
Supply
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Supply-The various quantities of a good or
service that producers are willing to sell at all
possible prices. This is the opposite of
demand.
Supply Schedule-A table that lists all the
various quantities supplied by producers at all
given prices
Supply Curve-A graph that shows the
amount of a product that would be supplied at
all available prices
S
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P
P
L
Y
Supply
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Law of Supply-As the price increases, the
amount that a producer is willing to supply
will also increase
Profit Motive
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Profit Motive-The driving force that encourages
individuals and organizations to increase the
material well being
 Businesses invest time, $, and capital in order to make
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even more $
To cover costs they must charge more for the product that
it cost them to make it.
Always are trying to make a profit-the $ left over after all
expenses are paid
May use profits to increase worker salaries or hire new
workers
May invest in new equipment or supplies
May simply keep it for themselves
Factors Affecting Supply
1) Changes in the cost of raw materials
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As prices for raw materials increases, the
amount supplied will decrease
As the prices of raw materials drop, more will be
supplied, probably at the same price
Factors Affecting Supply
2) Changes in taxes
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An increase in taxes will decrease the supply as
it will increase the production cost of that item
A decrease in taxes in taxes will increase the
supply
Factors Affecting Supply
3) Productivity
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The more efficient the production process is, the
more that will be supplied
If production costs increase, then less will be
supplied
Factors Affecting Supply
4) Changes in technology -the methods or
processes used to make goods and
services
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Technology can speed up the production
process increasing the supply
Can also cut production costs which also
increase supply
EX: Scanners at store, quicker check outs plus
they can track inventory more accurately
Factors Affecting Supply
5) Changes in government policies
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Stricter government regulations increase
production costs and lower supply
Looser government regulations decrease
production costs and increase supply
Laws that increase wages also increase
production costs and lead to a decrease in
supply or to a workers being laid off
Factors Affecting Supply
6) Changes in government subsidies -a
payment to an individual or group for certain
actions
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Ex: Government pays farmers $2 for every
bushel of corn they produce, this lowers
production costs, encourages farmers to stay in
the market, and also encourages new farmers to
enter the market, thus increasing the supply
If subsidies are repealed, production costs go up
and supply goes down
Government may also pay producers not to
produce a product, thus lowering the supply
Supply Elasticity
Supply Elasticity-The measure of how the quantity
supplied of a good or service changes in response to
changes in price
 Big changes in supply are said to have elastic supply
 If changes in price have little affect on supply, supply
is inelastic
 All depends on how quickly a producer can adjust
their production process
 Ex: Oil production is inelastic because it can’t be
changed quickly to adjust to the market (they can’t find
a new site, dig a new well, or build a new refinery)
 Ex: Candy is elastic since they production process can
quickly be changed to meet an increase in demand
(put on another shift, hire more workers, start a
second production line)
Supply and Demand at Work
Surplus
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Surplus-The amount by which quantity
supplied is higher than the quantity
demanded
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Means that the price is too high
People are unwilling or unable to pay in enough
numbers to make producers happy
Sellers must lower their price or find incentives to
increase sales
Shortage
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Shortage-the amount by which the quantity
demanded is higher than the quantity
supplied
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The price is too low
Price must rise to maximize profit
Equilibrium Price
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Equilibrium Price-When the quantity
demanded and the quantity supplied are
equal
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This is where maximum profits are found
Will stay there until some factor changes
Price Controls
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Price Controls-When the government sets
the price of a product to ensure a fair price (a
price that does not favor producers or
consumers)
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May be a price ceiling-a max that producers may
charge. EX: A landlord may charge only up to a
certain price for rent
May set a price floor-a minimum price that can
be charged. EX: minimum wage for workers
Advantages of Prices as a way to answer
the basic economic questions
1) Prices are neutral
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Favor neither the producer or consumer
Competition forces both sides to compromise
on a fair market value
2) Prices are flexible
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Allows us to react quickly to unforeseen events
Can quickly get back to normal after unexpected
price “shocks”
Advantages of Prices as a way to answer
the basic economic questions
3) Prices are familiar
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We use them everyday, we understand them
We can compare unrelated goods
4) Prices give us freedom of choice
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Allows producers to make a wide range of
products at various prices
Gives all opportunities to get involved in the
economy