Transcript Supply and Demand

Supply and Demand
Chapter 5
You’re Deman(d), David Cook!
• How does winning American Idol effect
supply and demand?
•
http://www.youtube.com/watch?v=iANuTVi2FcI
• Ticket prices, appearances, t-shirts, etc.
How Do Demand and Price
Interact?
• Would you buy it for:
– 399.99?
– 299.99?
– 199.99?
• What are we WILLING and ABLE to buy?
– Buying one Nintendo Wii at 299.99 is your
quantity demanded
» You were WILLING and ABLE to buy it at 299.99 as
opposed to 399.99 (Perhaps you were willing but not
able)
What About Competition?
• What if a different store sells the Wii for
199.99?
• Selling 10 units at 199.99 = quantity demanded
• What will happen to the store that sold one unit for
299.99?
– Demand:
» What happens to price after many units have been
sold?
The Usage of a Demand Schedule
• Demand Schedule: Visual of what one
person will buy at various prices
(ceteris paribus)
• Demand Curve: Shows the relationship
between price and the quantity buyers are
WILLING and ABLE to buy
– i.e. the cheaper a something is, the more consumers are
going to buy of it
Why 
Market Demand
• M.D. - Medical Doctor
• Market Demand: sum of all individual
quantities demanded in a market
• When refer to demand, generally it is market demand; how often do we care
about ONE guy buying tacos?!?!
» Usually there is a clear relationship between price
and demand.
» Exceptions to the rule?
The Law of Demand
• This is the strongest of economic
relationships:
• Price goes up / Demand goes down
• Price goes down / Demand goes up
• INVERSE RELATIONSHIP
• Why do they move in opposite directions?
– Well, I’m glad you asked…
The Reasons
• 1. The law of diminishing marginal utility
» Consuming just one more…
» The Dave Matthews Band
• 2. The income effect
» People only have so much money
• 3. The substitution effect
» People will substitute cheaper goods
• Only a change in price causes a change in
quantity demanded
– Ahhh…but what about the tipping point?
What Can Cause Demand To
Change?
• 3 Scenarios For a Hot Dog Stand –
– A Carnival
– A Blizzard
– Hot Dogs Cause Cancer
Graphing Changes in Demand
• When quantities demanded increase or
decrease at EVERY PRICE…
– Shift to the right…
– Shift to the left…
What does this show??
• There are 6 DEMAND SHIFTERS…
Demand Shifters
• 1. Changes in income…
– With more money, we buy more things
» Conservative v. Liberal outlook
• 2. Changes in the number of consumers…
– Summer resort towns
» What other examples are there?
• 3. Changes in taste and preference…
– We do not buy the same products year after
year
» Sushi
Demand Shifters
• 4. Changes in Consumer Expectations
– Expectations of price changes
» It’s going to go on sale next week… (NFM)
• 5. Changes in the Price of Substitutes
– Substitute goods may cost less
» DVD’s / Movie Tickets
• 6. Changes in the Price of Complimentary
Goods
– Consumed with other goods
» Video game systems and games
How Do Supply and Price Interact
• The lower the price, the fewer goods the
producer is willing to sell
– Quantity Supplied: the amount of a good
or service producers are willing and able
to offer for sale at a given price
• Supply is usually expressed in a time
period (such as weeks or months)
Supply Schedule
• As price increases, so does the amount of
(x) someone is willing to sell
• From a supply schedule, you can create
a supply curve
» Supply curves are the inverse of demand curves
• Market Supply:
The Law of Supply
• Direct Relationship
• Why do they move in the same direction?
• 1. Production decisions by existing producers
» “strike while the iron is hot” (revenue)
• 2. Market entries and exits
» Producers will react in predictable ways
» Changes in quantity supplied
What Can Cause Supply to
Change?
• Changes in the cost of inputs
• Cost of factors of production
• Profit is the key to success (duh)
• Changes in the number of producers
• Producers enter a market when they think there is a profit to
be made
» Personal music devices
• Changes in conditions due to natural
disasters or international events
» A cold snap in Florida
» Civil War in African countries
Supply Shifters Con’t
• Changes in Technology
• This would probably cause a reduction in
production cost
» Robots building cars
• Changes in Producer Expectations
• Make decisions based on the rise and fall of
price of certain goods
» Farm prices
• Changes in Government Policy
• Subsidy / Excise Tax