Transcript Demand Curves / Supply Curves & Equilibrium

SUPPLY, DEMAND AND
PRICE
Unit 1 –
Topic 1 .2
SUPPLY, DEMAND AND PRICE: REVIEW
Supply
 The quantity (amount)
of a good or service
that producers can
provide
 determined by the
costs of producing it
and by the price
people are willing to
pay for it
Demand
 The quantity of a good
or service that
consumers are able
and willing to buy
SUPPLY, DEMAND AND PRICE:REVIEW
Law of Demand
Law of Supply
 The economic principle that
demand goes up when
prices goes down; and,
conversely, comes down
when prices go up
 The economic principle that
supply goes up when prices
goes up; and, conversely,
comes down when prices
come down

SUPPLY, DEMAND AND PRICE:REVIEW
 Relating Price to supply and demand
 If demand is high while supply is low, prices tend to be high
 If demand is low while supply is high, prices tend to be low
 When the quantity of goods that a producer is willing to supply at a
certain price matches the quantity of goods that consumers are
willing to buy at that price, then the equilibrium price has been met
the diag

Why would there be a shortage and surplus as indicated in
diagram?
LAW OF DEMAND
Law of Demand says that as the
price of an item decreases, the
quantity demanded will increase;
and, as the price of an item
increases, the quantity demanded
will decrease
The quantity demanded varies
inversely with the price
DEMAND CURVE
Demand Curve is a line graph that shows the amount
of a product that will be purchased at each price; it shows
an inverse relationship and is always
D
Qd
downsloping
REMEMBER:
A change along the curve
indicates a change in price and a
change in quantity demanded
A change of the curve (right or
left) indicates an across the
board change in demand
SUPPLY
Supply is a schedule which shows the
amounts of a good or service a producer
is willing and able to make available at
each price during a specified time period
Law of Supply states that the quantity of
a commodity supplied varies directly with
its price: the number of goods and
services offered for sale increases as the
price increases.
SUPPLY CURVE
 Supply Curve will always be upsloping.
S
Remember………..
A change along the curve indicates
a change in price and a change in
quantity supplied
A change of the curve (right or left)
indicates an across the board
change in supply
EQUILIBRIUM PRICE
Equilibrium Price (also called the
Market price) is the price at which
goods and services may actually be
bought and sold.
Equilibrium Price is where quantity
demanded is equal to the quantity
supplied
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EP
D
SUPPLY AND DEMAND GRAPHS
 Develop both a demand and supply graph using the
information provided on your handout
SUPPLY, DEMAND AND PRICE
 Okay, now it may get a wee bit confusing…
SUPPLY, DEMAND AND PRICE
Elasticity:
 How sensitive consumers are to a change in price
 How much less will they buy if prices are raised?
 How much more will they buy if prices are lowered?
SUPPLY, DEMAND AND PRICE
 Consider the following situation:
- Medication for high
Blood Pressure
- You need 30 pills
per month
- Will the price have
any effect on what
you will purchase?
- Let’s see!
SUPPLY, DEMAND AND PRICE
 Consider the following situation:
- You have an
unhealthy habit of
eating 30 Twix bars
per month
- Will the price have
any ef fect on what
you will purchase?
- Let’s see!
SUPPLY, DEMAND AND PRICE
Elastic vs Inelastic
Elastic - A good or service is elastic if a slight
change in price leads to a drastic change in
the quantity demanded or supplied
E.g. Going to the movies, vacations, soda
pop, tvs, luxury goods
Rule of thumb - We can do without if price
rises
 *Quantity = amount
SUPPLY, DEMAND AND PRICE
 Elastic vs Inelastic
Inelastic - inelastic good or service is one in
which changes in price experience only small
changes in the quantity demanded or supplied
E.g. Gas, life saving surgery, medications, drugs,
cigarettes, necessity goods
Rule of thumb – Will be purchased regardless
of price changes
 *Quantity = amount
SUPPLY, DEMAND AND PRICE
 Inelastic goods/ser vices may be characterized by:
 Less flexible – not as many options
 No good substitutes
 Lack of choices
 Necessity
 Cultural
 Cannot live without
 Inexpensive
 Elastic goods/ser vices may be characterized by:
 Flexible – If prices of plasma TVs increase, you may still purchase
an LED TV
 Perceived substitutes
 Many choices
 Can learn to live without
SUPPLY, DEMAND AND PRICE
 Are the following goods or services elastic or inelastic?
 Designer shoes?
 Game consoles?
 Computers?
 Earrings?
 Engagement rings?
SUPPLY, DEMAND AND PRICE
 The more inelastic:
 Small changes in supply impact price a lot (Hurricane in Gulf of
Mexico may stunt oil supply temporarily – gas can shoot up in price)
 The more prices change (there is little consequence, it will still be
bought)
 Remember Law of Demand: if prices go up, demand goes
down. However, if prices go up and demand goes down only a
little bit – this is what we call an inelastic demand
 E.g. We’re still buying lots of gas!
 This is why you can see extra taxes on these products Link
SUPPLY, DEMAND AND PRICE
 Inelastic: Price and Revenue
 Inelastic demand – There is a positive relationship
between price and total revenue
 An increase in price increases total revenue
 A decrease in price decreases total revenue
SUPPLY, DEMAND AND PRICE
 Elastic: Price and Revenue
 Elastic demand – There is a negative relationship
between price and total revenue
 An increase in price decreases total revenue
 A decrease in price increases total revenue
How can consumers respond to price
increases for goods and services?
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Purchase less.
Use a cheaper substitute.
Delay the purchase.
Do not purchase.
Competition – when two or more businesses
try to sell the same type of product or service
to the same customer.
Direct Competition – is between similar
products.
Indirect Competition – is between goods or
services that are not directly related to each
other.
What happens when competition enters the
marketplace?
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Gives consumers more choice.
May reduce prices.
Forces businesses to be more efficient.
Improves customer service.
May force businesses out of the
marketplace.