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LAW OF DEMAND•Price •Dema

nd As the price of a product

increases, consumers buy less of a product

~~~~~~~~~~~~~~~~~

As the price of a product decreases, consumers buy more of

a product increases

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Quantity Demanded vs. Demand•Quantity Demanded and

Demand sound alike but they are two very different concepts.

•Quantity Demand: The amount of a good or service people are willing and able to buy at a particular price, other things being equal.

•Demand: Demand is the entire schedule

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The Demand Schedule

• A demand schedule is a table that lists the quantity of a good a person will buy at each different price.

Chapter 4, Section 1

• A market demand schedule is a table that lists the quantity of a good all consumers in a market will buy at each different price.Demand Schedules

Individual Demand Schedule

Price of a slice of pizza

Quantity demanded per day

Market Demand Schedule

Price of a slice of pizza

Quantity demanded per day

$.50

$1.00

$1.50

$2.00

$2.50

$3.00

5

4

3

2

1

0

$.50

$1.00

$1.50

$2.00

$2.50

$3.00

300

250

200

150

100

50

2 3• jfWhat is the difference between a market and individual demand

schedule?

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The Demand CurveMarket Demand Curve

3.00

2.50

2.00

1.50

1.00

.50

0

0 50 100 150 200 250 300 350Slices of pizza per day

Pri

ce p

er s

lic

e (i

n d

oll

ars)

Demand

2 3 Chapter 4, Section 1

• A demand curve is a graphical representation of a demand schedule.

• Three characteristics of every demand curve: 1.Downward sloping

2.Must assume ceteris paribus

3.Relationship between price and quantity

• What is the one factor that causes a shift in the quantity demanded?

PRICE!!

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• Movement along the demand curve is a result in a consumer changing their behavior based on a change in price.

• Increase in quantity demanded is demonstrated by moving down the demand curve

• Decrease in quantity demanded is demonstrated by moving up the demand curve

• Why can’t a change in demand from other factors be demonstrated by moving along thedemand curve?

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Shifting the Whole Demand Curve

1. IncomeChanges in consumers incomes

affect demand. A normal good is agood that consumers demand moreof when their incomes increase. An

inferior good is a good thatconsumers demand less of when

their income increases.

2. Consumer Expectations

Whether or not we expect a good toincrease or decrease in price in the

future greatly affects our demand forthat good today.

3. Population

Changes in the size of thepopulation also affects the demand

for most products.

4. Consumer Tastes andAdvertising

Advertising plays an important role inmany trends and therefore

influences demand.

Chapter 4, Section 231What else do you think could influence YOUR demand for a

product?

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Shifting the Curve (cont.)

• Complements are two goods that are bought and used together. Example: skis and ski boots

• Substitutes are goods used in place of one another. Example: skis and snowboards

#5: Price of Related Goods The demand curve for one good can be affected by

a change in the demand for another good.

31

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Shifting the Curve (cont.)• An increase in demand is shown

by moving the demand curve to the right

–What would cause an increase in demand?

• A decrease in demand is shown by moving the demand curve to the left?

–What would cause a decrease in demand?

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

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What Is Elasticity of Demand?

• Demand for a good that consumers will continue to buy despite a price increase is inelastic.

Elasticity of demand is a measure of how consumers react to a change in price.

• Demand for a good that is very sensitive to changes in price is elastic.

Chapter 4, Section 321Why would a prescription drug, like insulin, have inelastic demand for a

person with diabetes?

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Factors Affecting Elasticity

1. Availability of Substitutes

If there are few substitutes for agood, then demand will not likelydecrease as price increases. The

opposite is also usually true.

2. Relative Importance

Another factor determining elasticityof demand is how much of yourbudget you spend on the good.

3. Necessities versusLuxuries

Whether a person considers a goodto be a necessity or a luxury has a

great impact on the good’s elasticityof demand for that person.

4. Change over Time

Demand sometimes becomes moreelastic over time because peoplecan eventually find substitutes.

Chapter 4, Section 321What are some other factors that you feel could impact a consumers response to a change in the

price of a product?

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Market Supply Curve

Pri

ce

(in

do

lla

rs)

Output (slices per day)

3.00

2.50

2.00

1.50

1.00

.50

0

0 500 1000 1500 2000 2500 3000 3500

Supply

Supply CurvesCharacteristics of a

Supply Curve1.Relationship

between price and quantity supplied

2.Always upward sloping

3.Must have ceteris paribus (“all things held constant”) to exist

A market supply curve is a graph of the quantity supplied of a good by all suppliers at different prices

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Price

As price increases…

Supply

Quantity supplied increases

Price

As price falls…

Supply

Quantity supplied

falls

The Law of Supply

According to the law of supply, as price increases, supply increases. By contrast as price decreases, supply

decreases.

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How Does the Law of Supply Work?

Economists use the term quantity supplied to describe how much of a good is offered for sale at a specific price. Just like demand, quantity supplied indicates movement along the supply curve, because ONLY price is being considered (ceteris paribus).

Why do suppliers produce more as the price increases?

1.The promise of increased revenues when prices are high encourages firms to produce more. The more you can make, the more you will produce!

2.Rising prices draw new firms into a market and add to the quantity supplied of a good.

Higher Production + Market Entry = Law of Supply

More $$$$-- More Supply!

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$.50 1,000

Price per slice of pizza Slices supplied per day

Market Supply Schedule

$1.00 1,500

$1.50 2,000

$2.00 2,500

$2.50 3,000

$3.00 3,500

Supply SchedulesA market supply schedule is a chart that lists how much of a good all suppliers will offer at

different prices.

What would an individual supply schedule list?

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Input Costs and Supply

• Any change in the cost of an input such as the raw materials, machinery, or labor used to produce a good, will affect supply.

• As input costs increase, the firm’s marginal costs also increase, decreasing profitability and supply.

• Input costs can also decrease. New technology can greatly decrease costs and increase supply.

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Government Influences on Supply

By raising or lowering the cost of producing goods, the government can encourage or discourage an entrepreneur or industry.

SubsidiesA subsidy is a government payment that supports a business or market. Subsidies cause the supply of a good to increase.

TaxesThe government can reduce the supply of some goods by placing an excise tax on them. An excise tax is a tax on the production or sale of a good.

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Other Factors Influencing Supply

• Number of Suppliers – If more firms enter a market, the market supply of the

good will rise. If firms leave the market, supply will decrease.

• The Global Economy– The supply of imported goods and services has an

impact on the supply of the same goods and services here.

– Government import restrictions will cause a decrease in the supply of restricted goods.

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Elasticity of supply is a measure of the way quantity supplied reacts to a change in price.

Elasticity of Supply

• If supply is not very responsive to changes in price, it is considered

inelastic.

• If supply is very sensitive to changes in price it is considered elastic.

Why can’t I respond to a change in price for trees,

but I can for taxi rides?

Elastic

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Time

What Affects Elasticity of Supply?

Presentation Pro

Essential Questions: Chapter 6

Chapter 6: Prices

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Pri

ce

pe

r s

lic

e

Equilibrium Point

Finding Equilibrium

Price of a slice

of pizza

Quantity demanded

Quantity supplied

Result

Combined Supply and Demand Schedule

$ .50 300 100

$3.50

$3.00

$2.50

$2.00

$1.50

$1.00

$.50

Slices of pizza per day

050 100 150 200 250 300 350

Supply Demand

The point at which quantity demanded and quantity supplied come together is known as equilibrium.

$2.00

$2.50

$3.00

150

100

50

250

300

350

Surplus from excess supply

$1.50 200 200 Equilibrium

Equilibrium Price

a

Eq

uili

briu

m

Qu

an

tity

$1.00 250 150

Shortage from excess demand

Balancing the Market

Supply + Demand = Equilibrium

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If the market price or quantity supplied is anywhere but at the equilibrium price, the market is in a state called

disequilibrium. There are two causes for disequilibrium:

Market Disequilibrium

Excess Demand

• Excess demand occurs when quantity demanded is more than quantity supplied.

• Shortage

Excess Supply

• Excess supply occurs when quantity supplied exceeds quantity demanded.

• Surplus

Interactions between buyers and sellers will always push the market back towards equilibrium.

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Price Ceilings

• A price ceiling is a maximum price that can be legally charged for a good.

• An example of a price ceiling is rent control, a situation where a government sets a maximum amount that can be charged for rent in an area.

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Price Floors

• A price floor is a minimum price, set by the government, that must be paid for a good or service.

• One well-known price floor is the minimum wage, which sets a minimum price that an employer can pay a worker for an hour of labor.

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Prices provide a language for buyers and sellers.

1. Prices as an Incentive

Prices communicate to both buyers and sellers whether goods or services are scarce or easily available. Prices can encourage or discourage production.

2. Signals

Think of prices as a traffic light. A relatively high price is a green light telling producers to make more. A relatively low price is a red light telling producers to make less.

3. Flexibility

In many markets, prices are much more flexible than production levels. They can be easily increased or decreased to solve problems of excess supply or excess demand.

4. Price System is "Free"

Unlike central planning, a distribution system based on prices costs nothing to administer.

Advantages of Prices