Chapter 21

Law of

Supply and Demand

Demand

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

DEMAND

Demand

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…

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… Increases in income leads to an increase in

demand Less income means less demand

Factors Affecting Demand

3) Changes in consumers’ taste… 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… 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… 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… 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

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

Inelastic Demand-A change in price has little effect on demand Demand for turkey at Thanksgiving Occurs when there are few substitutes ex:

medicine Inexpensive item also have inelastic demand

Supply

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

SUPPLY

Supply

Law of Supply-As the price increases, the amount that a producer is willing to supply will also increase

Profit Motive

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

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 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

2) Changes in taxes 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 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

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 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

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

Factors Affecting 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

Surplus-The amount by which quantity supplied is higher than the quantity demanded 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

Shortage-the amount by which the quantity demanded is higher than the quantity supplied The price is too low Price must rise to maximize profit

Equilibrium Price

Equilibrium Price-When the quantity demanded and the quantity supplied are equal This is where maximum profits are found Will stay there until some factor changes

Price Controls

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) 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 Favor neither the producer or consumer Competition forces both sides to compromise

on a fair market value

2) Prices are flexible 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

questions3) Prices are familiar We use them everyday, we understand them We can compare unrelated goods

4) Prices give us freedom of choice Allows producers to make a wide range of

products at various prices Gives all opportunities to get involved in the

economy