Demand/Supply Curves and Elasticity

Mucho Importante in Economics…the basis of it all!!!!(pgs 57-68, Krugman)

12.1 Students understand common economic terms and concepts and economic reasoning.

12.2 Students analyze the elements of America's market economy in a global setting.

Supply and Demand in a Competitive Market Competitive Market: Market with many buyers and

sellers of the same good or service No individual has any influence

Supply and Demand Model Physically shows market behavior Key elements in Supply and Demand Model

The demand curve The supply curve Factors that cause curve to shift (“shifters”) Equilibrium Price Changes in Equilibrium price when demand or supply

shift

Supply and Demand Model

The Demand Curve

The higher the price, the fewer people who want to buy the good or service

The lower the price, the more people who want to buy the good or service

Demand Schedule: table that shows how much of good or service consumers will buy at different prices

The Demand Curve Model

Plot the Demand Schedule Vertical Axis is always price Horizontal is always quantity demanded

Law of Demand Curve slops downward: reflects the principle that a higher price

reduces the number of people willing to buy a good or service…”able and willing”

Exceptions Giffen Good (with increase in price, demand would not fall)

Primarily seen with the poor – potatoes and rice

Veblen Good (demand stays the same or more as prices go up)

“Snob effect”

Shifts in the Demand Curve

Different factors affect shifts in the quantity demanded Graph curve shifts right or left depended on

the effect of the factor Difference btw “movements along the curve”

vs “shifts” Decrease in demand = left Increase in demand = right

Factors that Contribute to a Demand Shift Changes in the price of related goods

Substitutes (purchase instead, alternate) Complements (goods consumed together)

Changes in income “normal” goods vs “inferior” goods (cars vs. busses)

Changes in tastes Preferences (fads, fashion)

Changes in expectations Sales after Christmas

Demand curve relies on “all things being equal”

The Supply Schedule

Higher the price offered, the more willing to sell…”quantity supplied”

Supply Schedule

Supply Curve

How much of a good or service people are willing to sell at any given price

Supply “Shifters”

Change in the quantity supplied at any given price Movements along the supply: change in the quantity supplied of a good

that is the result of a change in that good’s price

Shifts of the supply curve: change in input prices, technology, expectations

Supply, Demand, and Equilibrium

Determines the price of a good or service markets move toward equilibrium

When the price has moved to a level at which the quantity demanded equals the quantity supplied

Equilibrium price or market clearing price: every buyer willing to pay that price finds a seller willing to sell at that price

Shortages and surpluses?

Role of Prices in a Mixed Economy (the United States for instance) Prices provide incentive for firms and workers

to produce Prices give markets flexibility to respond to

changing conditions Prices guide scare resources to their most

efficient uses

Government Intervention in Markets

Price controls when too high for consumers or too low for producers Price floor: Prevents prices from going too

low, ex. minimum wage

Price ceiling: Prevents prices from going to high, ex. rent control

Rationing and the Black Market

Rationing: controlled distribution of a limited supply of a good or service

Black Markets: goods are traded at prices or in quantities higher than allowed by law.

Supply/Demand and Markets Vocabulary Competitive market Demand Schedule Supply Schedule Demand Curve Supply Curve “Shifters” (both Demand and Supply) Equilibrium Shortages and Surpluses Mixed economy Price ceiling Price floor Rationing Black Market