Supply and Demand

Knowledge of Terms

• Consumer = person who uses a good or services or buys a good or services

• Producer = provides goods and services• We are all consumers and producers• You do not have to profit to be a producer….you are

a producer if you wash dishes at home. However, in economics the producers are most often seeking a profit.

• Medium of Exchange = what is accepted as payment – in the U.S. our medium of exchange is MONEY

What is Demand?

• DEMAND = the desire to have a good or service, AND the ability to pay for it.

• Demand DOES not mean simply wanting something.• The Law of Demand - • As Price Goes , Quantity Demanded Goes

• As Price Goes , Quantity Demanded Goes

• Meaning that if the price is lower, then consumers will DEMAND more : ) But when the price go higher, consumers will DEMAND less

Why does this happen

• Two reasons effect our purchasing• Substitution Effect = When prices of one item rise,

you are more likely to substitute another good/service in its place.

• Example –You usually buy Coke product, but Coke has now started charging 3.50 for a 20oz drink instead of a 1.00, but another soda brand still charges a 1.00 for a 20oz drink – most people would forgo buying coke and substitute the other brand or you would CUT DOWN on how many Cokes you bought.

Why does this happen

• The other reason is known as• Income effect = As prices increase, but your

income does not, you’re forced to make cutbacks . This results in less quantity demanded – The opposite can also occur, if prices fall, you feel wealthier and are more likely to purchase more

• ECONOMISTS MEASURE consumption by how much you bought, not how much you spent

Understanding Demand

• Just because you WANT a good/service, doesn’t mean you demand it. Demand relates to what you are actually willing and able to purchase at a given price – you may want a car, but in reality you cannot afford it, therefore there is no demand for the car

• A DEMAND SCHEDULE = a table that lists the quantity of a good a person is willing to purchase at each price in the market

Demand ScheduleIndividual Demand for Coke

Price of One 20oz Coke Quantity Demanded per day

$0.75 6

$ 1.00 5

$ 1. 25 4

$1. 75 3

$ 2. 25 2

$2. 50 1

$ 3.00 0

Demand Curve

• Demand Curves ALWAYS slope Down and to the right ( D & R)

• Demand Curves are a result of plotting the Demand Schedule – Label these curves as D for Demand – Price is always Vertical and Quantity is always horizontal

Reading the Curve

• ONE KEY POINT TO NOTE – the curves DO NOT include any other facts other than Price and Quantity Demanded – so we assume that all other factors remain constant – like income and substitution

• Also, keep in mind business are more concerned with the market as a whole and not just the individuals demand – they would use a Market Demand Curve/Schedule

Supply

• Supply = The amount of goods available• LAW OF SUPPLY = how the producers decide how

much the will supply• Law of Supply says • As price goes ,Quantity Supplied goes • • As price goes , Quantity Supplied goes

Meaning producers will produce more if the profit motive is higher and less if the profit motive is lower

Why does this happen

• Profit motive / incentive• As profit decreases, producers may decide to

stop producing all together, leading to an overall decrease in supply for the product

• IF the producer lowers price, his profits decrease and he may decide to substitute other products

Supply Schedule

• Show the relationship between price and quantity supplied

• Supply schedules are very difficult to do for just one person – so they are typically shown for the Market or firm as a whole

Teddy Bear Company

Price for a two foot teddy bear

Quantity Supplied

$5 20 $10 40 $20 100 $30 150 $ 50 300

Supply Curve

• Supply Curve ALWAYS slopes Up and to the right ( s UP ply has UP )

• Supply Curves are a result of the Supply Schedule – label curve as S for supply – Price is vertical and quantity supplied is horizontal

Demand Curves v. Shifting• A demand curve represents change in QUANTITY Demanded

based off of price change alone – ceteris paribus = all other things remain constant

• But what happens if there is a change in outside factors – like a report that states chewing gum makes you live longer – this would lead to a change in overall DEMAND at all the given prices – this causes the entire curve to move

• An increase in demand (not QD) causes the entire curve to actually shift RIGHT – creating new sets of data/#’s

• A decrease in demand (not QD) causes the entire curve to actually shift LEFT – creating new sets of data/#’s

• IRDL!!!!!!!• IRDL!!!!!!!• IRDL!!!!!!!

Demand schedule for change in overall Demand (not QD)

Original Demand

Price of 1 pack of Chewing Gum

Quantity Demanded in a week

New Demand after report

Price of 1 pack of Chewing Gum

Quantity Demanded in a week

. 25 20 . 25 35

. 50 17 . 50 28

. 75 12 . 75 23

1.00 10 1.00 17

1.25 8 1.25 12

1.50 5 1.50 8

1.75 2 1.75 5

Why the shifts occur• Any given number of factors influence our overall demand –

change in income, consumer expectations, advertising, preferences, population change, popularity, etc – all these factors can cause the overall demand for a good to increase or decrease

• Demand curves can shift based off other goods as well• Compliments – goods that are bought together or necessary for

another good • If the demand for the compliment changes , then so would the

demand for the good• Substitutions – a good that can be used in place of another – if

there is a better substitute, then your overall demand for the original good would shift

Supply Curve v. Shifting

• A supply curve represents change in QUANTITY supplied based off of price change alone – ceteris paribus = all other things remain constant

• But what would happen if the gov’t passed stronger regulations – the cost is too high for the company to continue current production – so they have to cutback at all prices

• An increase in supply causes the curve to shift Right• A decrease in supply cause the curve to shift LEFT

Why do the shifts occur

• Any number of reasons – increase costs of production, new technology, government influence, subsidies (gov’t support $), taxes, regulations

Finding the Equilibrium

• Equilibrium – point of balance between price and quantity

• This is the point where supply and demand come together and create a stable market price

Disequilibrium

• If the market price or quantity supplied is anywhere other than at the equilibrium, then a disequilibrium occurs.

• This leads to EITHER excess demand or excess supply• EXCESS DEMAND – the quantity demanded is higher than

the quantity supplied – this occurs when the price is BELOW the equilibrium

• We also call this a SHORTAGE• If there is excess demand, sellers will raise the price bc

they know consumers want more, but if they raise it too high, this can lead to excess supply

Disequilibrium

• EXCESS SUPPLY – when there is more quantity supplied than there is quantity demanded

• Excess supply happens when the price goes above the equilibrium

• Buyers are no longer willing to buy as much for the higher price

• Also called a SURPLUS

Government Intervention

• The government sometimes has to step in to protect consumers and workers they can set Price Ceilings and Price Floors

• Price Ceilings – a MAXIMUM price that can legally be charge for a good or service

• Price Ceilings ALWAYS fall below the equilibrium• Price Floors – a MINIMUM price that can legally be charge

for a good or service• Price Floors ALWAYS fall above the equilibrium

• Kind of Backwards??????