economics v. walker how do we make that decision -- are we willing and able? first, are consumers...

SUPPLY AND DEMAND

Economics

V. Walker

DEMAND IS WHATEVER CONSUMERS DECIDE TO BUYHow do we make that decision -- Are

we willing and able?

First, are consumers willing to buy -- do they want it?

Second, are they able –- is it affordable or worth the cost?

DEMAND

Demand = The amount of a good or service that consumers are willing and able to buy at all prices in a given period. i.e. “per day” or “per week”

Quantity Demanded = The amount of a good or service that consumers are willing and able to buy at a SPECIFIC PRICE.

Market Demand = The sum of all individual quantities demanded in a market

when economists talk about demand, they are usually referring to overall market demand.

THE LAW OF DEMAND

Law of Demand states that; as PRICE increases, DEMAND decreases

Price and quantity demanded move in opposite directions – inverse relationship

“most famous law in economics, and the one that economists are most sure of” – David Henderson.

1. A new video game system is released just before Christmas, and everyone's "gotta have it." As parents race to the store to buy the system for their kids, the price throughout December holds steady at $349.99. What do you think will happen to the price in January? …February? …June?

A: Demand will likely decrease; that is, people who have bought the system don't need to buy it again, so fewer potential customers will remain. Consequently, the price should decrease.

2. Local stores sell a fleece jacket for about $50. Sales of the jacket are good, but not great. However, when consumers learn that Lebron James wears this jacket, sales increase. What do you think will happen to the price?

A. Demand increased, so the price will likely go up.

3. When a motorcycle manufacturer announces that it will no longer make its most popular model of bike, what do you think will happen to the price of the bike?

A. Demand has not changed, but the supply has decreased, so the price will probably go up.

4. Mrs. Thomas sells red velvet cookies. They are delicious, and she is the only one in town who makes them. However, when Ms. Brown moves to town, she begins to make cookies, without any difference in quality or taste from Mrs. Thomas’ cookies. What will likely happen to the price of Mrs. Thomas’ cookies?

A. Price should go down, because supply increased.

THE LAW OF DEMAND3 factors that affect consumer

spending – why price and quantity demanded move in opposite directions:

Diminishing Utility – less joy out of one morePeople will buy more, even if there is less utility, but only

for the right price – “Buy three get the fourth free” – do you really need or want four big macs? Maybe. If price is low enough, people may still want to buy that additional item…

Income Effect – people’s money is limited, cannot always buy the same amount at that price.

Substitution Effect – substitute goods that can fulfill the same need – people sub the cheaper good in…e.g. Uggs vs. no-name Ugg-like boots.

DEMAND AND PRICE INTERACTIONS

Demand can be influenced by price – movement along the curve is: Change in the Quantity Demanded.Affects the willingness to purchase a

product

Demand schedules – show quantity that would be purchased at a specific price.

Using this information gives us a Demand Curve (can actually be curved)Shows what people will buy at specific

prices – relationship between price and quantity buyers are willing & able to buy.

GRAPHING THE CHANGESIN DEMAND

Changes in Demand – happen when quantities change at ALL pricesDemand can increase or decrease Always caused by outside factors

Decrease in demand shifts demand curve LEFT Increase in demand shifts demand curve RIGHT

When curve moves it is referred to as a demand shiftPrice does NOT affect this, other factors do!

WHAT CHANGES DEMAND?Demand effected by demand

shiftersAnything that alters what a person

may desireChange in Income

More money, more goods; less money, less goods

Change in # of Consumers – more customers --- or less. Can be a seasonal change. E.g. my home state of RI – swells with tourists in summer; only locals in winter.

Changes in Tastes/Wants – Cravings, fads, etc. Sushi! Advertising plays significant role. Can you think of a good that you wanted due to advertising?

WHAT CHANGES DEMAND?(DEMAND SHIFTERS CONT.)

Changes in Expectations Poor review of a good, govt. report,

regulations…

Change in Price of Substitute Good Movie tickets vs. Redbox, tacos vs burritos…

Change in Price of a Complementary GoodGood that is usually associated with the

other (e.g. tennis rackets & tennis balls; Skis & ski boots; printers & ink cartridges)

GRAPHING DEMANDP

Qo

$5

4

3

2

1

P QD

$54321

1020355580

Price of Tacos

Quantity of Tacos

Tacos Plot the Points

10 20 30 40 50 60 70 80

55

P

Qo

$5

4

3

2

1

P QD

$54321

1020355580

Price of Tacos

Quantity of Tacos

Tacos Plot the Points

10 20 30 40 50 60 70 80

GRAPHING DEMAND

35

P

Qo

$5

4

3

2

1

P QD

$54321

1020355580

Price of Tacos

Quantity of Tacos

Tacos Plot the Points

10 20 30 40 50 60 70 80

GRAPHING DEMAND

P

Qo

$5

4

3

2

1

P QD

$54321

1020355580

Price of Tacos

Quantity of Tacos

Tacos Plot the Points

10 20 30 40 50 60 70 80

GRAPHING DEMAND

P

Qo

$5

4

3

2

1

P QD

$54321

1020355580

Price of Tacos

Quantity of Tacos

TacosPlot the Points

10 20 30 40 50 60 70 80

GRAPHING DEMAND

P

Qo

$5

4

3

2

1

P QD

$54321

1020355580

D

Price of Tacos

Quantity of Tacos

Tacos Connect the Points

10 20 30 40 50 60 70 80

GRAPHING DEMAND

P

Qo

$5

4

3

2

1

P QD

$54321

1020355580

D

Price of Tacos

Quantity of Tacos

Tacos

10 20 30 40 50 60 70 80

What ifDemand

Increases?

GRAPHING DEMAND

P

Qo

$5

4

3

2

1

P QD

$54321

D

Price of Tacos

Quantity of Tacos

Tacos

10 20 30 40 50 60 70 80

D’

Increase

in

Demand

Increase

in Quantity

Demanded1020355580

30406080 +

GRAPHING DEMAND

P

Qo

$5

4

3

2

1

P QD

$54321

1020355580

D

Price of Tacos

Quantity of Tacos

Tacos

10 20 30 40 50 60 70 80

What ifDemand

Decreases?

GRAPHING DEMAND

P

Qo

$5

4

3

2

1

P QD

$54321

1020355580

D

Price of Tacos

Quantity of Tacos

Tacos

10 20 30 40 50 60 70 80

-- 10204060

D’

Decrease

in

Demand

GRAPHING DEMAND

https://americanheritage.byu.edu/Pages/GamesandActivities/Supply-and-Demand-Interactive-Chart.aspx

MARKET DEMAND V. SINGLE DEMAND

Market Demand – includes the sum of all the desired amounts from all those in the marketThe usual reference to demand in an economyDemand Curve – movement along this line known

as – change in market demand

Now…about SUPPLY

SUPPLY AND PRICE INTERACTIONS

While buyers want more at a lower price, sellers do NOT want to sell MORE at a lower price.Sellers want to sell at higher prices, and are

less likely to sell the same amount at lower ones

Quantity supplied – amount of product person is willing to sell at a specific price

Supply – amount of all producers willing to sell at a specific price during a specific timeEx. 315,000 tacos in a week

SUPPLY SCHEDULE AND SUPPLY CURVE Just like demand, we use a supply curve to

show what people are willing to sellSupply curve – shows amount at specific prices

Market Supply – sum of all suppliers at a price

GRAPH THIS INFORMATION

WHAT THE GRAPH SHOULD LOOK LIKE

Graph should take the sum of all 3 taco

places and place them at the specific prices they want to sell at

WHAT CAUSES SUPPLY TO CHANGE? Multiple reasons for

changes in supplyVery similar to changes in

demandCalled supply shifters

Graphing Shifts in Supply Curveshifts in quantity caused by

numerous things decrease in supply shifts the

curve left increase in supply increases

supply to the right

WHAT ARE THE SUPPLY SHIFTERS Changes in the cost of inputs

when factors of production price increases/decreases, supply curves will shift

Changes in the number of suppliers the more people there are the higher the

supply numbers and visa versa Changes due to natural disaster or

international eventsmajor events such as this can decrease

supply greatly Changes in technology - can increase

supply by increasing productivity

WHAT ARE THE SUPPLY SHIFTERS

Changes in producer expectations If market price is low, producers may

purposely limit the supply to get a higher price

Changes in government policyCan affect in two different ways

Subsidies – cash payments to help producers Happens with US farmers. Govt pays them NOT

to produce goods; keeps prices higher Excise taxes – taxes put on goods

Govt controls price by making it more expensive to make

ELASTICITY OF SUPPLY AND DEMAND

Elasticity – how much stretch the quantity demanded or supplied has when price changes degree of elasticity tell economists how responsive

consumers are to changes in price Demand elasticity – shows consumers response to

price inelastic – consumer response is slight or not at all

usually this way with necessity products elastic – consumer response to price change is large; would

buy something else if price rose Supply Elasticity - Measures producers response to

price changes as prices rise producers want to make more

elastic producers will increase production when prices rise inelastic producers can’t change production due to a price increase

CALCULATING ELASTICITYOF SUPPLY & DEMAND

Calculations tell you whether a reaction is elastic or inelasticDemand elasticity = (% change in qty.

demanded/ % change in price)Supply elasticity = (% change in qty.

supplied/ % change in price) Ex. 75% (change in qty.)/ 50% (price change) =

1.25

Numbers determine elasticity If below 1, it is inelastic; if greater than 1,

elastic If equal to 1, it is considered to be unitary

elasticity

MEASURING ELASTICITY THRU TOTAL REVENUE Second way to measure elasticity is thru the Total

Revenue Test Compares prices and quantities at different prices to see where

revenue goes. Calculated by quantities x price – put into chart

If revenue continues to rise – inelastic If revenue continues to fall – elastic

Price Quantity Demande

d

Total Revenue

$1.00 60000 $60000

$1.50 38000 $57000

$2.00 28000 $56000

$2.50 20000 $50000

$3.00 11000 $33000

Price Quantity Demanded

Total Revenue

$1.00 20000 $20000

$1.50 19000 $28500

$2.00 17000 $34000

$2.50 15500 $38750

$3.00 14000 $42000

GRAPHING ELASTICITY

Graphs can also show the elasticity of goodsSteep slopes show

inelasticityShallow slopes show

elasticity Found by graphing two

pointsGraph the initial price

and quantity and the NEW price and quantity

FACTORS THAT AFFECT DEMAND ELASTICITY

Availability of substitutes – if there are multiple substitutes makes the product elastic

Price v. Income – what the increase in price is to your level of income

Necessity v. Luxury – necessities usually considered inelastic

Time needed to adjust – more time it takes for people to adjust can change elasticity rates

FACTORS THAT AFFECT SUPPLY ELASTICITY

Availability of inputs – not being able to get goods can slow production

Mobility of inputs – how easily products can be moved to where they are needed for production

Storage capacity – ability to store goods for production

Time needed for adjustment – additional time allows supply chain to have time to get to producers

http://www.mrshultz.com/lessons/supplydemand/index.html