Chapter 7Chapter 7Demand and Demand and

SupplySupply

The MarketplaceThe Marketplace

Consumers influence the price of goods Consumers influence the price of goods in a market economyin a market economy

Demand is how people decide what to Demand is how people decide what to buy and at what pricebuy and at what price

Supply is how sellers decide how much Supply is how sellers decide how much to sell and what to chargeto sell and what to charge

A market represents actions between A market represents actions between buyers and sellersbuyers and sellers

Marketplace – Supply and Marketplace – Supply and DemandDemand

DEMANDDEMAND

Market economy – people act in their own best Market economy – people act in their own best interests to answer What, How, Form whominterests to answer What, How, Form whom

Demand is created only when the customer is Demand is created only when the customer is both both willingwilling and and ableable to buy a product to buy a product

Quantity demanded is the amount (quantity) of Quantity demanded is the amount (quantity) of an item that consumers are willing and able to an item that consumers are willing and able to buy at a certain pricebuy at a certain price

DEMANDDEMAND

Before you can start a business, you Before you can start a business, you have to know what the DEMAND is for have to know what the DEMAND is for your product!your product!

If you open a pizza place, and there are 3 If you open a pizza place, and there are 3 other pizza places in the neighborhood, other pizza places in the neighborhood, the demand is different than if you’re the the demand is different than if you’re the only one!!only one!!

The Law of DemandThe Law of Demand

As price goes up, quantity demanded As price goes up, quantity demanded goes downgoes down

As price goes down, quantity As price goes down, quantity demanded goes updemanded goes up

INVERSE RELATIONSHIPINVERSE RELATIONSHIP

The Law of DemandThe Law of Demand

Quantity demanded and price move in Quantity demanded and price move in opposite directions (inverse relationship)opposite directions (inverse relationship)

$ Q $ Q

Discussion QuestionDiscussion Question

How does the seesaw illustrate the How does the seesaw illustrate the relationship between price and quantity relationship between price and quantity demanded?demanded?

Price Quantity

DEMAND SCHEDULE

The numbers in the demand schedule to the right show that as the price per CD decreases, the quantity demanded increases. Note that at $16 each, a quantity of 500 million CDs will be demanded.

Graphing the Demand Curve

Part BPlotting the Price– Quantity Pairs

Note how the price and quantity demanded numbers in the demand schedule have been transferred to the graph on the right. Find letter E. Note that it represents a number of CDs demanded (500 million) at a specific price ($16).

Graphing the Demand Curve

Part CDemand Curve for CDs

The points in the previous graph have been connected with a line in the chart to the right. This line is the demand curve, which always falls from left to right. How many CDs will be demanded at a price of $12 each?

DETERMINANTS OF DETERMINANTS OF DEMANDDEMAND

# 1 = PRICE# 1 = PRICE This will effect the This will effect the QUANTITY DEMANDED: QUANTITY DEMANDED: Two Effects:Two Effects:

A. A. Income EffectIncome EffectWhen people are limited by their income as to what they can When people are limited by their income as to what they can

purchase. If the price rises and their income stays the purchase. If the price rises and their income stays the same, they cannot buy the same quantity of a product.same, they cannot buy the same quantity of a product.

Ex: When gas prices rise and your income does not.Ex: When gas prices rise and your income does not.

What happens when the price of gas goes down and What happens when the price of gas goes down and your income remains the same?your income remains the same?

DETERMINANTS OF DETERMINANTS OF DEMANDDEMAND

B. Substitution EffectB. Substitution Effect

When people can replace one product When people can replace one product with another if it satisfies the same with another if it satisfies the same need.need.

Ex: buying a CD instead of buying concert Ex: buying a CD instead of buying concert ticketstickets

DID YOU KNOW?DID YOU KNOW?

Drugs needed to get and stay well can Drugs needed to get and stay well can

take a take a BIGBIG part of one’s income - part of one’s income - especially if that income is fixed.especially if that income is fixed.

Use of generic drugs give us cheaper Use of generic drugs give us cheaper alternatives to brand name drugs - once alternatives to brand name drugs - once the patent is up, other companies can the patent is up, other companies can make that same drug cheaper.make that same drug cheaper.

Law of DemandLaw of Demand

3. Diminishing Marginal Utility3. Diminishing Marginal Utility Marginal utility Marginal utility

The satisfaction you get from having The satisfaction you get from having one one more unitmore unit of a product of a product

Diminishing Marginal UtilityDiminishing Marginal Utility Falloff of satisfaction with each additional Falloff of satisfaction with each additional

unit you buyunit you buy Ex: browniesEx: brownies

PracticePractice

Write an example from personal Write an example from personal experience of how price, real income, or experience of how price, real income, or the substitution effect changed your the substitution effect changed your decision to buy a good or service.decision to buy a good or service.

PracticePractice Describe an instance in your own life Describe an instance in your own life

when diminishing marginal utility caused when diminishing marginal utility caused you to decrease the quantity you you to decrease the quantity you demanded of a product or servicedemanded of a product or service

Imagine you sell popcorn at the local Imagine you sell popcorn at the local football stadium. How would diminishing football stadium. How would diminishing marginal utility effect the prices of your marginal utility effect the prices of your popcorn after half-time?popcorn after half-time?

DETERMINANTS OF DETERMINANTS OF DEMANDDEMAND

The other Determinants effect a Demand The other Determinants effect a Demand change – price stays the same, but people change – price stays the same, but people willing to buy different amounts of the willing to buy different amounts of the productproduct

DETERMINANTS OF DETERMINANTS OF DEMANDDEMAND

1.1. Consumer incomeConsumer income (rise in income, more $ to (rise in income, more $ to spend = greater demand; lower income, less spend = greater demand; lower income, less $ to spend = less demand)$ to spend = less demand)

2.2. Consumer tastesConsumer tastes 3.3. Related ProductsRelated Products

A. SubstitutesA. SubstitutesB. ComplementsB. Complements

4.4. Future Expectations Future Expectations (expected income of (expected income of buyer, expected price, expected new buyer, expected price, expected new technology)technology)

5.5. PopulationPopulation (the total # of buyers in the (the total # of buyers in the market) – this is for the total market demand market) – this is for the total market demand

IncomeIncomeDeterminants of Demand

Part BChange in Demand if Your Income Decreases

• The demand curve D1 represents CD demand before income decreased. The demand

curve D2 represents CD

demand after income decreased. If your income goes up, however, you may buy more CDs at all possible prices, which would shift the demand curve to the right.

FadFadDeterminants of Demand Part C

Change in Demand if an Item Becomes a Fad • When a product

becomes a fad, more

of it is demanded at all prices, and the entire demand curve shifts to the right. Notice how D1–representing demand for Beanie Babies™ before they became popular–becomes D2– demand after they became a fad.

DEMAND CHEAT SHEET!DEMAND CHEAT SHEET! Demand is about the CONSUMERDemand is about the CONSUMER INVERSE RELATIONSHIP BETWEEN PRICE INVERSE RELATIONSHIP BETWEEN PRICE

AND QUANTITY DEMANDEDAND QUANTITY DEMANDED

As price goes down, quantity demanded goes upAs price goes down, quantity demanded goes up

As price goes up, quantity demanded goes downAs price goes up, quantity demanded goes down Determinants shift the demand curveDeterminants shift the demand curve

– If we have more money to spend, our demand is If we have more money to spend, our demand is higherhigher

– If a product is the hottest style/trend, our If a product is the hottest style/trend, our demand is higherdemand is higher

– If a substitute is available, demand is lower for If a substitute is available, demand is lower for the original product; higher for the substitutethe original product; higher for the substitute

Turn to pg. 175 and complete #1-3Turn to pg. 175 and complete #1-3