WarmUpHow would you describe supply and

demand?

Unit II: How Markets Work

Part I – Supply and Demand

DemandThe desire, willingness and ability to

buy a good or service

Affective DemandMust want to buyMust be willing to buyMust have the resources to buy

What is market demand?The total amount of demand created by

all consumers for a product

Demand ScheduleA table that lists the various quantities

of a product that will be bought at different prices

$50

$40

$30

$20

$10

$5

Demand CurveA graph that shows the amount of a

product that will be bought at all possible prices

Direction of the Demand CurveDownward Slope

What does the law of demand state?

As price goes UP demand goes DOWN and visa versa

What does utility refer to?Satisfaction

Diminishing Marginal UtilityPrinciple that additional satisfaction

goes down as we consume more of a product

Determinants of Demandchanges in:

Buyers (#of) – changes in populationIncome – people earn more they spend moreTastes – change in popularity or fadsExpectations – feelings of the futureRelated goods

Substitutes – goods that can replace others Compliments – goods that go along with another

Decrease in demand at every price will produce a Left shift in demand

curve

An increase in demand at every price will produce a right shift in

demand curve

Demand ElasticityHow much demand for a product is

affected by a change in price

Factors affecting elasticityPercentage of IncomeAvailability of substitutesNecessity or LuxuryLength of time

WarmupWhat is the law of demand?

What is supply?The various amounts of a good or

service that producers will supply at different prices

The Law of SupplySuppliers will generally offer more for

sale at higher prices and less at lower prices.

What does a Supply Schedule illustrate?

How much will be supplied at different prices

Supply Schedule for Video Games

Price Per Video Game Quantity Supplied

$50 200

$40 190

$30 170

$20 130

$10 100

$05 10

What does a supply curve illustrate?

The amount of a good or service that will be supplied at different prices

In what direction does the supply curve slope reading from left to

right?

Upward

What can cause a shift in supply at every price?

The Cost of ResourcesThe materials used to produce

ProductivityHow efficient the work force is

TechnologyThe methods used to make goods and

services

Then…. …..and Now

Government PoliciesGov regulations increase costs of

production

TaxesHigher taxes = higher costsLower taxes = lower costs

SubsidiesGovernment payment to help do

something (decreases costs)

ExpectationsWhat owners believe demand will be

Number of SuppliersMore suppliers = more supplyLess suppliers = less supply

Shift in Supply

Price of Video Games

Original Q Supplied

Change in Q Supplied

$50 200 300

$40 190 290

$30 170 270

$20 130 230

$10 100 200

$05 10 110

When market supply increases at every price the supply curve shifts

to the

Right

Now suppose the government increases taxes on the industry.

It will decreaseLabel this on the graph assuming that 100

less will supplied label it S3

What does supply elasticity mean?

How much supply is affected by a change in price

Elastic Supply – quantity changes a great deal when price changes

Inelastic Supply – quantity changes little when price changes

What affects the elasticity of supply?

How quickly a company can change how much it produces

Equilibrium Price The price at which

the amount demanded is equal to the amount supplied

Pe

Qe

What is the equilibrium price of video games in our market?

$25

What is a surplus?When there is more supply than

demand

What is a shortage?When there is greater demand than

supply

If price was set at $40 in our video game market what would exist?

Surplus

What about $10?

Shortage

What impact will a shortage have on price?

Prices will go up

Surplus?Prices go down

What are price controls?When the government sets the price of

goods and services because they feel forces of supply and demand are unfair

Price CeilingMaximum price that can be charged set

by governmentExample = Rent Control

Price FloorGovernment set minimum priceExample = minimum wage

Price as SignalsDetermine What to produce by telling

producers what they can make a profit off of

Determine How to produce – least costly means more profit

Determines Who gets what

Advantages of PricePrices are Neutral – they do not favor

producer or consumerPrices are Flexible – they can adjust to

changes in the market quicklyPrices provide Freedom of Choice – a

variety of products at different prices allows consumers to choose

Prices are Familiar – they are easily understood