Supply and Demand. The Basis of Microeconomics

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1 Supply and Demand The Basis of Microeconomics

2 Learning Targets I can explain how the forces of supply and demand impact a market economy and what variables affect these forces. (Including a discussion of elasticity) Given the appropriate information, I can derive supply and demand curves, and explain how the graphs might be affected by changes to a hypothetical scenario.

3 Demand What is it? Purchases of a good or service that people are actually willing and able to make, given price and choices available to them. Aggregate demand: the total demand for a good or service by all households, investments, or other countries(exports)

4 The Law of Demand There is an inverse relationship between price an quantity demanded. As price increases, the quantity demand will decrease, and vise-versa.

5 Demand Schedule A table showing the quantities of a good that that will be purchased at various prices.

6 What causes demand for products to increase/decrease? In looking at market demand for pizza for example all the owner needs to do is pick the price and quantity combination that resulted in the highest profit and then start baking. When Economists assume nothing beside the price changes we call this Ceteris Paribus Latin for all other things held constant. But what happens if one day the government announced that tomato sauce had a natural ingredient that strengthened the immune system demand would change but for a reason not directly related to price.

7 What else causes a change in demand? Income effect Substitution effect Availability of complements Changes in weather/season.

8 The Income Effect As your income changes, so do your tastes. If you got richer, you might have greater demand for champagne and caviar. If you got poorer, you might have more demand for Ramen noodles. (inferior goods)

9 The Substitution Effect The price of related good can affect demand. Substitutes are goods used in place of one another ie price of skis rise use a snowboard instead Compliments are two goods that are bought and used together an increase in the Price of ski boots will cause a decrease in the demand of people buying skis

10 Consumer Expectations What we expect about the future Price A Salesman tells you that the price for the Harley that you like is going up next week. A huge sale is starting next week on plasma TV s that you were looking at.other examples (air conditioners, oranges, lawn mowers, etc.)

11 Tastes and preferences Most effected by advertising why were bell bottoms ever in Why are some obsessed with American Idol Advertising can effect what we eat, where we buy things and even social trends.

12 Population Huge increases---baby boom can lead to shifts in demand 40 s baby stuff 50 s-60 s school and then universities Now closing in on retirement medical care, homes in Florida, recreational vehicles

13 Price elasticity of demand Size of the impact of a change in price on the quantity consumers will buy. Elastic small change in price/large change in quantity demanded Inelastic price increase will result in an increase in total revenue Elastic Inelastic Pronto pop

14 Calculating elasticity---a precise mathematical definition In order to find percent change you would need to do the following formula % change= Original #-New # X100 Original number Example if a price decreases from $4 to 3$ $4-$3/$4 X 100 = 25 then if the quantity demanded increases from 10 to 20, then 10-20/10 X 100 = %/25% = 4.0 Elasticity is greater then 1 so demand is elastic

15 Values of Elasticity Elasticity less than 1 inelastic Elasticity greater than 1---elastic Elasticity equal to 1 demand is unitary elastic..example lets say the elasticity of demand for a magazine is $2, When the price rises by 50% to $3, the newsstand will sell exactly half as many copies as before.

16 Part II: Supply The amount of a good or service that firms are prepared to sell at a given price.

17 The Law of Supply There is a direct relationship between price and the quantity supplied. As the price of a good or service increases, suppliers will want to produce more of it.

18 Change in Supply can happen when Change in marginal cost of production Increase/decrease in Number of sellers Change in expectations

19 Supply Fewer influences than demand. Increase or decrease in the number of suppliers. Changes in marginal cost Labor or materials