2 Worksheet A-2A 1. Surplus When the amount supplied exceeds the demand 2. Shortage When the amount demanded exceeds the supply 3. Utility The power to satisfy your wants and needs 4. Law of Diminishing Marginal Utility The more of something you get, the less it satisfies you
3 Worksheet A-2A 5. Supply Quantity that producers will provide at each price 6. Demand Quantity that consumers will buy at each price 7. Equilibrium Price Price at which the quantity demanded and supplied will be equal 8. Elasticity The degree to which there will be a change in quantity demanded or supplied when there is a change in price
4 Laws of Supply and Demand Supply Quantity that producers will provide at each price Demand Quantity that consumers will buy at each price Law of Supply As Price goes up producers will be willing to produce more of a good or service Law of Demand As Price goes up consumers will be unable or unwilling to buy as much
5 Elastic Demand: Elasticity When there is a change in price there will be a large change in the quantity demanded. Tends to be a more horizontal demand curve. Tends to be goods / services that are wants Inelastic Demand When there is a change in price there will be a small change in the quantity demanded. Tends to be a more vertical demand curve. Tends to be goods / services that are needs
6 Elasticity A more horizontal demand curve A more vertical demand curve Price Change BIG Means a more elastic good or service small Means a less elastic good or service
9 Substitutes and Complements Substitutes (Substitute Goods) goods that can be used in place of each other, because they satisfy the same need Compliments (Complementary Goods) goods that are typically used or bought with certain other goods Substitution Effect when two goods satisfy the same need or want, people will tend to buy the cheaper of the two
10 Markets and Elasticity Market Demand Total demand of all consumers for a specific good or service Market Supply Total produced by all suppliers of a specific good or service Demand Elasticity The extent (how much) demand will change when there is a change in price Supply Elasticity Profit The extent (how much) supply will change when there is a change in price The money a business has left over from total sales after it has paid all of its costs (total costs) $Total Sales - $Total Costs = Profit
11 Subsidy and Productivity Subsidy: Government payments for certain actions Government pays farmers to not grow corn on 100% of their farmland. This ensures that the market isn t t flooded and the price of corn does not crash. Productivity: The quantity of a good or service that a producer is able to supply with a specific amount of resources.
12 Factors that Influence Demand Population Number of Consumers in the area Consumer s s Expectations How consumers perceive (think about) the future Tastes and Preferences Popularity of a product, likes and dislikes Consumer s s Income How much money do consumers have to spend? Substitutes How available and expensive are competing products? Complements How available and expensive are the goods that are used with this product?
13 Factors that Influence Supply Cost of Resources Costs of the resources to produce the good or service Productivity How much wood would a wood chuck chuck, if a wood chuck could chuck wood? Taxes How high are taxes on this business? Government Regulation (laws) Subsidies: Government payments for certain actions Policies: Minimum wage increase, (de)regulations, restrictions Technology New cheaper and better ways of production Expectations Looking at the future Will consumer demand be higher in a year? Number of Suppliers How many businesses produce the same good or service?
14 Demand and Supply Schedules Price Quantity Price Quantity Demanded Supplied $ Million $ Million $ Million $ Million $ Million $ Million $ Million $ Million
15 Demand and Supply Curves Price in Dollars $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 Equilibrium Price Surplus Shortage Quantity in Millions Supply Curve Equilibrium Point Demand Curve
16 The relationship of Supply and Demand A match made in heaven???
17 Demand and Supply Things to remember Supply and Demand are opposites As prices change they react opposite to each other As demand changes, surpluses or shortages may be created. A surplus or shortage may force suppliers to make changes in consumer prices
18 So what happens if there s s a surplus? This means that the quantity supplied is more than the quantity demanded Where is the price on the supply and demand curve? Is it below or above the equilibrium price? Prices Supply Curve Equilibrium Quantity Demand Curve
19 What s s going on here?
20 What does he not understand? What can we say about demand and supply? What happens if demand increases?
21 Putting it all together If you are charging $50 for a new video game, and your company manufactured 2 million units, and sold 1.5 million in the first and second quarter (November 1-April 1 30) What can be said about supply and demand?
22 Answers We have a surplus of goods (500,000). Our price is higher than the equilibrium price. Factors that influence demand are at work. Which ones? What might be happening? Population Consumer s s Expectations Tastes and Preferences Consumer s s Income Substitutes Complements
23 Scarcity or Shortage What are you experiencing when Your little brother eats all the cookies You lose your lunch money The DVD you want is sold out at Walmart You can t t make your oatmeal for breakfast cause the box is empty
24 Homework Draw and label the supply and demand curve on your worksheet including: The X and Y axis (price & quantity) Price in Dollars / Quantity in Millions The Supply Curve The Demand Curve The Equilibrium Point Where Surpluses and Shortages occur.
25 Homework Price Quantity Price Quantity In Dollars Demanded In Dollars Supplied $ mil. $ mil. $ mil. $ mil. $ mil. $ mil. $ mil. $ mil. $ mil. $10 50 mil.
26 Elasticity EQ: What role does substitution play in elasticity in deciding price?
27 Law of Supply Remember the Law of Supply? The law of supply states that as price increases the Producer has an incentive to produce more. If price decreases, the producer has an incentive to produce less.
28 Law of Demand Remember the Law of Demand? The law of demand states that as the price of a product increases, more people will be unwilling or unable to purchase the product. When the price of the product decreases, more people will be willing and able to purchase the product.
29 $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 Demand and Supply Curves Price in Dollars Equilibrium Price Surplus Shortage Quantity in Millions Supply Curve Equilibrium Point Demand Curve
30 Increases in Supply 10 Demand 8 Price 6 4 Surplus Original Equilibrium Point New Equilibrium Point 2 Supply Quantity Demanded
31 Decrease In Supply 10 8 Demand New Equilibrium Point Price 6 4 New Supply Curve Shortage Original Equilibrium Point 2 Supply Quantity Demanded
32 Decrease in Demand 10 8 Demand Price 6 4 Demand Surplus Original Equilibrium Point New Equilibrium Point 2 Supply Quantity Demanded
33 Increase in Demand 10 Demand Demand 8 Price 6 4 Shortage New Equilibrium Point Original Equilibrium Point 2 Supply Quantity Demanded
34 3 Major Factors affecting Elastic Demand The substitution effect The greater the number of substitutes for a good, the greater the elasticity. Degree of necessity If a product is absolutely necessary, it will be less elastic. If a product is a luxury, it will be more elastic. Proportion of income The greater the proportion of income the good requires, the more elastic it will be.
35 Determining Elasticity What is a good that has many substitutes? When the price of one good goes up, what happens to the demand of the others? What would happen to the demand curve of the original good? What would happen to the demand curve of the substitute good? What are some examples of an inelastic good that is a necessity? What is an inelastic good that is not a necessity?