1 Demand/Supply Unit Essential Questions -What is the role of demand in free market capitalism? -How do changes in price influence quantity demanded? -What factors affect changes in demand that influence price in the free market? -What is the role of supply in free market capitalism? -How do changes in price influence quantity supplied? -What factors affect changes in supply that influence price in the free market? -What are the positive benefits of the price system? -How does the price system solve disequilibrium? -Should government intervene with price controls to assist varying groups of people who are affected differently by the market?
2 Key Objectives -describe the importance of demand in market economies as an allocation tool -define the economic definition of demand -identify the important characteristics of the economic definition of demand -determine the appropriate demand for a good or service utilizing the economic definition of demand -illustrate a demand function and label components of the x and y axis -define the law of demand and the relationship between price and quantity -describe the factors that cause the law of demand -identify how individual and market demand differ -compare and contrast changes in quantity demanded versus changes in demand -identify each determinant that causes shifts in demand -draw shift in demand and identify the determinants of demand that cause each shift -describe the importance of supply in market economies as an allocation tool -define the economic definition of supply
3 -identify the important characteristics of the economic definition of supply -determine the appropriate supply for a good or service utilizing the economic definition of supply -illustrate a supply function and label components of the x and y axis -define the law of supply and the relationship between price and quantity -describe the factor that causes the law of supply -identify how profit differs from revenue -compare and contrast changes in quantity supplied versus changes in supply -identify each determinant that causes shifts in supply -draw shifts in supply and identify the determinants of supply that cause each shift -list and describe the benefits of the free market system -identify what happens when price is set above/below the equilibrium -describe why government would impose a price controls in the free market -define and draw a price ceiling in the market -list and explain the effects of a price ceiling -define and draw a price floor in the free market -list and explain the effects of a price floor -develop alternatives to price controls to solve -market inequities -define and illustrate consumer and producer surplus
4 Capitalism Private Ownership Market Allocation Laws of Supply and DEMAND Demand- amount of a good or service a consumer is willing and able to pay at various prices during a given period of time. Two important aspects Willing and Able to pay Assume all other things equal (Ceteris Paribus)
5 Ex. Shopping for a new Car
6 Demand Schedule -table showing the amount of a good or service that people will buy at various prices.
7 Demand Curve -A graph that shows how demand for a good or service increases or decreases at various prices. (a graph of the demand schedule utilizing an X and Y axis)
8 The law of Demand (the inverse relationship of price and quantity demanded) -any increase in price will cause the amount demanded to decrease or if price decreases the amount demanded increases. -negative slope=inverse relationship -X is the dependent variable and Y is the independent variable
9 Three concepts used to explain law of Demand 1. Income Effect -The increase or decrease in purchasing power brought on by changes in price is called income effect. Ex. gas
10 2. Substitute Effect -The tendency to purchase substitutes (generics) as the price of other expensive products rises. Ex. Breakfast Cereal
11 3. Diminishing Marginal Utility -as utility declines, demand declines and consumer will only buy when price is reduced (Utility - satisfaction received from consumption) -as more units of a good or service are consumed, the utility received from consuming each additional unit declines. (amount of satisfaction received from consuming a product affects the quantity demanded) ex. water slide
12 Individual Demand vs. Market Demand the market demand curve is derived by adding together the quantities demanded by all consumers at each and every possible price.
13 NON PRICE Determinants of Demand (things that cause the demand curve to shift) 1. Taste and Preference -development of better technology or changes in personal taste affect demand. Ex. Ipods Ex. Iphone
14 2. Market Size -Number of buyers in the market Ex. opening of Trade with China Ex. compliance with Gov t TV standards (HDTV) Ex. bird flu Ex. prohibition
15 3. Income -any increase in income causes demand to shift Normal vs. Inferior good? Ex. Charcoal vs. Gas Grill, Hamburger vs. Steak
16 4. Price of Related Goods Ex. Butter vs. Margarine (an increase in the price of butter) Complimentary vs. Substitute goods Compliments Substitutes Price Cookies Price gold n plump Chicken Demand Milk Demand Turkey
17 5. Consumer Expectations Ex. New contract settlement (demand for new pool) Ex. Rise in Mortgage Rates Ex. Income tax return
18 Capitalism Private Ownership Market Allocation Laws of Supply and DEMAND Supply the amount of a good or service a producer is willing and able to supply at various prices during a given period of time. Two important aspects Willing and Able to supply Assume all other things equal (Ceteris Paribus)
19 Which of the following pictures best represents a student s supply?
20 Supply Schedule -table that lists each quantity of a product that producers are willing to supply at various prices
21 Supply Curve -graph showing relationship of quantity supplied at different prices.
22 Law of Supply -any increase in price will cause suppliers to supply more and any decrease in price will cause a reduction in quantity supplied. What effect causes this relationship to exist? Profit Motive- when revenues (sales) exceed costs of producing a product. In other words, your incentive to produce or work.
23 SHIFT HAPPENS There are six Non Price factors or determinants of Supply (shifts in the supply curve) 1. Technology - production process may become more efficient thus shifting supply
24 2. Resource Prices - prices paid for materials and wages Ex. Increase in the minimum wage
25 3. Taxes and Subsidies - may increase or decrease cost of production ex. excise tax
26 4. Market Size - larger number of sellers effects those competing in the market. ex. DVD players
28 6. Price of other goods ex. bread vs. rolls; assume there is an increase in the price of rolls from.75 to 1.50
29 Achieving Market Equilibrium In a free market system, who dictates what to produce, how to produce, and for whom to produce? The unique relationship between Supply and Demand Market Equilibrium- When supply and demand for a product are equal. Equilibrium point- The point at which supply and demand intersect to establish equilibrium price.
30 Shortage - When Demand is greater than supply or when price is below market equilibrium (how does the market get rid of shortages; short run vs long run)
31 Surplus - When Supply is greater than Demand or when price is greater than the market equilibrium (how does the market get rid of surpluses; short run vs long run)
32 Price Controls Government Influences on Supply and Demand Price Ceilings- A government regulation that makes it illegal to charge more than a specified price for a good or service. Effects of the Ceiling 1. Housing shortage 2. Black market develops ( key money )
33 3. Increased search activity (time spent looking for an available apartment) -Increases the opportunity costs -O.C. + Rent= Rent payment
34 4. Are rent ceilings fair? (Do they provide for poorer groups?) -Who benefits? a. First come, First serve b. Older families
35 Price Floors- lowest price at which it is legal to trade a particular good. ex: Minimum wage
36 Effects of the floor 1. Unemployment 2. Black Market -illegal wages below minimum wage 3. Increased search activity (opportunity cost of the search?) 4. Is the minimum wage fair? Are those who get the jobs the least well off?