Econ-Ch. 5 Demand & Supply PDF

Chapter 5 Demand and Supply Intro Demand- The quantity of a good or service that consumers are both willing and able to buy at various prices. ○ must be expressed in a time frame “per day” or “per week” or “per year” Demand Schedule lists quantities of a good that a person or group o...

Chapter 5 Demand and Supply Intro Demand- The quantity of a good or service that consumers are both willing and able to buy at various prices. ○ must be expressed in a time frame “per day” or “per week” or “per year” Demand Schedule lists quantities of a good that a person or group of people will buy at various prices Market Demand The sum of all the individual quantities demanded in a market ○ - economists refer to this when speaking of demand Businesses explore this by fluctuating prices or conducting surveys Law of Demand!! PRICE and QUANTITY DEMANDED move in opposite directions- ○ when price increases, demand goes down (vice versa)  3 Reasons for Inverse Relationship 1) Law of Diminishing Marginal Utility The more we have, the less satisfaction we are likely to get from additional units less likely to buy large quantities unless the price is LOW continued... 2) Income Effect If prices continue to rise, people cannot afford to buy like they did at the original price Less money to buy usual products :( continued... 3) Substitution Effect when a different good can satisfy the same want fast food or organic water or gatorade Demand explained by Mr. Clifford Shifts in demand Demand Shifters Changes in consumer income ○ more money= more opportunity to buy Changes in the number of consumers ○ resort towns- summer vs. winter Changes in consumer tastes and preferences ○ social media and advertising affect this ○ sushi is a good example- can find it everywhere now Continued... Changes in consumer expectations ○ less likely to buy before black friday Changes in price of substitute goods ○ chicken vs. beef ○ http://www.youtube.com/watch?v=eWIoYSurSrw Changes in price to complementary goods ○ tennis rackets and tennis balls sold together Shifts in demand Supply What producers are willing and able to SELL at various prices producers are looking at maximizing profits always expressed in a time period- weeks, months, year, etc Law of Supply As price increases, quantity supplied increases As price decreases, quantity supplied decreases Shifts in supply Supply Shifters cost of inputs ○ price seed corn goes up, people plant less. PROFIT is the key! changes in number of producers ○ ipad was first, since then we’ve seen many new varieties. changes in conditions due to natural disasters or international events ○ deep freeze could affect orange crop, wet spring could cause farmers NOT to plant- decrease in supply ○ war breaks out in Saudi Arabia- decrease in oil continued... changes in technology ○ robots allow for cheap labor, increase in supply changes in producer expectations ○ grain prices- sell or put it into storage changes in government policy ○ offer subsidies (often to farmers) cash payment aimed at helping a producer to continue to operate excise tax- tax on a good (oil) Demand Elasticity elasticity of demand- measure of consumers’ sensitivity to change of price. inelastic- when something responds slightly or not at all to a change in price ○ toothpaste...even if prices rise we will still buy it- keeps market stable elastic- very responsive to a change in price calculating…. Demand Elasticity= % change in quantity demanded % change in price Result- greater than 1- demand is elastic less than 1 - demand is inelastic Factors that influence elasticity of demand 1. Availability of substitutes a. demand for products with close substitutes tends to be elastic...ex...sports drink 2. price relative to income a. we notice change in price of big ticket items i. black friday sales 3. necessities vs. luxuries a. necessities = inelastic (we’re still going to buy food) b. luxuries= elastic ( we don’t need to buy jewelry) continued... 4. Time needed to adjust to a price change a. people need time to adjust to major price changes (gas) Elasticity of Supply measure of the sensitivity of producers to a change in price tells economists how much a producer will change the quantity supplied in response to a change in price Calculating supply elasticity = % change in quantity supplied % change in price Result= greater than 1 = supply is elastic less than 1 = supply is inelastic Supply and Demand The 2 MOST IMPORTANT forces in a market economy consumers are always looking for a bargain and when prices are low producers are willing to supply more when prices are high