SUPPLY AND DEMANDEconomics – Chapter 7

Remember, EVERYTHING is “scarce”…

The Fundamentals!

Supply and demand is perhaps one of the most fundamental concepts of economics and it is the backbone of a market economy…. “marketplaces” and “voluntary exchange”

“Demand” refers to how much of a product or service is desired by buyers. The quantity demanded is the amount of

a product people are willing to buy at a certain price;

“Supply” represents how much any given market can offer. The quantity supplied refers to

the amount of a certain good producers are willing to supply when receiving a certain price.

Price is a reflection of supply and demand!!!

Oil, Supply, and Demand – Oh, my!

Oil, Supply, and Demand – Oh, my!

The Law of Demand

The “law of demand” states that the higher the price of a good, the less people will demand that good! … the higher the price, the lower the quantity demanded (b/c of the high price – think about it).

The amount of a good that buyers purchase at a higher price is less – because as the price of a good goes up, so does the opportunity cost of buying that good. People will probably avoid buying a

product that will force them to give up the consumption of something else they value more…

The Demand Curve

Each point on the curve reflects a direct correlation between quantity demanded (Q) and price (P).

So, at point A, the quantity demanded will be Q1 and the price will be P1…

There is a negative relationship between price and quantity demanded… *** The higher the price of a

good the lower the quantity demanded (A), and the lower the price, the more the good will be in demand (C) ***

Determinants of Demand

Demand for a product, good, or service can change in certain situations… Changes in Population (pop.

increase/decrease) Changes in Income (income is HUGE) Changes in Taste and Preferences

(Adidas – Jordan) Substitutes (butter or margarine) Complementary Goods (like two

peas in a pod!)

Price Elasticity of Demand Elasticity deals with a consumer’s

responsiveness to an increase of decrease in the price of a product…

The price elasticity of demand deals with how much demand varies according to changes in price… Basically, this is how much consumers

(you guys) respond to changes in price.

Elastic vs. Inelastic DemandA price increase of a product

that is WANTED will deter more consumers because the opportunity cost of buying the product will become too high (this ‘good’ must have an elastic demand)…

Products that are NEEDED are more insensitive to price changes because consumers would continue buying these products despite price increases (this product must have an inelastic demand)…

The Law of Supply The “law of supply” states that as the

price of a product goes up, the quantity supplied of that product will rise… So, the opposite must be true as well... “as the price of a product goes down, the

quantity supplied of that product will go down” Producers supply more at a higher price

because selling a higher quantity at a higher price increases revenue! This is called the “incentive of greater

profit”

The Supply Curve Each point on the curve reflects a

direct correlation between quantity supplied (Q) and price (P).

So, at point B, the quantity supplied will be Q2 and the price will be P2…

There is a positive relationship between price and quantity supplied… *** The higher the price of a good the

higher the quantity supplied (C), and the lower the price, the less the good will be supplied (A) ***

Determinants of Supply Supply of a product, good, or service can

change in certain situations… Price of inputs (increase/decrease – supply) Number of firms in the industry (More/less

companies?) Taxes (government involvement) Technology (reduces cost of production!)

Equilibrium Price In the real world,

supply and demand work together…

As price goes up, demand goes down.

As price goes down, demand goes up.

“Equilibrium price” is when the quantity demanded equals the quantity supplied – everyone is happy!!! Is this real life???