Supply and Demand Introduction 1 Supply and

Supply and Demand Introduction 1

Supply and Demand are the forces that make markets and market economies work. They determine the prices at which goods are bought and sold, and the quantities (amounts) at which they are bought and sold. 2

Market -- anywhere buyers and sellers of a product get to meet. 3

Demand • Quantity demanded (Qd) is a specific quantity at a specific price, represented by a single point on a demand curve. • Demand (D) is the amount of a good or service that consumers are willing and able to purchase at all prices. 4

The law of demand – as the price of a good or service increases, quantity demanded (Qd) for that good or service will decrease. This assumes the rule of ceteris paribus meaning “all other things being equal” What determines the quantity that an individual will demand? 5

Demand Schedule Price Quantity $1 50 $2 45 $3 40 $4 35 $5 30 $6 25 $7 20 6

Demand Graph 7

Demand Graph 8

If price changes, quantity demanded (Qd) will change. It is a movement along the demand curve. For example…If price goes from $2 to $7…what happens? Price Quantity 9

But wait… what could cause the entire curve to shift left or right so that every point on the line would change? Price Quantity 10

Determinants of Demand (Demand curve shifters) • There are six non-price factors that shift the entire demand curve left or right. 11

Demand Shifts What do they look like? More Demand Price When Qd rises at each and every price, then the whole curve (D) shifts to the right. D D 1 Quantity 12

Demand Shifts Less Demand Price When Qd drops at each and every price, then the whole curve (D) shifts to the left. D 1 D Quantity 13

1. Income • If income levels changes then overall demand will change. “Mo money, mo problems” - Biggie. Smalls 14

• Direct relationship … If income rises and demand rises, then that good is considered a normal good. • Most economic goods that we measure are normal goods. • Examples… music purchases, gasoline, restaurant meals, steak, cars, most everything 15

• Indirect relationship… If income rises and demand falls, then that item is an inferior good. • For example, bus rides, fast food, hot dogs, ramen noodles, mac and cheese, chicken noodle soup, tuna fish 16

2. Prices of substitute goods. • How are these goods related? …we use them either/or. One can be easily substituted for the other such as… • Butter or margarine • Mayonnaise or salad dressing • Sweaters or jackets 17

• So, lets use butter and margarine • When the price of butter goes up, the demand for margarine also goes up. • This is a direct relationship between the price of one good and the demand for another. • Why? 18

Butter graph Margarine graph Price Price 4. 00 Pr ice 2. 00 D D 1 Quantity Qd 20 40 Price butter goes up from $2. 00 to $4. 00 Price of margarine does not change. Qd of butter goes? Demand for margarine goes? Movement on the curve. 19

One more time… • Price of butter rises…quantity (Qd) of butter demanded falls. (law of demand) • The demand for margarine rises, because due to the law of demand people are buying less butter and are substituting more margarine. 20

3. Complementary Goods • These are goods that we normally use together. • As the price of one goes up, the demand for the other goes down. 21

• So when the price of one of these goes up, the quantity demanded of that good falls, (law of demand) and the demand for the complementary good falls. (Indirect relationship) • For example when the price of peanut butter goes up, people use less, (that’s a movement along an existing demand curve for peanut butter and illustrates the law of demand. ) • But since we use peanut butter and jelly together, when the price of peanut butter goes up, we demand less jelly because we are eating fewer peanut butter and jelly sandwiches. PB & J are complements. 22

PB Graph Jelly Graph Price left less $3 $2 D 1 D Qd Price Peanut Butter Price Jelly stays constant Qd of peanut butter Demand for Jelly shifts to the left 23

4. Tastes and Preferences • When consumers tastes change, the demand curve for that product will move. 24

Everyone wants one! Price 3 -D printer D 1 D Qd 25

Nobody wants one of those! Price D 1 D Qd 26

5. Expectations of the future • Brings all the other reasons into play. • If you expect the item to be more expensive in the future you may buy _ _ now. • If you expect that prices of homes will keep falling, would you buy a home now? NO 27

More Future Expectations • If you expect your income to go up in the future you may buy _ _ now. • If you expect your income to fall (lose your job) what happens to your demand now? 28

Positive Future Expectations Price D 1 Qd 29

Negative Future Expectations Price D 1 Qd 30

6. Number of Buyers in a market • Simple…more buyers, means more buyers at each and every price, therefore the demand curve will move, to the right. • Fewer buyers means that demand moves to the left, toward the origin, left is always less. Example: In the summer in Va. Beach, there is an increase in the number of tourists (buyers). What happens for the demand for hotel rooms in June, July, & August? 31

More Purchasers Price D D 1 Qd 32

Fewer Purchasers Price D 1 D Qd 33

Practice Due to technical problems, the price of i. Pads doubles. What happens to the demand curve for Samsung tablets? What demand determinate tells you that? Price D Qd 34

Practice You just got a new job making $20, 000 more a year than you used to. What happens to the demand curve for expensive clothes? What demand determinate tells you that? Price D Qd 35

Practice In June, the Bonnaroo Music and Arts Festival will be held in Nashville, TN. What happens to the demand curve for fast food in Nashville during the festival? What happens after the festival? What demand determinate tells you that? Price D Qd 36

Practice Disease has killed many syrup producing trees in the U. S causing syrup prices to rise dramatically. What happens to the demand curve for pancake batter? What demand determinate tells you that? Price D Qd 37

Practice Ray Rice was convicted of domestic abuse and banned from the NFL. What happened to the demand curve for Ray Rice jerseys? What demand determinate tells you that? Price D Qd 38

Practice Congress is considering legislation that would fine any state selling recreational marijuana $1, 000 per day starting in 2016. What happens to the demand curve for legal marijuana in Colorado? What demand determinate tells you that? Price D Qd 39