Chapter 7Supply & Demand

Demand

• All consumers have a great influence on the price of all goods and services

• Demand – the amount of a good or service that consumers are able and willing to buy at various possible prices during a specified period of time

• Supply – the amount of a good or service that producers are able and willing to sell at various prices during a specified period of time

Demand

• Market – the process of freely exchanging goods and services between buyers and sellers

• Voluntary Exchange – a transaction in which a buyer and a seller exercise their economic freedom by working out their own terms of exchange (automobiles)

Demand

• Demand exists when a person is willing & able to buy something.

• There is an inverse relationship between the quantity demanded and the price.

• Law of Demand – economic rule stating that the quantity demanded & price move in opposite directions• As price goes up, quantity demanded goes down.• As price goes down, quantity demanded goes up.

Demand

• Quantity Demanded – the amount of a good or service that a consumer is willing and able to purchase at a specific price

• QD influenced by:• Real Income Effect – economic rule stating that

individuals cannot keep buying the same quantity of a product if its price rises while their income stays the same (gasoline

• Substitution Effect – economic rule stating that if two items satisfy the same need and the price of one rises, people will buy the other

• Diminishing Marginal Utility

Demand

• Utility – the ability of any good or service to satisfy consumer wants

• Marginal Utility – an additional amount of satisfaction

• Law of Diminishing Marginal Utility – rule stating that the additional satisfaction a consumer gets from purchasing one or more unit of a product will lessen with each additional unit purchased (soda)

Demand

• Supply and demand are illustrated with graphs.

• Demand Schedule – table showing quantities demanded at different possible prices

• Demand Curve – downward sloping line that shows in graph form the quantities demanded at each possible price

• Refer to graphs on pages 178 & 179• Quantity demanded is a specific point on a

graph while demand is represented by the entire graph.

Demand

• Determinants of Demand• Change in population• Changes in income• Changes in tastes and preferences• Substitutes• Complementary goods – a product often

used with another product• Refer to graphs on pages 182 & 183

Demand

• Elasticity – economic concept dealing with consumers’ responsiveness to an increase or decrease in the price of a product

• Price Elasticity of Demand – economic concept that deals with how much demand varies according to changes in price

• Elastic Demand – situation in which the rise or fall in a product’s price greatly affects the amount that people are willing to buy

• Inelastic Demand – situation in which a product’s price change has little impact on the quantity demanded by consumers

• Factors affecting elasticity • Existence of substitutes (insulin & soda)• % of budget devoted to that good (pepper & cars)• Time consumers are given to adjust to price (electricity)

Supply

• Law of Supply – economic rule stating that price and quantity supplied move in the same direction• As the price rises for a good, the quantity supplied

generally rises.• As the price falls, the quantity supplied also falls.

• Quantity Supplied – the amount of a good or service that a producer is willing and able to supply at a specific price

• The higher the price the greater the profit incentive.

Supply

• Supply Schedule – table showing quantities supplied at different prices

• Supply Curve – upward-sloping line that shows in graph form the quantities supplied at each possible price

• Be familiar with graphs on pages 188 & 189.

Supply

• Law of Diminishing Returns – after a certain point adding additional factors of production output increases at a diminishing rate

• Determinants of Supply• Price of inputs • Number of firms in the industry• Taxes• Technology• Graphs on page 191

Supply & Demand

• As price goes down, quantity demanded goes up and supply goes down

• As price goes up, quantity demanded goes down and supply goes up.

• Equilibrium Price – the price at which the amount producers are willing to supply is equal to the amount consumers are willing to buy

• Graph on page 195

Supply & Demand• Shortage – situation in which the

quantity demanded is greater than the quantity supplied at the current price

• Surplus – situation in which quantity supplied is greater than quantity demanded at the current price

Supply & Demand

• Price Ceiling – a legal maximum price that may be charged for a particular good or service

• Rationing – the distribution of goods and services based on something other than price

• Black Market – underground or illegal market in which goods are traded above their legal price or in which illegal goods are sold

• Price Floor – a legal minimum price below which a good or service may not be sold