Supply and Demand and Markets

1
Supply and Demandand Markets

• Pages 112-116

2
What is a Market?

• Any network that brings buyers and sellers into
  contact with one another so they can exchange
  goods and services.
• It is through markets that our economy answers
  the three major questions.

3
What is a Market?

• Some are physical (face-to-face contact)

4
What is a Market?

• but they do not have to be (face-to-face
  contact unnecessary)
• This is how we might shop

5
What is a Market?

• Or places like the Winnipeg Grain Exchange where
  just the knowledge of the kind and quantity of
  something is the only thing known.
• A market exists wherever the forces of supply and
  demand meet to effect and exchange

6
What is a Market?

• In any given market, the total number of sellers
  constitute the supply and the total number of
  buyers constitute the demand.
• Supply and demand interact to determine the price
  and quantity of goods and services supplied and
  demanded.

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Demand

• The QUANTITIES of a good or service that buyers
  are willing and able to buy at various prices in
  a particular period of time.
• The amount of a particular thing that you will
  buy at different prices is a demand schedule
  see page 114.

8
Demand

• Another way that you can display the information
  in a demand schedule is in a demand curve.
• The inverse relationship between price and
  quantity demanded holds true for nearly all goods
  and services.
• As price decreases demand increases the law
  of downward-sloping demand
• and there are no other changes

9
Graphing Demand Curves
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Demand and Utility

• The law of diminishing marginal utility states
  that each additional unit of a good consumed at
  any given time yields less satisfaction than the
  one previously consumed.

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Demand and Utility

• Question How might the law of diminishing
  marginal utility help to explain why the demand
  curve slopes down and to the right?

12
Demand and Utility

• Answer Since the marginal utility of a good
  diminishes as more is consumed, people would only
  be willing to buy more if the prices were reduced.

13
Elasticity of Demand

• The responsiveness of the quantity demanded to a
  change in price.
• Elastic demand quantity demanded changes as
  price changes.
• Inelastic demand when a price change has no
  effect on the demand of a good or service.

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Elasticity of Demand

• Unitary elasticity of demand a change in price
  brings about an exactly proportionate change in
  quantity demanded.

15
Factors Determining Elasticity

• Essential items tend to be inelastic because
  consumers cannot readily avoid using (buying)
  them.
• Ex. Electricity
• Products that have a lot of substitutes tend to
  have elastic demand because consumers can avoid
  buying them
• Ex. McDonalds hamburgers.

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Factors Determining Elasticity

• Item price in a budget small priced items tend
  to be inelastic larger priced items tend to be
  elastic.
• Ex. A 5 increase in the price of pepper vs. a
  5 increase in the price of a car.

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Factors Determining Elasticity

• Time items can become more elastic over time.
• Ex. Demand for gasoline is inelastic over a short
  period of time (essential with few substitutes),
  but over time people can make changes (fuel
  efficient vehicle) which makes the demand more
  elastic.

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Factors Determining Elasticity

• Look at our chart again. Should we make any
  changes?

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Supply

• The quantities of a good or service that sellers
  are willing and able to sell at various prices in
  a particular period of time.
• The amount of a particular thing that producers
  are willing and able to supply at different
  prices is a supply schedule

20
Supply

• Another way that you can display the information
  in a supply schedule is in a supply curve.
• A supply curve slopes up and to the right,
  illustrating that as price increases supply
  increases (a direct relationship).

21
Supply

• Question Why might this direct relationship
  between price and supply exist?

22
Supply

• Answer As prices of X increases more and more
  suppliers see the chance to make profits and the
  switch to making (or making more of) X.
• Ex. One clothing company makes skinny jeans and
  they catch on. Next thing you know you can buy
  them everywhere.

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Buyers and Sellers

• Buyers and sellers look at high and low prices
  differently. How is this so?

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Buyers and Sellers

• Buyers are discouraged by high prices (buy less
  or look for substitutes), while sellers are
  encouraged by high prices (seek to produce more
  and sell more).
• Lower prices have the opposite effect.

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Fill in the blanks

• As price falls ________ are demanded and
  _________ supplied.
• As price rises _________ are demanded and
  _________ supplied.

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Fill in the blanks

• As price falls more are demanded and fewer are
  supplied
• As price rises fewer are demanded and more are
  supplied.

27
Questions

• Do the following questions on pages 133-135
• 1, 2, 3, 4, 5 (Choose only two to graph. Make up
  your own values for the graph, with the emphasis
  showing the supply or demand shift)

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Equilibrium

• The price at which the quantity supplied and the
  quantity demanded are equal.
• See page 123
• When the quantity of melons coming into the
  market (by suppliers) is equal to the quantity of
  melons taken off the market (by buyers).

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Equilibrium

• When there is no shortage or surplus.
• Equilibrium price is the market clearing price.
• Look at how figure 6.12 illustrates this as a
  schedule and how figure 6.14 illustrates this as
  a graph.

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Surplus and Shortage

• Surplus when more is supplied than what is
  demanded.
• Shortage when more is demanded than is supplied.
• Figure 6.19 illustrates this (70 40 cents)

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Shifts in Demand and Supply
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Shifts in Demand

• Occur when there is a change in the quantity of a
  product demanded for reasons other than a price
  change.
• The demand curve shifts to the right with an
  increase in demand
• The demand curve shifts to the left with a
  decrease in demand

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Causes of Shifts in Demand

• Change in market size
• Change in income
• Change in cost of substitutes
• Change in tastes
• Change in price of complementary products can
  cause a shift in demand
• Ex. Price of gas and demand for large vehicles

34
Shifts in Supply

• Decreases in supply can be caused by
• Adverse whether conditions (ex. Crop failure)
• Increase in the prices of resources used in
  production (ex. Machinery, fertilizers)
• Increases in supply can be caused by
• Favorable weather conditions.
• Decrease in the prices of resources.
• Improvements in technology used in production.

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Elasticity of Supply

• The responsiveness to producers to price changes
  in their products.
• i.e. adjustments to supply that producers make in
  response to price change.

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Elasticity of Supply

• Goods that can be stored easily and
  inexpensively, and for a long period of time will
  be more elastic.
• Goods that spoil easily and are difficult to
  store will be more inelastic
• Time is a big determining factor

37
Tomato Example

• If the price of tomatoes at the farmers market
  decreased suddenly, there is not much producers
  could do about it.
• Over time though, they could readjust the amount
  of land devoted to growing tomatoes.