Supply and Demand

1. Economics – Unit 2
Supply and Demand
Law of Supply
Law of Demand

2. Remember Market Systems? - Market Economy
What are the characteristics of Free Markets?
PRIVATE
PROPERTY
PROFIT MOTIVE FREE
ENTERPRISE

3. What is Supply and Demand?
Supply
 How much the market can offer
 At $1,000 per iPhone, Apple can
supply 50,000 iPhone 11s.
Demand
 How much (quantity) of a product or
service is desired by
buyers (consumers)
 Willing and able to purchase a product
at a particular price
 How many iPhone 11s does the public
want at $1,000?

4. Law of Supply
• As a good's price increases (goes up) the quantity suppliers are willing and able to supply
increases.
 A new toy at Christmas time... price increases, and there are more of the certain toy to buy.
• As a good's price decreases, (goes down) the quantity suppliers are willing and able to
supply decreases.
 Apple's iPhone 8.... price drops, Apple does not make too many more, supply drops
• Quantity supplied is usually directly related to its price
• So... If the price increases, supply increases... vice versa If the price decreases, supply
decreases.
• Producers supply more at a higher price because selling a higher quantity at a higher
prices increases revenue.

5. Supply or
Demand
schedule
• Displays the quantity of
the product supplied or
demanded at each price

6. Supply curves
• Graphic representation
of the quantities of a
good supplied at various
prices.
• Low price, low quantity
of the item
• High price, high supply
of the item

7. Factors that determine SUPPLY
•P.I.G. T.O.E.S”
• •– P roductivity (workers, machines, and/or assembly)
• •– I nputs (Change in the price of materials needed to make the
• •good)
• •– G overnment Actions (Subsidies, Taxes, and Regulations)
• •– T echnology (Improvements in machines and production)
• •– O utputs (Price changes in other products)
• •– E xpectations (outlook of the future)
• •– S ize of Industry (Number of companies in the industry)

8. Law of Demand
• If all other factors remain equal, the higher the price of a good, the less people will demand that
good
• The higher the price the lower the quantity demanded
• As the price of a good goes up, so does the opportunity cost of buying that good.
• People will naturally avoid buying a product that will force them to not buy something else they
value more.
• Higher prices drive potential consumers from the market if their resources do not allow them to
even consider a purchase.
• Will you buy the $1,00 iPhone 11 or spend that $1,000 elsewhere?
• At a high price, there is not much demand for the product

9. Demand Curve
• High price, low demand
• Low price, more
demand

10. Factors which determine DEMAND
• “P.O.I.N.T.”
• •– P rice of other goods (substitute or complementary)
• •– O utlook (consumer expectation of the future)
• •– I ncome (normal goods versus inferior goods)
• •– N umber of potential customers (pop.of market)
• •– T aste (fads or trends)

11. Supply and Demand
Relationship
• Excess Supply = Surplus
• If price is too high, excess supply will be created
• Excess Demand = Shortage
• Price is too low – too many consumers want the
good

12. Law of Supply and
Demand
a quick view

13. Equilibrium
Price
• Supply and demand are
equal
• Allocation of goods is at
its most efficient
• Sellers are selling all the
goods they produced and
consumers are getting all
the goods that they
demand

14. Why would
a supply
curve
"shift"?
Causes of
a Supply
Shift
Change in the price of resources –
costs go down, price goes down to
capture a larger market OR costs go
up, price goes up to maintain profit
Change in the number of producers
– more producers = more supply or
less producers = less supply
Change in technology – better
technology =more efficient production
– more supply

15. Why would
a supply
curve
"shift"?
Causes of
a Supply
Shift
Government Intervention – new taxes
(decrease in supply), subsides (increase
in supply), regulations will affect supply
Change in Expectations – producers
change their decision on what to
produce based on expectations of
change. Ex: more winter jackets ahead
of winter-time.

16. Causes of Demand Shifts
• Price right?
• Yes
• Higher price, less demand
• Lower price, more demand
• All can cause a sift in the demand curve
• BUT...... There are other variables other than price
• If the price stays constant......

17. Causes of
Demand
Shift with a
Constant
Price
(Market
variables
other than
price)
• Change in taste & preference – things go out
of style
• Change in the number of consumers –
change in population in an area
• Change in price in related goods
• Complementary product – new iPhone 11 cover
for new iPhone 11; old covers decrease because of
a new complementary product to the new product
• Supplementary product – Roku stick (cheaper)
instead of Amazon stick (more expensive)

18. Causes of
Demand
Shift with a
Constant
Price
(Market
variables
other than
price)
• Change in income levels
• I get paid more; I want a Lexus instead of a
Honda
• I lose my job; I eat at the diner instead of the steak
house
• Change in expectations
• Freeze in Florida wipes out orange crop; I'm
buying orange juice now before the price increases

19. Elasticity
(think rubber band)
Common definition –
degree to which a demand
or supply curve reacts to a
change in price
Inelastic good or service –
change in price may not
throw off the quantity
demanded or supplied of
the product
Usually more of a
day to day necessity
god or service
(milk)
Highly elastic – slight
change in price leads to a
sharp in quantity demanded
or supplied
Product is available
on the market but
may not be needed
daily (TV)

20. Remember Opportunity costs?
How does it relate to Elasticity?
• Cost of a good or service
• Buying a prom dress $1,000
• What can I do with the $$ instead of buying that Prom Dress?
• Cruise on Carnival
• Goods or Services may not be purchased because of a less of a necessity which
then makes the opportunity costs too high.
• TV price is too high, do not need a new TV, could use one but... I need that $$ to buy food
• Goods or services which are not as much as a necessity are more affected by
elasticity and high opportunity costs

21. Crash Course: Supply and Demand