The Law of Supply and Demand, and Government Intervention

2. The Law of Demand
The Law of Demand states that as Demand
goes up Price goes down.
There is an Inversely proportional relationship
between Price and Demand

3. The Demand Curve
•The demand curve is
downward sloping,
indicating the negative
relationship between
the price of a product
and the quantity
demanded.

4. The Demand Curve
•Since it is downward-sloping, this means that
as price decreases, consumers will buy
more of the good.

5. Hypothetical goods that are
exempted from the Law of Demand
 These goods exempted from the Law of Demand
because they have an upward sloping demand
curve rather than the usual downward slope.
 Giffen Goods
 inferior goods that are substitutes for more expensive
goods, that people buy more when they cannot afford a
superior good.
 Veblen Goods
 goods that people buy because it is expensive, as a
show of wealth.

6. Changes in the Demand Curve
 Change in price will result in a movement
along the demand curve

7. Changes in the Demand Curve
 Change in a non-price variable
 For a NORMAL GOOD (when Income increases)
There is an
outward shift

8. Changes in the Demand Curve
 Change in a non-price variable
 For an INFERIOR GOOD
There is an
inward shift
D1
D2
S
P
Q
P1
P2
Q2 Q1

9. The Law of Supply
The Law of Demand states that as Supply goes
up Price goes up as well.
There is a directly proportional relationship
between Price and Supply.

10. The Supply Curve
•The supply curve is
upward sloping,
indicating the positive
relationship between
the price of a product
and the quantity
supplied.

11. The Supply Curve
•Producers are
willing to increase
production at
higher prices to
increase profit.

12. Changes in the Supply Curve
 Change in price will result in a movement
along the supply curve

13. Changes in the Supply Curve
 Change in the cost of production
 supply will shift outward if costs decrease and;
 supply will shift inward if they increase.
 Change in the expected Demand
 supply will shift outward if enthusiasm is expected to
increase and;
 supply will shift inward if there is an expectation for
consumers preferences to change in favor of an
alternate good or service.

14. Government Intervention
 Done by the government to combat
market inequities and promote fairness.
 Three common ways of intervention:
 Taxation
 Regulation
 Subsidies

15. Regulation (Price Control)
 Price Ceiling
 to protect consumers of a certain good or
service by establishing a maximum price,
a government wants to ensure the good
is affordable for as many consumers as
possible.

16. Regulation (Price Control)
 Price Floor
 to protect producers of a certain good or
service by establishing a minimum price,
a government wants to ensure the good
is profitable for as many producers as
possible.

17. Regulation (Price Control)
 Effects of Price Control
 Price Ceiling = Shortages of goods
 Price Floor = Supply Surplus
= Consumer Surplus
= Producer Surplus