Demand and Supply
Ms. Trimels12th grade Economics
DemandHow much of a good or service people are willing and able to buy at various prices.
Law of Demand: the inverse relationship between price and quantity demanded of a good or service.
- As prices fall, more people want it. As prices rise, people will do without.
* Demand Schedule - Ex. 1 (p. 54)
Demand vs. Quantity DemandedDemand: The amount of demand possible at all prices at a given period.
- It refers to the entire relationship between prices and the quantity of this product or service at various prices.
- the willingness of buyer and his affordability to pay the price for the economic good or service → what he can afford at each price
Quantity demanded: The amount demanded at a particular price - It refers to one particular point on the demand curve; how much is
demanded at a specific priceA change in price is a change in quantity demanded
Shift in [Total] DemandShift Right = Increase
- Looks like “up”
Shift Left = Decrease- Looks like “down”
What Changes Demand?1. Income
a. Changes in price affect the purchasing power of a consumer’s income. (AKA, the amount of something you can get w/each dollar)
$1000/month $100/month
2. Taste / Preferencesa. What you like affects what you’ll buy. b. Advertisements, diets, health warnings, etc.
I
3. Substitutesa. Changes in price motivate consumers to buy the cheaper
substitute
P↑ → D↑ (for substitute)
I like oranges.
$2 $5
Nvm I like apples.
4. Complimentsa. Proportional demand for related goods
i. Ex: cookies and milk, hotdogs and buns
D↑ = D↑ (for compliment)
P↑ = D ↓ (for compliment)
$10
I don’t need milk if I don’t want cookies
D ↓
5. Expectationsa. If consumers expect something to be different in the future, they
will consume at a different level today6. Population
a. A sudden, large influx of people would change the demandi. Ex: immigration, baby boom
Law of Diminishing Marginal Utility:As you continue to consume a given product, you will eventually get less additional utility from each unit you consume.
In other words, the more you get something, the less value it has to you.
*For the AP ExamYou will need to read the test questions carefully to determine if something is a normal good or an inferior good.
Normal goods: Income and demand are directly related
Inferior goods: Income and demand are inversely related
Ex: Bus passes, McDonald’s, Ramen noodles
SupplyThe specific quantity of a good or service that suppliers are willing and able to provide at different prices.
Law of Supply: There is a direct relationship between price and quantity supplied.
- As prices rise, producers make more to increase profit
*Supply Schedule - Ex. 3 (p. 56)
What changes supply?1. Technology
a. Advances → efficiency→ more supply bc means of acquiring it become cheaper
2. Price of Resources or Raw Materialsa. An increase in the price of a key resource will decrease the supply
because there will be less of it, and vice versa.
$6 Owner of Cheese Shop: I can’t make
as much cheese.
3. Price of other goodsa. If a producer sees something else make more money, he/she may
switch to selling that good/service
4. Number of Producersa. A change in the number of people producing a good or
service
5. Taxes and Subsidiesa. Taxes decrease supply; subsidies increase supply
↓ ↓Taxes = producer has to spend more Subsidies = producer gets paid more
6. Expectationsa. Same as demand. A producer’s projections might affect how much
he/she supplies
Market EquilibriumWhen the quantity demanded is equal to the quantity supplied.
Surplus and ShortageSurplus: When there is more supplied than demanded at the market price.Shortage: When there is more demanded than supplied at the market price.
“At the market price” is the key. - This does not mean that the resources itself are in a
shortage or a surplus, it just means that people don’t have the purchasing power for said material.