1. Unit 2
Supply and Demand

2. Demand
 What is demand?
›The desire, ability, and willingness of
consumers to buy a product.
 Demand is a microeconomic concept
›Microeconomics  part of the
economy that deals with behavior and
decision making by small units
[individuals, firms]

3. Law of Demand
 The quantity demanded (Q-d)for an
economic product varies inversely
with its price.
 P  Q-d
 P  Q-d

4. The Demand Schedule
 A listing that shows the Q-d at all prices
that might prevail in the market at a
given time. Price Number of CDs
per CD Demanded
$ 30 0
$ 25 0
$ 20 1
$15 3
$10 5
$5 8

5. The Demand Curve
 A graphic depiction of the points
corresponding to a demand schedule.
 Illustrates the quantity that consumers
will demand at each and every price.
 Downward sloping Price
Demand Curve
Quantity
Demanded

6. Change in Quantity-Demanded
v. Change in Demand
• Illustrated by a movement along the
Change in current demand curve
quantity- • The whole demand curve does not shift
demanded • Response to a change in the price of
the product
• Illustrated by a shift of the entire
Change in demand curve left or right
demand • Response to a change in one of the four
“non-price” determinants of
demand

7. A Change in Quantity-Demanded
Movement along the demand curve
Shows a change in the quantity of the
product purchased in response to
a change in price. Price
Example:
If the price of an I-Phone
decreases, the
Quantity
quantity-demanded of Demanded
I-phones would increase

8. Change in Demand
Changes in any of the ‘non price’ determinants of demand will cause the
entire demand curve to shift right (increase) or left (decrease).
Ex- If demand increases, the entire demand curve will shift right.
This means that at each and every price, more will be demanded (Q-d).
1. Consumer Income
2. Consumer Tastes
3. Price of Substitute Goods
4. Price of Complement Goods

9. Diminishing Marginal Utility
• Marginal Utility: extra usefulness or
satisfaction a person gets from acquiring
one more unit of a product.
• Law of Diminishing Marginal Utility
States that the extra satisfaction we
get from using additional quantities of a
product begin to diminish.

10. Recap: Food Simulation
• You got the most satisfaction
from the first food purchase.
• You get less satisfaction
from the second, and even
less from the next but
you continue to eat…
• When you reach the point where
the marginal utility does not
justify eating (i.e., you get sick),
you stop.

11. Recap: Food Simulation
• Because of diminishing satisfaction, we
would not be willing to pay as much for
the 2nd, 3rd, 4th, and so on, as we did the
first.

12. DEFINE ‘ELASTIC’
What images come to mind
when you hear this term?

13. Elasticity of Demand
Demand Elasticity:
Extent to which changes in price cause
changes in the quantity-demand.
Have you ever bought a product that you
needed and the cost was not important?
- What was it?
- Why didn’t the cost matter to you?

14. Elastic versus Inelastic
DEMAND
Elastic Demand Inelastic Demand
• A given change in price • A given change in price
causes a relatively larger causes a relatively smaller
change in quantity- change in the quantity-
demanded demanded
• Example – Luxury Food • Example – Milk

15. Estimating the
Elasticity of Demand
1. Can the purchase be delayed?
2.Are adequate substitutes
available?
3. Does the purchase use a
large portion of income?
Yes to 2+ = Elastic
No to 2+ = Inelastic

16. Estimating the
Elasticity of Demand
Services of Gasoline
Determining Fresh Gasoline in
Elasticity
Table Salt Medical Milk from
Tomatoes General
Doctors SUNOCO
Can the
purchase be
delayed?
Are there
adequate
substitutes?
Does the
purchase
require a
large portion
of income?
Elastic?
Inelastic?

17. Supply
 What is supply?
•The ability and willingness of
producers to offer products for sale.
›The producers (suppliers) decide
how much to offer for sale at various
prices.
›This decision depends on the cost of
producing goods/services.

18. Law of Supply
 The quantity supplied(Q-s)for an
economic product varies directly with
its price.
 P  Q-s
 P  Q-s

19. The Supply Schedule
 A listing that shows the Q-s at all prices
that might prevail in the market at a
given time. Price Number of CDs
per CD Supplied
$ 30 8
$ 25 7
$ 20 6
$ 15 4
$10 2
$5 0

20. The Supply Curve
 A graphic depiction of the points
corresponding to a supply schedule.
 Illustrates the quantity that suppliers
will supply at each and every price.
 Upward sloping Price
Supply Curve
Quantity
Supplied

21. Change in Quantity-Supplied
v. Change in Supply
Change • Illustrated by a movement along the
current supply curve
in • The whole supply curve does not shift
quantity-
• Response to a change in the price of
supplied the product
• Illustrated by a shift of the entire
Change supply curve left or right
• Response to a change in one of the
in supply
eight “non-price” determinants of
supply

22. A Change in Quantity-Supplied
Movement along the supply curve
Shows a change in the quantity of the
product supplied in response to
a change in price. Price
Example:
If the price of an I-phone
increases, the
Quantity
quantity-supplied of Supplied
I-phones would increase

23. Change in Supply
1. Cost of Inputs
2. Productivity Remember:
Suppliers want to sell
3. Technology
more at a higher price
4. Taxes
5. Subsidies
6. Future Expectations
7. Government Regulations
8. Number of Sellers

24. Headliners:
Supply and Demand
• Pretend you are a writer for the local newspaper.
• Your task is to create a ‘catchy’ headline and write a brief
news article detailing a scenario that would cause a change
in supply or demand. Be sure to describe which
determinant of supply or demand your article is discussing.
• Include drawings and a S&D graph to illustrate how the
change in supply or demand would impact local consumers.
Examples of “catchy” headlines from recent news…
• “J. Crew benefits as Mrs. Obama wears the Brand”
• “Demand increasing for locally grown thanksgiving fixings”
• “Tickets! Tickets! Who’s Got Tickets?”
• “Consumer demand for small cars is here to stay”