Supply and Demand in the Market Place
small parts of the economy
The Law of Demand
Important topics to understand
The Income Effect – When
the price of a good decreases, the buyers income increases.
is an incentive to buy more.
sale tends to make consumer purchase more)
*Rockefeller, Carnegie, Morgan*
Substitution Effect - when a
price of an article drops, it tends to sell more and effect related products
of gas drops, related items increase (waxing, washing)
Diminishing Marginal Utility
you increase marginal utility, there a decrease in worth
One perfect rose
only one available for miles)
worth more to you than a dozen in which you could purchase at the Mobile Mart
Rare, Singular make it worth more to the consumer.
enthusiasts covet the
1964 Corvette Stingray (T-Back)roof
will pay top dollar at a car auction. (Rare, scarce, singular)
Influence Production - how much a company
has to produce including quality and competition.
Influence Labor - During boom periods
and high growth periods are high; benefits are many because of high prices.
power and production.
Resources - Higher prices
Less purchasing Power
Demand – refers to the
quantities of a good that consumers are willing and able to purchase at various prices during a given time.
Elasticity of Demand
what the consumers will purchase at different prices
chart which describes what is being purchased and at what price
Elastic Demand Schedule-Potatoes/lb.
Price Quantity Buyers
(law of increased marginal utility)
(Graphing demand info – Demand Curve)
The Law of Demand
quantity of a good that people will buy varies inversely with the price of the good.
The Consumer’s Reaction
are usually pleased to purchase at a lower price rather than a higher one and probably will purchase more.
Boutiques, Department Stores, Supermarkets, Specialty Wear
DO NOT publish price increases
Shop Rite’s “can,can” sale
*5 cans for less* (Overstocking)
(suits, sport jackets, shirts)
Lord and Taylors
price/Sale 30% off price)
at the Clearance Rack
*Also note that
Revenue = price
addition you must remember that revenue can increase by raising the prices and selling less goods.
Inelastic Demand - When total revenue
from sales decreases with a price decrease and the demand is relatively unresponsive or inelastic
good is a necessity
There are no substitute goods
Small effect on a budget
Inelastic Demand - Salt
Supply - is the quantity of a good that sellers are ready to sell in a market at a specified price.
From the perspective of the producer
* The higher they can sell their product, the more they will produce.
Supply Schedule tells the producer
what he can sell certain items for and how much he can produce and still make a profit
the supply schedule
the Supply Curve)
Remember! Sellers react positively to higher
The Price Elasticity of Supply
Ratio of the percentage change in the quantity supplied to the percentage change in the product's price.
Increased Marginal Productivity of the Producer/Seller
Demand dictates the amount produced.
seller will attempt to produce the most possible
at the cheapest cost. EG. Andrew Carnegie - US Steel
$5.00 = Price of Steel/lb
$2.50 = Carnegie profit
$2.50 = production costs
(including, natural resources, capital, labor, transportation)
Diminishing Marginal Productivity
Margin of profit is not maintained
eating up profits
EG. less demand but costs remain
*Changing Market (different products)
*Slower Rate of Selling
*Rising labor costs
How can you continue to employ workers if the production demands do not warrant the output of their
Where do the consumers
communicate with the producers?
In the Market place,
through the market system.
will shop and look for sales, constantly.
(the producer is aware of this)
will adjust or reduce prices in order to maintain a level of business
(the consumer is aware of this)
The Law of Supply and Demand
The quantity of a good that buyers want and the quantity that sellers offer their product
are brought to a price.
problems and conditions in the market place(for consumers/producers)
condition in which demand is greater than supply
parent wants the latest gimmick toy (object)
will over spend during the holiday
will rise, accordingly
serious is the shortage)
to satisfy the wants of the consumer
in business for profit
to maintain interest in products without discouragement
condition in which supply is greater than demand in the market
*Everyone has the item
*the novelty has worn off
*sense price gouging
*over stocking and production
projections are effected
there a method of stability where consumers and producers can communicate effectively?
price at which the quantity demand equals the quantity supplied
The Equilibrium Price
The buyers will purchase the least amount of CD's at $16.00 and the most at $4.00
The Seller at $16.00 will make available the most amount of CD's possible and at $4.00
the least available amount.
The Equilibrium Price is $10.00
when there is a shifting of the equilibrium price
minimum price set by the government that is above the market equilibrium price
maximum price set by the government that is below the market equilibrium price.
It cannot go higher
Con Ed (regulated monopoly)
Preventing price gouging