Law of Demand and Supply
The Law of Demand
Demand:
Definition: The desire to own something and the ability to pay for it.
The Law of Demand:
Definition: Demand varies inversely with price, meaning as price increases, the quantity demanded decreases, and vice versa.
Demand Curve:
Price is always plotted on the y-axis.
Quantity is always plotted on the x-axis.
Demand curves typically have a negative slope, indicating the inverse relationship between price and quantity demanded.
Change in Quantity Demanded:
Cause: Changes in price.
Effect: Movement along the demand curve (also a change in quantity).
Change in Demand
Change in Demand:
Condition: If anything other than price or quantity changes.
Result: The entire demand curve shifts left or right.
Left Shift: Indicates a decrease in demand.
Right Shift: Indicates an increase in demand.
Important Distinction:
Change in Quantity Demanded is not equal to Change in Demand.
Factors That Shift Demand
Consumer Income:
How changes in income affect purchasing ability.
Future Expectations:
Anticipation of future prices or income can affect current demand.
Population (Number of Buyers):
A larger population can increase demand.
Consumer Preferences:
Changes in tastes can impact demand.
Price of Complementary Goods:
An increase in the price of a complementary good can decrease demand for the primary good.
Price of Substitute Goods:
An increase in the price of a substitute can increase demand for the primary good.
The Law of Diminishing Marginal Utility
Definition:
The satisfaction gained from a product declines with each additional unit acquired and/or consumed.
Explanation: As consumers buy more of a product, each additional unit consumed yields less satisfaction than the previous unit.
Eventually, this leads to a negative return, where consuming more results in decreased satisfaction.
Price Elasticity of Demand
Definition:
Measures how much consumer demand responds to a change in price.
Types of Demand:
Elastic Demand:
Definition: A large change in quantity demanded is observed with a change in price.
Graphical Representation: Demand curve is shallow.
Inelastic Demand:
Definition: A small change in quantity demanded is observed with a change in price.
Graphical Representation: Demand curve is steep.
Causes of Elasticity
Factors influencing whether demand is elastic or inelastic:
Substitutes:
Many substitutes: Demand is more elastic.
Few substitutes: Demand is more inelastic.
Size of Price Tag:
Expensive goods: Demand is more elastic due to a significant monetary factor.
Cheap goods: Demand is more inelastic since price changes have less impact.
Necessity vs. Luxury:
Luxury items: Typically elastic
Necessity items: Typically inelastic.
Time Horizon:
Long-Term: Demand is generally more elastic as consumers find alternatives over time.
Short-Term: Demand is often more inelastic as immediate needs must be met.
The Law of Supply
Supply:
Definition: The amount of goods that sellers are able and willing to make available in the market.
The Law of Supply:
Definition: Supply varies directly with price, meaning as price increases, supply also increases.
Supply Curve:
Price is always plotted on the y-axis.
Quantity is always plotted on the x-axis.
Supply curves typically have a positive slope, indicating the direct relationship between price and quantity supplied.
Change in Quantity Supplied
Change in Quantity Supplied:
Cause: Changes in price.
Effect: Movement along the supply curve (also a change in quantity).
Change in Supply
Change in Supply:
Condition: If anything other than price or quantity changes.
Result: The entire supply curve shifts left or right.
Left Shift: Indicates a decrease in supply.
Right Shift: Indicates an increase in supply.
Factors That Shift Supply
Cost of Inputs (Raw Materials):
Increases in production costs can decrease supply.
Future Expectations:
Anticipated future prices can impact current supply levels.
Population (Number of Sellers):
More sellers can lead to greater supply.
Government Influence:
Taxes, subsidies, and regulations can impact supply.
Technology (Machines):
Advancements can increase efficiency, leading to more supply.
Productivity/Efficiency (Humans):
Labor productivity affects total output.
The Law of Diminishing Marginal Returns
Definition:
The level of output from one unit of production declines with each additional unit acquired and/or consumed.
Description: As more of a factor of production is employed, the additional output produced from each extra unit of input eventually declines.
Similar to the Law of Diminishing Marginal Utility, there will come a point of negative return.
Price Elasticity of Supply
Definition:
Measures how much sellers respond to a change in price.
Types of Supply:
Elastic Supply:
Definition: A large change in quantity supplied is observed with a change in price.
Graphical Representation: Supply curve is shallow.
Inelastic Supply:
Definition: A small change in quantity supplied is observed with a change in price.
Graphical Representation: Supply curve is steep.
Supply vs. Demand
Demand:
What consumers want in the marketplace.
Graphical Characteristics: Price plotted on the y-axis, Demand on the x-axis.
Slope Characteristics: Always negative (downward slope).
Direct relationship to price changes: When price decreases, quantity demanded increases.
Supply:
What sellers decide to make available in the marketplace.
Graphical Characteristics: Price plotted on the y-axis, Quantity on the x-axis.
Slope Characteristics: Always positive (upward slope).
Direct relationship to price changes: When price increases, quantity supplied increases.