Unit 1 - Supply and Demand (1-11-16 to 1-15-16)

Demand and Supply

Demand: quantities that people are willing and able to buy at various prices
"What causes a Δ in quantity demanded?" = Δ in PRICE

What causes a "Δ in demand"?

1. Δ in buyers taste (advertisement)
2. Δ in the # of buyers (population)
3. Δ in the price of related goods 

• Complementary = Car and Gas
• Substitute = Soda/Tea/Juice

      4. Δ in income

• Normal = as peoples income rises, demands for goods and services also rise
• Inferior = increase in income causes fall in demand

      5. Δ in expectations

Supply: quantities that producers or sellers are willing and able to produce at various prices
"What causes a Δ in quantity supplied?" = Δ in PRICE

What causes a "Δ in supply"?

1. Δ in weather (natural disaster, drought)
2. Δ in # of sellers
3. Δ in cost of production
4. Δ in technology
5. Δ in expectations
6. Δ in taxes or subsidies

Elasticity of Demand

• measure of how consumers react in Δ in price

Elastic Demand: demand that is very sensitive in Δ in price

• E>1
• product is NOT a necessity; there are substitutes
• ex.) Soda, Steaks, Candy, Fur Coats

Inelastic Demand: demand NOT SENSITIVE in Δ in price.

• E<1
• product is a necessity; few to no substitutes
• people will buy no matter what
• ex.) Gas, Salt, Insulin/Medication, Milk

Unitary Elastic Demand:

• E=1

Price Elasticity of Demand (PED)

Step 1: Quantity

• (New Quantity - Old Quantity) / Old Quantity = QUANTITY

Step 2: Price

• (New Price - Old Price) / Old Price = PRICE

Step 3: PED

• (% Δ in quantity demanded) / (% Δ in price) = PED