Demand
Demand is a relatively basic economic concept that has major implications for the rest of economics. At its base level, demand is how much of a given good or service that people want to buy. There's probably less demand for, say, private rocketships than there is for, say, eggs. A five-year-old could probably have figured that out. Maybe.
It's when we start to play with demand that economics really gets interesting. Start with you typical demand curve, at right. Note that the x-axis is Quantity, and the y-axis is Price. This is the standard for demand curves, and you will see this same set up on every demand curve you ever see, ever. Promise.
The most important thing to understand about the demand curve to the right is that as the price of an object decreases, a greater quantity of that product is demanded. The demand itself doesn't change; just a shift in the quantity demanded (THERE IS A HUGE DIFFERENCE HERE!!!).
It's when we start to play with demand that economics really gets interesting. Start with you typical demand curve, at right. Note that the x-axis is Quantity, and the y-axis is Price. This is the standard for demand curves, and you will see this same set up on every demand curve you ever see, ever. Promise.
The most important thing to understand about the demand curve to the right is that as the price of an object decreases, a greater quantity of that product is demanded. The demand itself doesn't change; just a shift in the quantity demanded (THERE IS A HUGE DIFFERENCE HERE!!!).
Let's say, though, that our demand curve at left is for a Joe's House of Diplomas, a local college that is trying to determine how to set its tuition rates. Demand curve D1 represents the basic demand curve for Joe's. For example if they want to attract 15,000 students, they should charge about $15,000 in tuition. You will note that as the price of tuition increases, fewer students will enroll at Joe's House of Diplomas. This is because in a market economy, there are almost always viable alternatives. Students that cannot afford to attend Joe's will enroll in a school with lower tuition. This is known as the "substitution effect."
Let's say, though, that US News and World Report publishes there annual rankings, and ranks Joe's House of Diplomas the #1 liberal arts college in America. This may cause demand to shift from D1 to D2, due to a change in the public's perception of the value they would be getting for their money.
Similarly, if another local college were to be ranked ahead of Joe's House of Diplomas, and that local college had lower tuition rates than Joe's, you might see Joe's demand curve shift to the left, which is known as the substitute effect. If there are viable alternatives to a product, the demand for the given product is likely to shift left, or decrease.
Let's say, though, that US News and World Report publishes there annual rankings, and ranks Joe's House of Diplomas the #1 liberal arts college in America. This may cause demand to shift from D1 to D2, due to a change in the public's perception of the value they would be getting for their money.
Similarly, if another local college were to be ranked ahead of Joe's House of Diplomas, and that local college had lower tuition rates than Joe's, you might see Joe's demand curve shift to the left, which is known as the substitute effect. If there are viable alternatives to a product, the demand for the given product is likely to shift left, or decrease.
Demand elasticity is a concept that is defined as the extent to which a change in price causes a change in the quantity demanded. Some products have high price elasticity: that is, if the price of the object increases, consumers will not buy as much of the product. An example might be for Trident gum. If the price of Trident gum rises, people will buy other kinds of gum: the substitute effect.
Other products have low price elasticity, or are price inelastic. An example would be gasoline. No matter how much the price of gasoline increase, people are still going to buy it, particularly if they need to drive their cars to work or school or the mall.
To determine a product's price elasticity, examine examine the demand curve. Products with high price elasticity will have a gentler slope. Products that are price inelastic will have a more vertical slope. Products that are fully price elastic will have no slope (that is, a straight line).
Other products have low price elasticity, or are price inelastic. An example would be gasoline. No matter how much the price of gasoline increase, people are still going to buy it, particularly if they need to drive their cars to work or school or the mall.
To determine a product's price elasticity, examine examine the demand curve. Products with high price elasticity will have a gentler slope. Products that are price inelastic will have a more vertical slope. Products that are fully price elastic will have no slope (that is, a straight line).
Supply
Supply is sort of like the inverse of demand (in fact, the supply curve has a positive slope, while the demand curve has a negative slope). This is because while buyers would like to save money (and so will buy less of a product as the price rises), sellers are the opposite. Sellers are looking to sell their product for the largest amount possible. This is why as the price of a good increases, the quantity supplied will also increase, even as the quantity demanded is decreasing.
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If you graph a supply curve and a demand curve for a product on the same graph, you will find the point that they intersection. This intersection is known as equilibrium, and it is the point of maximum efficiency in production. From here, you can derive the equilibrium price and equilibrium quantity (the price that should be charged for each product and the number that should be supplied in order to achieve perfect efficiency.
The video at left demonstrates many of these economic principles using the Indiana Jones movies, because, well, Harrison Ford is awesome... much like economics. Also, just like demand curves, supply curves can shift when acted upon by outside factors, but there is a difference between a shift in supply and a change in quantity supplied. |
To synthesize our supply and demand unit, we'll be working on a group poster project that demonstrates knowledge of the effects of supply and demand shifts. The project explanation and expectations can be accessed by clicking the button to the right.
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