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How do we determine prices?

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Supply and Demand

Supply and Demand

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  • 1. What Determines PriceS?
    Supply and Demand
  • 2. A Competitive Market
    Any arrangement that brings buyers and sellers together
    Physical or virtual
  • 3. Since Economics is about Choices…
    Demand
    Supply
    We see how all buyers’ and sellers’ decisions interact in the market to create prices.
  • 4. What is DEMAND?
    Individual: how one person’s decisions affect price
    Market: total sum of all buyers in a market
    Consumers’ willingness and ability to buy an item at a given price
    Wants within budget constraints
    Refers to a behavior
  • 5. THE LAW OF DEMAND
    Shows an inverse relationship between price (P) and quantity (Q)
    Price affects the quantity demanded
    Higher prices  lower quantity demanded
    Lower prices  more quantity demanded
    Sales!
  • 6. THE LAW OF DEMAND
    Why does the curve go down?
  • 7. The Demand Law exists…
    Income effect
    $ increase  you feel poorer, you buy less
    $ decrease  you feel richer, you buy more
    Substitution effect
    Pepsi vs. Coke
    Marginal Utility
    Ex. All You Can Eat Buffet
    Each plate makes you less happy than the plate before
  • 8. DemandSchedule vs. Curve
    Curve
    Schedule shows all of the combinations of quantities demanded at different prices, ceteris paribus
    Curve
    Plots the relationship between price and quantity demanded
  • 9. How do you shift the Demand Curve?
    Tastes or Preferences
    Related Goods’ Prices
    Income
    Population (# of buyers)
    Expectations
  • 10. The 5 Determinants of Demand
    Affected by trends and health considerations
    Related Prices
    Complements
    Hot dogs and buns
    If P goes up of complement, demand decreases and vice virsa
    Substitutes
    Pepsi vs. Coke
    If P of substitute goes up demand increases
    Tastes (Preferences)
  • 11. The 5 Determinants of Demand
    If income increases
    Buy more luxury/normal goods
    If income decreases
    Buy more normal/inferior goods
    More buyers = more demand
    Less buyers = less demand
    Income
    Population (# of Buyers)
  • 12. The Five Determinants of Demand
    Expectations
    If P is expected to go up in the future, demand increases NOW
    If P is expected to go down in the future, demand decreases NOW
  • 13. SHIFT IT…
  • 14. Shift Vs. Change in Quantity Demanded
  • 15. GROUP ACTIVITY
    You are in charge of opening a firm offering a specific good or service. Decide on a product name, slogan, and then answer the three basic questions of production: what you will produce, how you will produce it, and for whom you will produce it. After, draw a potential demand curve for your expected market of the good or service. Explain how your demanders’ curves could shift in or out using the determinants of demand. Be prepared to justify your answers as expert economists.
  • 16. Supply
    Producers’ willingness and ability to sell a good or service
    Refers to a behavior
  • 17. THE LAW OF Supply
    Shows a direct relationship between price (P) and quantity (Q)
    Price affects the quantity supplied
    Higher prices  higher quantity supplied
    Lower prices  less quantity supplied
    PRODUCERS LOVE HIGHER PRICES!
  • 18. THE LAW OF SUPPLY
    Why does the curve go up?
  • 19. The law of Supply
    • Increasing Opportunity Costs
    • 20. Increasing production
    • 21. Need more space
    • 22. Can’t add factories and machines fast enough
    • 23. Labor is used
    • 24. Crowding out results (too much congestion)
  • Law of Increasing opportunity costs
    Supply Schedule
    A “profit- maximizing” producer wants to produce more at a higher price.
  • 25. Movement along the Curve vs. Shift
    Changes in the quantity supplied comes because of a price change
    A shift in the Curve comes because of a change in a determinant of supply.
  • 26. How do you shift the Supply Curve?
    Sellers (#)
    Productivity
    Input Costs
    Expectations
    Related Prices
    Cash Change
    Taxes or subsidies
  • 27. The 6 Determinants of Supply
    If more suppliers
    Shifts right
    If less suppliers
    Shifts left
    Increase supply
    Technology, capital innovation
    Decrease supply
    Natural phenomenon hinders productivity
    Sellers
    Productivity
  • 28. The 6 Determinants of Supply
    If inputs price increases
    Shifts left
    If inputs price decreases
    Shifts right
    If price will go up in the future, the supply NOW decreases
    If price will decrease in the future, the supply NOW increases
    Input Prices
    Expectations
  • 29. The 6 Determinants of Supply
    If related price increases
    Shifts left
    If related price decreases
    Shifts right
    Subsidy
    Supply shifts right
    Tax
    Supply shifts left
    Related Prices
    Cash Change
  • 30. Market Equilibrium
    P= $1.00
    Qs = 10 million bottles
    WHEN SUPPLY MEETS DEMAND