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  1. 1. Supply and Demand Chapter 7
  2. 2. Learning Goals Explain how shifts in equilibrium occur. Describe how price ceilings and price floors restrict the free exchange of prices.
  3. 3. Marketplace Consumers influence the price of goods in a market economy Demand is how people decide what to buy and at what price Supply is how sellers decide how much to sell and what to charge A market represents actions between buyers and sellers
  4. 4. Voluntary Exchange The seller sets the price The buyer agrees to the product and price through the act of purchasing product Supply and demand analysis is a model of how buyers and sellers behave in the marketplace
  5. 5. The Law of Demand Demand is created only when Demand of Product X the customer is both willing and able to buy a product $100.00 As Price goes up, quantity demanded goes down and $90.00 vice versa P = D P=D $80.00 Real Income Effect: when $70.00 people are limited by their $60.00 income as to what they can Price purchase. $50.00 Substitution Effect: when $40.00 people can replace one $30.00 product with another if it $20.00 D1 satisfies the same need $10.00 Utility: used to mean customer satisfaction, or the $0.00 power a good or service has 1 2 3 4 5 6 7 to satisfy a want Quantity
  6. 6. Diminishing Marginal Utility People will purchase additional items until the satisfaction from the last unit is equal to the price (it is “worth it”). The lessening of this satisfaction with each additional purchase is called diminishing marginal utility.
  7. 7. Substitutions??? Q: What are some reasons that people substitute one product for another? What are some reasons that people continue to buy a product despite its price?
  8. 8. Variables Q: Vending machines of the future will have variable pricing. On a winter day, a pop may cost only 50 cents, but on a summer day it may cost $1.00. What other variables might increase, or decrease, the demand for pop?
  9. 9. Quantity Demanded vs Demand A change in quantity demanded is caused by a change in the price of a good. If something other than price causes demand to increase or decrease, this is known as a change in demand and shifts the demand curve. Q: Think of some factors or events other than price that can cause demand as a whole to increase or decrease? Gives examples such as a factor or event.
  10. 10. Determinants of Demand Population Income Tastes and preferences, including fads Substitutes: when a new competitor is added or an old competitor leaves the market. Complementary goods: products that rely upon one another, demand for one affects demand for the other Q: For products that fill the three basic needs (food, clothing, and shelter), which determinant(s) of demand would be most significant and why?
  11. 11. Price Elasticity of Demand How much consumers respond to a given change in price is elasticity. Elastic demand occurs when the demand for some goods is greatly affected by the price. Inelastic demand occurs when the demand for some goods is less affected by price.
  12. 12. Price Elasticity of Demand cont… How many substitutes exist and how closely they provide the same quality and service affects elasticity of demand (fewer or no substitutes make demand inelastic). Percent of a personal budget spent on that item affects elasticity of demand (the higher percent of budget, the more elastic the demand). How much time consumers have to adjust to the new price affects elasticity of demand (more time makes for greater elasticity).
  13. 13. Classwork Do you think it is in a company’s best interest to drastically change the price of a popular product and give consumers months to buy the product at the new price? Why or why not?
  14. 14. The Law of Supply Supply is the willingness and ability of producers to provide goods to the consumer As prices rise, the quantity supplied generally rises As Prices fall, the quantity supplied falls A direct relationship exists between price and quantity supplied Q: What would happen to the price of ipods© if a company opened a new ipod© manufacturing plant that produced millions of ipods©? •The price of ipods© would fall because supply would exceed demand
  15. 15. Incentive of Greater Profits Increase in price and increase in production leads to an increase in profits Higher prices encourage more competitors to join the market Higher prices turn potential suppliers into actual suppliers, adding to the total output Q: Why do higher prices encourage more competitors to enter an industry? Explain your answer in terms of risk and profit. • If prices go up, possible competitors now see that there is more money to be made than before. The gain seems more worth the risk than it did before
  16. 16. Quantity Supplied vs. Supply A change in quantity supplied is caused by a change in price Something other than price can cause a change in supply as a whole to increase or decrease Q: When something other than price causes the supply to increase, what do you think happens to price? Explain. • The price will decrease because the supply will be too great.
  17. 17. Determinants of Supply Price of inputs or cost of production – can cause increase in supply Competition - # of companies in an industry can cause an increase in supply Increase in taxes – decrease in supply Technology – improvements cause an increase in supply Q: Give specific examples of inputs (production costs) for a video store. • Costs of video, wages, insurance, phones, electricity, heat, air conditioning, refreshments, etc.
  18. 18. Determinants of Supply and Demand ExamplesA shopper registers online and theneasily searches through categoriesthat list thousands of items whichcan be bid on in seconds. Here aresome typical items and bid pricesthat were found on the Internet. Babe Ruth trading card from Upper Deck. This card has a splinter of a Babe Ruth bat embedded in it. Bid at $1350.00 New Digital camera. Bid at $140.00 Lot of 100 un-circulated comics. Bid at $16.95
  19. 19. Determinants of Supply and Demand Examples 1. How might another Yankee vs. Dodgers World Series affect people’s tastes and preferences and change the demand for item A? How would it affect the price of this item? 2. How might a change in technology affect the supply of item B? What would happen to the price? 3. Would you expect the price of items A and C to be higher or lower ten years from now? What does this have to do with supply? 4. What complementary goods would affect demand for item B?
  20. 20. Equilibrium Price The price at which the supply meets the demand – where the two curves intersect – Q: Why is the equilibrium price so important? •It shows how the market works to establish prices
  21. 21. Law of Diminishing Returns Adding units to increase production increases total output for a limited time period The extra output for each additional unit will eventually decrease Businesses will continue to add units of a factor of production until doing so no longer increases revenue
  22. 22. Certificates Must measure 1” in diameter 1 minute to produce as many as possible Answer the following questions on the back of your half sheet:1. At what stage did the groups complete the most certificates perperson?2. At what stage did the law of diminishing returns begin to apply? 3. What is the most important thing your learned?
  23. 23. Law of Diminishing Returns cont… Q: What are some different ways that factors of production can be increased? Choose one of your examples to explain the law of diminishing returns. •More employees can be hired, more materials can be purchased, more machines can be bought to make the product, more stores can be built, etc. •If a company continues to build toy stores, they will increase profits. However, at some point the amount of money spent to build and maintain the new stores will not bring in enough extra profit to warrant the increased expenditures
  24. 24. Shifts in Equilibrium Price If either curve shifts due to something other than price, the equilibrium price will change Q: Blue Jeans
  25. 25. Prices Serve as Signals Rising prices signal producers to make more and consumers to purchase less Falling prices signal producers to make less and consumers to purchase more Shortages occur when the quantity demanded (at equilibrium price) is greater than quantity supplied Surpluses occur when the quantity supplied (at equilibrium price) is greater than quantity demanded Market forces can cause the prices to rise or fall to correct shortages and surpluses
  26. 26. Price Controls Price ceilings :a maximum price set by the government to prevent prices from going above a certain level Items in short supply might be rationed Shortages can lead to a black market, or illegal places to purchase such products at exorbitant prices Price floors: minimum prices also set by the government to prevent prices from going below a certain level. • Price floors set a minimum wage level and support agricultural prices Q: Consider the examples of farmers and price floors from the text (pg. 198). How can these price floors actually hurt the economy? •The price floors might encourage farmers to overproduce at times when regular production would still earn them a profit. In this way the consumer does not always get the best product for the best price.
  27. 27. Putting Supply and Demand Together Equilibrium Price: • Where quantity demanded and quantity supplied meet
  28. 28. Shifts in Equilibrium Price When supply or demand curves shift, the equilibrium price also shifts
  29. 29. Prices Serve as Signals Rising prices signal producers to produce more and consumers to purchase less Falling prices signal producers to produce less and consumers to purchase more