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How do we determine prices?


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Supply and Demand

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How do we determine prices?

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