Transcript Why do prices change?

Why do prices change?
• Inflation/Deflation (times of generally
rising/declining prices) reflect the changes
• Change in market conditions for a particular
product/service
– change in factors that affect consumers’
demand for the good
– change in factors that affect producers’ supply
of the good
Consumer Demand
• Households get less satisfaction from later
units of a product/service than they get from
earlier units -- diminishing marginal
utility (declining marginal value)
– why the first run of the season down the ski
slope is more exciting than the second
– why the second donut doesn’t taste as good as
the first
• Implies that consumers are only willing to
buy more of a good if the price declines
Consumer Demand (cont.)
• Demand Curve - depicts the relationship
between the price of the product and the
quantity of the product that consumers will
purchase.
• For this class, Demand Curves will always
have a negative slope
Demand for Donuts
Price/donut
1.2
1
0.8
0.6
D1
0.4
0.2
0
1
2
6
Quantity of Donuts (in 1,000’s)
12
What affects the shape/position of
the demand curve?
• Household income
– as income rises families increase their demand for
“normal” goods and decrease their demand for
“inferior” goods
• Household preferences
– some people don’t like to eat sweet things in the
morning while others do
• The availability and price of substitutes
– e.g., bagels vs. donuts
• The availability and price of complements
– e.g., coffee and donuts
Defining Terms
• Normal Goods: a good for which
consumption increases as an individual’s
income rises.
• Inferior Goods: a good for which
consumption decreases as an individual’s
income rises
Producer Supply
• Producers’ willingness to provide a product
or service is dependent on the price they can
get for the good/service in the market…
– the higher the price, the more they are willing
to produce
• Producers’ supply is a positive function of
price
• For this class, Supply Curves will always
have a positive slope
Supply of Donuts
Price/donut
1.2
S1
1
0.8
0.6
0.4
0.2
0
1
2
6
Quantity of Donuts (in 1,000’s)
12
What affects the shape of the supply curve?
• Production technology
– e.g., must donuts be made by hand or can a machine do
it?
• Cost of inputs (a.k.a Input Costs)
– e.g., price of labor, machines, space
Supply & Demand Intersect to
Determine Market Price
Price/donut
1.2
1
P1
S1
E1
0.8
0.6
0.4
D1
0.2
0
1
2
6
Q1
Quantity of Donuts (in 1,000’s)
12
Let’s draw some curves!
• How does an income increase affect
demand for a normal good?
• How does an income decrease affect
demand for a normal good?
• How does an income increase affect
demand for an inferior good?
• How does an income decrease affect
demand for an inferior good?
Examples...
• Oprah Effect: Households become aware of the
perceived negative health consequences of eating
beef
• shifts demand to the left and the market price for
beef declines.
• ABC Factory moves it’s manufacturing plant to
Veracruz, Mexico. What will happen to the price
of ABC’s products?
• shifts supply to the right and the market price for
ABC’s products decrease.
Examples...
• California has the best strawberry crop in years.
What will happen to the price of chocolate and
whipped cream?
• May shift demand for chocolate and whipped
cream to the
– right (increasing both equilibrium quantity and
price).
• Strike of union workers may
• raise employee costs and shift supply curve to the
left (raising equilibrium price and decreasing
quantity).