Transcript Slide 1

Topic 3:
Demand, Supply, & Pricing
Buyers demand goods, sellers supply those goods, and the
interactions between the two groups lead to an agreement
on the price and the quantity traded.
Warm-Up:
1) What is your most important consideration when
you consider buying something?
2) What are five things that you couldn’t live without?
Would you still buy these items if they doubles or
tripled in price?
Rules To Remember
DWAP: desire, willingness, ability to purchase
 Demand dips
 Law of Demand
inverse Price(P) &
Quantity(Q)
 Demand = Quantity Demanded (D = Qd)
 Price only changes quantity demanded
 5 shift factors of the demand curve that are
not related to price

Law of Demand

The law of demand holds that other things
equal, as the price of a good or service
rises, its quantity demanded falls.
◦ Inverse relationship: as the price of a good or service falls,
its quantity demanded increases.

Demand is important because it shows
how people are willing to allocate
resources
Example
Pizza:
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If a slice of pizza costs $1,
would you buy it?
How many slices would
you buy?
If a slice of pizza cost $3,
would you buy it?
How many slices would
you now buy?
This shows us the law of
demand…as price
increases you will buy less
Demand Schedule:
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A demand schedule is a table that lists the quantity of a good that an
individual in a market will buy at each different price.
A market demand schedule is a table that lists the quantity of a good all
consumers in a market will buy at each different price.
Demand Curve

Shows how much consumers will demand at
given prices in graph form
Change in quantity demanded (Qd)
 refers to movement along the curve; a
change in quantity based on price
Consider This:
 What
might happen to sales of a
particular type of car if its producer
announced that its new engine emitted
no pollution, was more powerful than
previous engines, had better gas mileage
than ALL other vehicles, and would cost
the same?
Shifts in Demand

A willingness
to buy
different
amounts at
the same
prices
Shift in the Quantity Demanded
A willingness to buy different amounts at the same prices

The following five things cause a shift in the demand
curve (SPITE):
◦ Substitution: complimentary goods used to replace or with
a good or service
◦ Population: population increases, demand tends to increase
◦ Income: more $, more willing to pay more or buy more
quantity
◦ Tastes & Preferences: trends, values/ beliefs
◦ Expectations: what they expect
How the Demand Curve Changes
When we have an INCREASE in demand
the curve will shift to the RIGHT because
at the SAME price we are demanding more
 When we have a DECREASE in demand the
curve will shift to the left because at the
SAME price we are demanded less

Demand Elasticity
Warm-Up:
•Give
3 examples of goods that can
affect demand for another good
because of price change.
Demand Elasticity
 Small
change in price = great (large)
change in quantity demanded
 The extent in which changes in price
cause changes in the quantity
demanded
 It is the way consumers respond to
price changes
 Elasticity of a good varies at every
price level
Consider This:
 What
is essential to me?
 What goods must I have even if
the price rises greatly?
Elastic Demand

Consumers care about changes in the
price of products with elastic demand
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Example:
◦ The current price of a donut is $.75. Dunkin Donuts
hold a promotion for their coffee, and in the
meantime lower the price of a donut to $.50.
◦ What is the effect on quantity demanded?
◦ How is this related to elasticity?
Determinants of
Demand Elasticity

Urgency of need (Necessity v. Luxury)
◦ if it is not a necessity it is elastic
◦ if it is a need, it is inelastic
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Relative Importance
◦ Ex. Clothing: if you currently spend ½ of your
budget on clothing, an increase in the cost of
clothing will cause a large reduction in the
quantity you purchase.- Elastic
◦ Ex. Shoelaces: if the price doubled, would
you cut back? Probably not because you may
not even notice the difference b/c it is only a
small part of your budget-Inelastic
Determinants of Demand Elasticity
(Continued)
 Substitution availability
◦ If substitutions are available- elastic
 Ex. Butter/ margarine

Change over time
◦ Can’t react quickly to price increase so it
takes time to find substitutes; so demand is
inelastic for a short time until they find
substitutes

Income portion to buy
◦ If goods/services are expensive-elastic
Inelastic Demand
A
small change in price causes a very
little change in quantity demanded
 A demand for a good you keep buying
despite a price increase
◦ Examples:
 Gas
 Milk at the grocery store costs $3.79 per gallon.
Price Chopper has a weekly sale and lowers the
price to $3.39 per gallon.
 What is the effect on quantity demanded?
 How is this related to inelasticity?
Supply
Warm-Up:
Rules of Supply (Producer)
S = Supply (Think about what’s already on
the store shelves available for purchase and
not what the manufacturing potential is).
 Supply to the sky (Curve)
 Law of Supply- direct relationship (P Q )
 Price = change in Quantity Supplied
 8 factors that shift supply
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Law of Supply

holds that other things equal, as the price of
a good rises, its quantity supplied will rise,
and vice versa.
P
Q
OR
P
Q
Direct Relationship
•Producers produce more output when
prices rise so they can cover higher marginal
costs of production
What is a Supply Schedule?
 Shows
the
relationship
between price &
quantity supplied
What is a Supply Curve?
A graphical representation of the supply schedule
 Horizontal axis measures the quantity of good supplied
 Producer's supply curve shows the quantity of an item
that producers will supply for given prices.

Equilibrium
In economics, an equilibrium is a situation in
which:
•there is no inherent tendency to change,
•quantity demanded equals quantity supplied
Equilibrium occurs at a price of $3 and a quantity of 30 units.
Shifts in Supply

A change in any variable other than price that influences
quantity supplied produces a shift in the supply curve or a
change in supply (GETSTIPS).
 Government Regulation
 Expectations
 Technology
 Subsidies
 Taxes
 Input (Cost Of)
 Productivity
 Sellers (number of)
Elasticity of Supply
◦ Measure of the way suppliers respond
to a change in price
◦ If supply is ELASTIC it means that
changes in price will have a large impact
on Quantity supplied
◦ If supply is INELASTIC, it means price
does little to change Quantity Supplied
What Affects
Elasticity of Supply?
Time
• In the short run, a
firm cannot easily
change its output
level, so supply is
inelastic.
 In
the long run, firms
are more flexible, so
supply can become
more elastic.
Supply Elasticity vs.
Demand Elasticity
 If
quantities are being purchased, the
concept is demand elasticity
 If quantities are being sold, concept is
supply inelasticity
Government Influences
on Supply
Subsidies
A subsidy is a government payment that supports a
business or market. Subsidies cause the supply of a
good to increase.
Taxes
The government can reduce the supply of some goods
by placing an excise tax on them. An excise tax is a tax
on the production or sale of a good.
Regulation
Regulation occurs when the government steps into a
market to affect the price, quantity, or quality of a good.
Regulation usually raises costs.
Costs
Total Cost
Fixed Costs
Variable Costs
Sum of fixed &
Variable costs
Costs that don’t
change with output
Costs that change with
Output
Ex. Wage workers,
Raw materials,
electricity
Definitions
Marginal Costs:
 Costs incurred by making one more unit
Marginal Product:
 Extra output made by adding one more unit of input
Theory of Production:
 Deals w/ relationship between Factors of Production
and output; it looks at how output changes when input
changes
Law of Variable Proportions:
 output will change as one input is changed
Stages of Production
Stage #1
Increasing
Returns
Each input
contributes
more to total
output
(ex. Labor)
Stage # 2
Diminishing
Returns
Output
increases with
each input, but
at a slower rate
Stage # 3
Negative
Returns
Each added
input makes
total output
decrease
Pricing & Decision Making
Pricing As Signals: The role of prices is to act as signals for buyers and
sellers in the market.
Measure of Value
Signal
• Standard form of measure for g/s
• for excess or shortage: suppliers inc/dec production for profit;
consumers inc/dec spending
• can decrease price to get rid of a surplus
Flexible
•Can increase price to alleviate shortage problem
• no administrative cost b/c supply and demand determine price
Cost
Choice of g/s
Efficient
• variety of prices for each g/s
• FOPS adjust based on demand
• Easily understood (universal language)
Allocation without Prices:
 Rationing:
◦ Government decides everyone’s fair
share
 Ex. WWII/ OPEC 1973 Oil Embargo
 Problems with Rationing
◦ Fairness: small shares for everyone
◦ Diminished incentives: no motivation to
work
◦ Can lead to BLACK MARKET
How Prices are Determined?
 The Economic Model
◦ Analyzes behaviors
◦ Predicts outcomes
 When
Quantity Demanded =
Quantity Supplied, we have a
market equilibrium
Surplus
 When
Qs>Qd
 Effects:
◦ cause Price to
decrease
◦ Qd to
increase
◦ Qs to
decrease
Shortage
Shortage
◦
Qs < Qd
EFFECTS of a
Shortage (how to
return to Eq):
1.
Increase price
2.
Quantity Supplied
increase
What happens when prices are fixed?
 Price Ceilings
◦ Maximum legal price charged b/c the gov’t
thinks price is too high
◦ Effect: SHORTAGE
◦ Example: rent control
 Price Floors
◦ Minimum legal price charged b/c the gov’t
thinks it is too low
◦ Effect: SURPLUS
◦ Example: minimum wage
$2.00
Price Ceiling
$1.00
$.50
$2.00
$1.00
Price Floor
$.50