Transcript supply and demand - Lockport Township High School | Haiku

DEMAND, SUPPLY, AND
PRICE
Chapters 4, 5, & 6
Chapter 4: Section 1
What is Demand?
Scenario I
• Proctor & Gamble introduced disposable diapers
to the marketplace in 1961. At first parents only
used Pampers for special occasions. Today, 95%
of American parents use disposable diapers at a
cost of $2,100 a child. Why do you think the
change took place so gradually?
ANSWER:
• Change in preferences, Faster Pace Society today,
Easier Disposal Today, Advertising, More
Choices today, Substitutes, and etc.
Supply and Demand
• Demand--- The amount of a good or service that
consumers are willing and able to BUY at various prices
• Consumers individually and collectively have a great
influence on the price of all goods and services.
• Supply--- The amount of a good or service that producers
will offer to SELL at various prices
• Businesses and Firms-- people who want to sell items
decide how much to sell and at what price.
• A market represents actions between buyers and sellers
• Voluntary Exchange--the basis of activity in a
market economy.
– The seller sets the price
– The buyer agrees to the
by the purchase.
– Supply and demand
shows this voluntary
exchange.
Graphing a Demand Curve
• Demand Schedule
is a table that
shows prices and
the quantity
demanded at each
price.
Price Per
Soda
$0.25
$.50
$.75
$1.00
$1.25
$1.50
Quantity
Demanded
CONSTRUCT A DEMAND SCHEDULE USING
THE FOLLOWING INFORMATION:
• A local movie theatre does an experiment every
Monday afternoon to see how many people will come
see a movie at different prices. Here is what they
found: at $2 per ticket 500 people bought tickets, at
$4 per ticket 400 people bought tickets, $6 = 300,
$8= 200, $10 = 100.
PRICE per movie ticket
$2
QUANTITY of movie
tickets DEMANDED
500 tickets
PRICE per movie ticket
$2
QUANTITY of movie
tickets DEMANDED
500 tickets
$4
400 tickets
$6
300 tickets
$8
200 tickets
$10
100 tickets
Demand Curve
• Demand Curve-- Shows/graphs the
quantity demanded of a good or service
at each possible price.
• Use the information from the demand schedule
to CONSTRUCT A DEMAND CURVE.
Plot the points first, and then connect them.
Label the line D1.
• *Make sure to include: a title, labels for the
x and y axis, and numbers that are labeled
consistently
Demand
• The Law of Demand- A rule or theory that
states:
• 1) As PRICE goes UP, the quantity
consumers DEMAND goes DOWN.
• 2) As PRICE goes DOWN, quantity
DEMANDED goes UP.
• More will be demanded at lower prices and
less at higher prices
• There is an INVERSE relationship between
price and quantity demanded
• At which price will the movie theater make
the most money (or maximize their profit)?
• TOTAL REVENUE= Price x Quantity
• TR= P x Q
• ANSWER: $6 per ticket x 300 tickets= $1800
• At all other prices, the theater will make less TOTAL
REVENUE than it will if it sells tickets for $6
Law of Demand
Price
Quantity
Graphing A Demand Curve
Demand Schedule
Price of
Widgets
$1.00
# of Widgets
People want
to buy
100
$2.00
90
$3.00
70
$4.00
40
Shifts in Demand
Demand Schedule
Price of
Widgets
$1.00
# of
Widgets
People Want
to Buy
(100) To 80
$2.00
(90) To 70
$3.00
(70) To 50
$4.00
(40) To 10
Change in Demand
Price
Quantity
Change in Demand
Price
D0 to D1: Increase in Demand
6
D1
D0
7
13
Quantity
• What is a change
in quantity
demanded ?
• Change in Qd is
along the demand
curve and shows a
change in the
quantity of the
product
purchased in
response to a
change in price.
WALKING TO
ECONOMICS CLASS IN
AN UNCROWDED HALL.
Change in Quantity Demanded
Price
A to B: Increase in quantity demanded
A
10
B
6
D0
4
7
Quantity
• Utility is the term
used to mean
customer
satisfaction, or
the power a good
or service has to
satisfy a want.
First Can
Second Can
Third Can
Fourth Can
• Example: Energy
Drink
Fifth Can
• Marginal Utility- People will purchase additional
items until the satisfaction from the last unit is
equal to the price.
• Law of Diminishing Utility- The lessening of this
satisfaction with each additional purchase is
called diminishing marginal utility.
Chapter 4: Section II
Factors Affecting
Demand
• 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?
– Income effect is when people are limited by
their income as to what they can purchase.
– Substitution effect is when people can
replace one product with another if it
satisfies the same need.
• What are some
examples of how
demand might
change?
Determinants of Demand
• Consumer Tastes
• Changes in prices of
substitutes
• Changes in prices of
complements
• Consumer Income
• Change in consumer
expectations
• Population changes
• Advertising
Consumer Income & Tastes
• As incomes rise, consumers are able to buy more
products at each and every price.
• As incomes fall, consumers buy less of goods at each
and every price
-Rises move right
-Decreases move left
• Consumer tastes can be affected as well
-Advertising, done right, increases popularity and
increases demand
-If a product grows tiring, demand can fall
-Technology can create new tastes as well
Substitutes
• A change in price of related products can cause a
change in demand
Substitutes
-Products that can be used in place of other
products
i.e. butter vs. margarine
Butter price goes up, margarine demand
increases
• Demand for a product tends to increase when its
substitutes price goes up
Complements
• Complements
-Related goods that when use of one
increases the use of the other
• Personal computers and software are
complementary goods
-Price of computers go down and demand
goes up for computers and software
-Gillette razors and razor blades
Razors low, razor blades high
Number of
Consumers/Population
• An increase of consumers can cause the market
demand to shift
– Older generations joining in from CDs to
iPods
– Book fans changing over to eReaders
Godfather
•
•
•
•
•
Demand for narcotics is created
Substitute for the other vices that Don Corleone offers
Expectations are that the narcotic business will grow
Sadly, it can also be a compliment to other vices
Quantity demanded will go up simply due to addiction
– “In the first year your end should be 3-4 million
dollars and then it will go up”
Changes in Expectations
• Future technologies might cause people to hold
their purchases
-Ipods coming out, cds went down
• Expectations could go the other way as well
If people think food shortages could be a
reality for the next year they will stock up,
driving demand up.
Tastes & Preferences
• The year is 1968 and
Al’s General Store has
just received a new
supply of Bell Bottom
Jeans.
• What will happen to
the demand for Bell
Bottoms in 1968?
Income
• Ford Motor Company
announces that all
salaries of employees
will be cut in half at its
Detroit plant.
• What happens to the
demand for steak and
lobster in Detroit?
Substitutes
• Coffee prices soar to a new
high in the U.S. due to a
recent embargo of
Columbia.
• What will happen to the
demand for tea?
• Butter VS Margarine
• Paperclips VS Staples
Complementary Goods
• Lockport’s Wal-Mart has
dropped the price of all cameras
by 70%.
• What will happen to the
demand for film in the Lockport
area?
• What are some other examples
of complements?
Population
• Hurricane Katrina
refugees move to
Baton Rouge, LA from
New Orleans, LA.
• What happens to the
demand for televisions
in Baton Rouge?
Chapter 4: Sections 3
Elasticity of Demand
Elasticity of Demand
• How much consumers
respond to a given price is
elasticity.
• Demand Elasticity occurs
when the demand for
some goods is GREATLY
AFFECTED by the
PRICE
Elastic Demand Curves
• Coffee is elastic:
FOLGERS VS
MAXWELL HOUSE
• Butter is elastic: Land
O’ Lakes VS Parkay
• Pop is elastic: Pepsi
VS Coca-Cola Classic.
Inelastic Demand Curves
• Inelastic Demand- occurs
when the demand for some
goods is LESS AFFECTED
by price.
• Give examples of inelastic
goods.
• Ex: Gasoline, Insulin,
medicines and other items
that are essentially needs.
(how easy is it to live without
it? Any alternatives?)
How does Elasticity Affect Me?
• % of a PERSONAL BUDGET SPENT on that
item affects elasticity of demand (the higher the
% of budget, the more elastic the demand.
• How much TIME consumers have to adjust to
the new price affects the elasticity of demand
(more time makes for greater elasticity).
Elastic/Inelastic Curves
• An Inelastic good is a necessity and will be
bought at any time when needed no matter the
price
– The most inelastic curve is a straight vertical line
• Elastic goods are things that can come and go,
matter the price. Wants…
– The most elastic curve is a straight horizontal line
Muppets
• Mortgages are inelastic
– You’ll have one/rent no matter what
– While you can choose where you live if you’re
invested in your home it would be hard to cut away
• The medical expenses Mr. Applegate has to
incur are also inelastic. He must pay it.
• Especially during this time period the money
lenders and mortgages holders could raise and
lower as wanted…
Elastic or Inelastic?
Chapter 5: Section I
What is Supply?
Scenario 2
• In the early days of the telephone,
human operators had to physically
connect each call. The phone
companies always thought that they
would have enough operators to do the
job. As the telephone became
increasingly popular, what happened to
the cost of labor for operations?
• About what percentage of your calls
today involve contact with a telephone
operator?
• Why were telephone companies willing
to supply more automated methods of
connecting telephone calls?
Law of Supply
• Supply is the willingness and ability of
producers to provide goods to the
consumer.
• Law of Supply- As prices rise, the quantity
supplied generally rises. As prices fall, the
quantity supplied falls (Direct
Relationship).
Law of Supply
Graphing a Supply Curve
Supply Schedule
Price of
Widgets
$1.00
# of Widgets
Sellers want to
Sell
10
$2.00
40
$3.00
70
$4.00
140
Shifts in Supply
Supply Schedule
Price of
Widgets
Number of
Widgets Sellers
Want to Sell
$1.00
(10) To 20
$2.00
(40) To 60
$3.00
(70) To 100
$4.00
(140) To 180
Changes in Supply
Price
Quantity
Change in Supply
S0 to S1: Increase in supply
Price
S0
S1
8
6
5
7
Quantity
Change in Quantity Supplied
Price
A to B: Increase in quantity supplied
S0
B
20
A
10
5
10
Quantity
Supply Shifters
•
•
•
•
•
•
•
Cost of Inputs
Productivity
Technology
Taxes and Subsidies
Expectations
Government regulations
Number of firms/sellers
Cost of Inputs
• A change in the cost of inputs can cause a change in
supply
-Supply can increase because of a decrease in
the cause of inputs such as labor or packaging
-If the prices of in puts drops producers are
willing to produce more
-An increase in cost of inputs has the opposite
effect
-If inputs are high producers are not producing
as much, causing a shift to the left (curve)
Productivity
• When management inspire, or workers decide
to work harder/efficiently, productivity
increases.
• Thus more of a unit is produced at every price
which can shift the curve to the right
• If workers are unmotivated, untrained, or
unhappy productivity decreases causing a shift
to the left.
• Less goods brought to market at every price
Technology
• New technologies tend to shift the supply curve
to the right (increase)
• New machines, chemicals, or industrial processes
can affect supply by lowering the cost of
production or by increasing productivity
• However equipment can break down, or
technology might be difficult to obtain.
• This would shift to the left (but not usually)
Taxes and Subsidies
• Firms view taxes as costs
• If the producer’s inventory is taxed or if fees are
paid to receive a license to produce, the cost of
production goes up
• Taxes go down and production costs go down
• Subsidy
– A government payment to an individual, business, or
other group to encourage or protect a certain type of
economic activity.
Technology
• Expectations about future price of a product can
also affect the supply curve
– If producers think the price of their product will go
up, they may withhold some of the supply
– This causes the curve to shift left
– If they think their prices will lower they may try to
produce as much as possible sending the curve
Right.
Government Regulations
• When the gov’t establishes new regulations, the cost of
production can be affected
• Cars
– When the gov’t mandates new auto safety features such
air bags and emission controls, cars cost more to make
– Companies produce fewer cars at each price in the
market because they are more costly to make
• Increased or tighter regulations shift the curve left
(decrease) but relaxed regulations allow producers to lower
costs of production and move the curve right (increase)
Number of Firms/Sellers
• Each of the fore mentioned factors can cause a
shift in the market supply curve and so can the
number of suppliers
• More firms in the industry = the supply curve
moving right. The larger number of firms the
greater the supply
• Sellers enter and leave the market all the time
• Internet helps firms to enter and leave
Cost of Inputs
• INPUTS = Raw
Materials, Wages of
workers, Insurance,
Utilities, and etc.
• The PRICE of Iron Ore
INCREASES at a local
steel mill.
• What will happen to the
supply curve for steel?
Productivity
• Management increases
the number of workers
hired for the second
quarter by 30% in a
computer factory.
• What will happen to the
supply of computers?
Technology
• TECHNOLOGY  able
to produce more in the
same amount of time 
usually lowers costs of
production
• Eli Whitney invented the
Cotton Gin that allowed
one man to pick cotton at
the rate of five men.
• What did the Cotton Gin
do to the supply of cotton
in the South during the
1800’s?
Taxes
• The City of Chicago has just raised
the tax on cigarettes by another
dollar?
• What will happen to the supply
curve for cigarettes in Chicago?
• Subsidy-government payment to an
individual, business, farmer, to
encourage them to produce goods in
a market causes an increase in
supply
Government Regulations
• Government mandates
new safety regulations
that cars must have new
emissions controls and air
bags?
• What happens to the cost
of production?
• The price the consumer
pays?
• And the supply curve of
cars?
# of Sellers/Firms (Competition)
• British Petroleum (BP)
opens two new oil
refineries in Joliet.
• What will happen to the
supply curve for oil in
the total industry?
Chapter 5: Section 2
No Chapter 5: Section 3
(Business Unit)
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
increases revenue.
# of
workers
# Widgets
produced
1
4
2
8
3
11
4
13
5
13
• Finding the right amount of workers to have in a
business
– Too many and you’re loosing money and
productivity
– Too few and there won’t be enough people to run
the business
Chapter 6:
Prices and Decision
Making
Prices in the Market
• Price- monetary value of a product as established
by supply and demand– signal that helps us make
our economic decisions.
• Rationing- distributing goods and services
without prices. EXAMPLE: World Wars 1 & 2
• “Black Market”- market where prices are made
illegally and products are sold illegally 
EXAMPLE: illegally selling people’s organs
• How do sellers often
time try to convince
buyers to agree to the
price of a product?
• Warranty, Deal (Buy 1
Get One Free), Sales,
Advertising, and etc.
• Why do higher prices encourage more
competitors to enter an industry?
• Answer: If the price goes 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.
Market Price
• When quantity
supplied equals
quantity demanded =
market price
(equilibrium price) Price
Demand
Supply
Equilibrium Price
• When Supply curve
crosses Demand curve
Quantity
Shift in Supply Affects Market Price
Demand
Supply
Price
Equilibrium Price
Quantity
Factors Affecting Market Price
Demand
Supply
Price
Equilibrium Price
Quantity
• How will the market price
be affected if:
• Supply increases,
Demand is the same?
• Supply decreases,
Demand is the same?
• Supply stays the same,
Demand increases?
• Supply stays the same,
Demand decreases?
Reading the Curve
• SURPLUS -- Q
demanded is less than the
Q supplied.
• SHORTAGE – Q
demanded is more than
the Q supplied. Ex:
PlayStation 3s were in a
shortage at Christmas;
parking spaces at LTHS
If price is too low…
Price
S
7
6
5
D
Shortage
12 - 6 = 6
6
12
Quantity
If price is too high…
Surplus
14 - 6 = 8
Price
S
9
8
7
D
6
8
14
Quantity
Price Restrictions
• Price Ceilings
– The maximum legal price that can be charged
– Examples:
• Gasoline prices in the 1970s
• Housing in New York City
• Proposed restrictions on ATM fees
• Price Floors
– The minimum legal price that can be charged.
– Examples:
• Minimum wage
• Agricultural price supports