Transcript Demand

Unit 2 Microeconomics
Standard
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SSEMI2 The student will explain how the Law of
Demand, the Law of Supply, prices, and profits work
to determine production and distribution in a market
economy.
a. Define the Law of Supply and the Law of Demand.
b. Describe the role of buyers and sellers in determining
market clearing price.
c. Illustrate on a graph how supply and demand
determine equilibrium price and quantity.
d. Explain how prices serve as incentives in a market
economy.
DEMAND
Demand: the amount of a g/s that a
consumer is willing and able to buy at
various possible prices
 Quantity Demanded: the amount of a g/s
that a consumer is willing and able to buy
at each particular price (or a specific
price)
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DEMAND
Quantity Demanded
P
P
Various Possible
Prices
D
Specific Price
D
Qd
Qd
The Law of Demand
(an inverse relationship of Price and Quantity Demanded)
P,
Qd
(an increase in price causes a decrease in quantity
demanded)
P,
Qd
(a decrease in price causes an increase in quantity
demanded)
Price
P3
P2
P1
QD3
QD2
QD1
Quantity
Three economic concepts help
explain the law of demand:
1.
Income Effect: an increase or decrease in
purchasing power caused by a change in price
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Purchasing Power: the amount of money (income)
people have available to spend on g/s
Being able to buy more (or less) of a g/s because
the price went down (or up)
Ex. Sale items
2.
Substitution Effect: the tendency of
consumers to substitute a similar, lowerpriced product for a more expensive
product

Ex. Generic brands vs. name brands
3.
Diminishing Marginal Utility: the
natural decreases in the utility of a g/s as
more units of it are consumed
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Helps explain why demand is not limitless
 Ex. Hot dogs
 The last isn’t as good as the first!
Demand Schedule: shows the
relationship between price and quantity
demanded in a table
 Demand Curve: plots the above
relationship on a graph (doesn’t have to be
curved, but can be)
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Time to Practice!
Changes in Demand
Determinants of Demand: non-price
factors that influence the demand for a g/s
 These include:
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1. Consumer Tastes and Preferences
Trends change demand
 Ex. Boy Bands
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D2
D1
Late 90s
D2
D3
Today
D1
Other Scenarios…
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Britney Spears
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Ricky Martin…Livin’ La Vida Loca???
2. Market Size
As a market expands, it has more
consumers, greater demand
 Advertising, govt. policy, technology can
affect market size
 Ex. iPods (advertising)
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Demand for all MP3 players
Increases because of the popularity
and advertising of Apple’s IPOD
P
D2
D1
Quantity Demanded for MP3 Players
3.Income
The more $ you have, the more demand
you have for g/s
 Or…the less $, less demand
 Ex. Donald Trump vs. Mrs. Perkins
 Who has greater demand for more g/s?
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4.Price of Related Goods
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Changes in a product’s price can affect
demand for the product’s related good
Two Types:
Price of Related Goods –
A. Substitute Goods
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Goods that can be used to replace the
purchase of a similar good

Jeans vs. Khakis
 As the price of jeans continues to go sky
high, you are likely to substitute khakis and
therefore causing the demand for khakis to
increase
Jeans are too much!
Switch to Khakis!
P2
P1
D2
D1
Qd2 Qd1
Jeans
Khakis
Price of Related Goods –
B. Complementary Goods
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Goods commonly used with other goods
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Kool-Aid and sugar
 As the price of Kool-Aid falls, the demand for
sugar increases
5. Consumer Expectations
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Demand will generally rise or fall based
on future predictions regarding income
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Possible increase in allowance...demand
increases
 Possibly getting fired from your
job…demand decreases
Elasticity of Demand
A measure of how consumers react to a
change in price
 Inelastic: demand that is not very sensitive
to changes in price
 Even a large change in price causes a
small change in quantity demanded
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 Necessities
 Ex.
insulin, baby formula
PERFECTLY INELASTIC
INELASTIC
D
D
Qd
Qd
Elastic Demand: demand that is very
sensitive to a change in price
 Even a small change in price causes a
large change in quantity demanded
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 Luxuries
 Ex.
Champagne, caviar, Coke
Perfectly Elastic
Elastic
D
D
Qd
Qd
SUPPLY
Supply: the amount of g/s producers are
willing to offer at various possible prices
during a given time period
 Quantity Supplied: the amount of a g/s
that a producer is willing to sell at each
particular price
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P
S
Qs
Supply – all possible points
Quantity Supplied – one particular
point
The Law of Supply
(a direct relationship between Price and Quantity Supplied)
P,
Qs
(an increase in price causes an increase in
quantity supplied)
P,
Qs
(a decrease in price causes a decrease in quantity
supplied)
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One main factor helps explain supply…
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Profit: the amount of money remaining
after producers have paid all of their costs
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Revenues > Costs of Production = Profit
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Costs of Production: costs incurred in the
production of a g/s
 Ex.
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Wages, rent, electricity, raw materials, etc.
Profit also signals other producers to enter
the market!
Time to Practice!
Changes in Supply
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Determinants of Supply: non-price factors
that cause shifts in the entire supply curve
Price of Resources
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Any change in the factors of production
can cause a change in supply
 Citrus
fruit crop destroyed…decrease in
supply of OJ
Government Tools
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A.
B.
C.
3 Main Tools:
Taxes – required payment of money to
the govt.
Subsidies – payments to private
businesses by govt.
Regulations – rules set by govt. on how
companies must conduct business
Technology
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New tools or processes that typically
increase supply
Competition
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More competition, more supply because
there are more products on the market
Price of Related Goods
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Change in price of one leads to an
increase or decrease in supply of the
other
Producer Expectations
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Future demands of consumers leads to
higher prices…causes an increase in
supply
Standard
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SSEMI3 The student will explain how
markets, prices, and competition influence
economic behavior.
a. Identify and illustrate on a graph factors that
cause changes in market supply and demand.
b. Explain and illustrate on a graph how price
floors create surpluses and price ceilings create
shortages.
c. Define price elasticity of demand and supply.
Putting It All Together with Price
Producers and Consumers speak a unique
language called PRICE
 Producers say: this is how much it cost to
produce
 Consumers say: this is how much I want to
pay for a product
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Benefits of the Price System:
1.
Information –
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Producers know which g/s is more profitable
 Consumers the relative worth of g/s
2.
Incentives –
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Price encourages both Law of Supply and
Law of Demand
Benefits Continued…
3.
Choice –
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4.
Efficiency –
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5.
encourages competition and therefore a variety of
products at different price points
provides for wise use of resources (it helps indicate
demand) and also quickly delivers info to producers
and consumers
Flexibility –
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great ability to change with increase and decreases
of supply and demand
Limitations of the Price System:
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1.
Market Failures: (limitations) when the price
system fails to account for some costs and
therefore cannot distribute them appropriately
These include:
Externalities: the side effects of the production
of a good that are not directly connected with
the production or consumption of the good
Limitations Continued…
2.
3.
Public Goods: any good consumed by all
members of a group
Instability: prices can swing to extremes during
times severe weather, natural disasters, or
worker protests
How do we determine prices?
Prices are determined by market
equilibrium.
 Market Equilibrium: when quantity
supplied is equal to quantity demanded
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where the needs of both producers and consumers
are satisfied
 shown on a graph where the supply and demand
curves intersect
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Market Equilibrium (Market
Clearing Price)
P
S
Equilibrium Point
Qd = Qs
D
Q
What happens when the price
systems “miscommunicates”?
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Surplus: exists when quantity supplied
exceeds the quantity demanded at the
price offered
Shortage: exists when the quantity
demanded exceeds the quantity supplied
Government and Prices
Govt. sometimes gets involved in
managing prices in an attempt of
preventing market instability
 Govt. sets prices to protect producer and
consumers from major price swings
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2 Ways Govt. Sets Prices:
1.
Price Ceilings: govt. regulation that
establishes a maximum price for a
particular good
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producers cannot charge above this price
 Ex. rent control in NYC, milk
P
S
MCP
Price
Ceiling
D
Q
2.
Price Floors: govt. regulation that
establishes a minimum level for prices
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more common than price ceilings
 helps protect farmers
 minimum wage: the lowest amount an
employer legally can pay a worker for a job
P
Price
Floor
S
MCP
D
Q
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Economists argue that artificially setting
prices can prevent the market from
reaching equilibrium!
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What problems might this cause?
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Rationing: system in which govt. or
another institution decides how to
distribute a product
 this
is done because the supply of a good is
so low
 Ex. WWII, Hurricane Katrina, college sports
tickets
Consequences of Rationing:
1.
Unfair – this system does not treat people
as equals…prices are neutral
2.
Expensive – administrative costs involved
in keeping rationing system in place
3.
Creates Black Markets – market where
goods are exchanged illegally at prices
that are higher than officially established
prices
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Ex. Ticket scalping
Standard - SSEMI4
The student will explain the organization and role of
business and analyze the four types of market
structures in the U.S. economy.
a. Compare and contrast three forms of business
organization—sole proprietorship, partnership, and
corporation.
b. Explain the role of profit as an incentive for
entrepreneurs.
c. Identify the basic characteristics of monopoly, oligopoly,
monopolistic competition, and pure competition.
3 Forms of Business Organization:
1.
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Sole Proprietorship – business owned
and operated by one person
Advantages:
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Ease of start-up
 Full control
 Exclusive Right to Profit
Sole Proprietorship Cont.
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Disadvantages:
 Unlimited
Liability: complete responsibility for
debt
 Sole Responsibility
 Limited Growth Potential
 Lack of Longevity: the amount of time the
business operates
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May not be able to offer fringe benefits
2.
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Partnership: business owned and
controlled by two or more people
Advantages:
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Ease of start-up
 Specialization
 Shared decision making
 Larger pool of capital (easier to borrow $)
Partnership Cont.
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Disadvantages:
 Unlimited
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Liability (unless LLP)
Limited Liability Partnership – can only lose initial
investment
 Potential
for conflict
 Lack of longevity
3.
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Corporation: business in which a group
of owners, called stockholders, share in
profits and losses
Advantages:
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Limited Liability for Shareholders
 Transferable ownership
 Ability to attract capital
 Longevity
Corporation Cont.
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Disadvantages:
 Expense
& difficult to start-up
 Double Taxation
 Potential Loss of Control by founders
 More legal requirements/regulations
Why start your own business?
Profit!
 As a business owner you need to be
aware of different market structures in
order to be as profitable as possible!
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Horizontal Merger (ATT & BellSouth)
 Vertical Merger
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Market Structures
Perfect Competition…must have…
1.
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Large # of firms
Sell identical products
Sellers are able to freely enter and exit
market
No price-setting power
No non-price competition
Examples of Perfect Competition
Agricultural Products
 Socks
 Nails, nuts and bolts
 eBay Auctions
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2. Monopolistic Competition: market
structure where many companies sell
products that are similar but not identical
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Many firms
Differentiated products
Few barriers to entry
Slight control over price
Considerable non-price competition
Examples
Restaurants
 Fast Food
 Clothing Stores
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Nonprice Competition
A way to attract customers through style,
service, or location, but not a lower price
 How?
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 Physical
Characteristics
 Location
 Service
Level
 Advertising, image, or status
Oligopoly: market structure where a few
large firms dominate the market
3.
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Few firms
Some variety of goods
High barriers to entry
Considerable price-setting power
Considerable non-price competition
Examples?
Airlines
 Pharmaceuticals
 Soft Drink Companies
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Collusion: agreement among firms to
divide market, set prices, limit production
 Cartel: a formal organization of producers
that agree to coordinate prices and
production (illegal in the US)
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 OPEC
(Organization of Petroleum Exporting
Countries)
Monopoly: a market dominated by a
single seller
4.
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One firm
No close substitute for product
Complete barriers to entry
Complete control over price
No non-price competition
Examples of Monopolies
Electric Companies
 Standard Oil (Rockefeller)
 US Steel (Carnegie)
 Microsoft ???
 Apple Inc.
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Legislation re: Monopolies
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Sherman Anti-Trust Act