Transcript Supply and Demand

Bellwork
List 1 thing you already know about supply
and demand.
2. How much would YOU pay for a pair of your
favorite shoes? Explain.
3. What determines how much you would pay
for them?
Did you know? The most expensive pair of shoes
in the world are “Ruby Slippers” from the
House of Harry Winston for $3 million
1.
Yesterday

Which part of yesterday’s trading represented
local trade? U.S. trade? International trade?

Tomorrow! Bring a pair of comfortable shoes
and a shirt under your button up shirt (It’s going
to be a fitness day  )
Also bring a few dollars with you.

Chapter 6
Supply and Demand
Economies




Free enterprise system: anyone is free to start a
business
Command economy: government sets prices,
and tells people where they can work and how
much they can earn.
Historically command economies have not been
efficient.
Examples of a command economy: Cuba and
the former Soviet Union, and China
Economies




Most economies are a mix
No country has a PURE free market or
command economy
For instance, in the U.S. the government
regulates the postal service, transit, police
In the U.S. we have freedom of speech, and
ownership are protected by law in the U.S.
which gives up more rights.
Price


Price relays information to the entrepreneur
When the price is too low, the product sells out
quickly and consumers want more



but…
When the price is too high, consumers will
refuse to buy it
…in most cases (we’ll find out why in a few
minutes)
??????????


What product or service what you stop buying if
the price goes up, even a little?
What product or service would you continue to
buy even if its price rose considerably?
Competition
Versus Monopoly
COMPETITION
 Keeps prices down
and quality high.
 Gives consumer
more choices and
lower prices.
 Encourages change
and new ventures.
MONOPOLY
 Keeps prices high and
quality low or
average.
 Is bad for the
consumer, who must
pay higher prices for
lower quality.
 Discourages change
and new business.
Setting an Economy’s Price
System
 To
understand how a nation’s
economy functions it is important to
understand the nation’s price system
 The forces that determine price are
called the forces of supply and
demand
 The place where these two forces meet
is called the marketplace
Supply and Demand


SUPPLY: The amount
of a product or service
sellers are willing to sell
at specific prices.
Supply: the business
(entrepreneurial)
response to consumer
demand.


DEMAND: the amount
of a product or service
that consumers are
willing and able to buy at
a specific price.
Demand: The desire for
a product or service
combined with the ability
to pay for it.
Supply and Demand Determine
Prices
in a Free Market Economy.


PRICE RELAYS
INFORMATION
BETWEEN
CONSUMER AND
PRODUCER.
If everything else stays
the same . . .
Law of Demand:
 As the price goes up, the
quantity demanded by
consumers goes down.
Law of Supply:
 Businesses will supply
more of a product or
service at a higher price.
Demand Curve

Demand Curve is a line graph that shows the
amount of a product that will be purchased at
each price; it shows an inverse relationship and
is always downsloping
D
Qd
Supply Curve

Supply Curve will always be upsloping.
S
Market Clearing Price




Market clearing price (also called equilibrium
price): The point where supply and demand meet.
Together, supply and demand will determine how much
will be sold and for how much.
For instance, if an apple cost $2.00 nobody would buy
it…. and if an apply cost 5 cents the retailer wouldn’t
make a profit….
So… the market and the consumer must come to a
price that they both will benefit from.
Market Clearing Price
Aggregate (Market) Demand
 What
events would increase or
decrease the aggregate or market
demand for goods and services
“across the board”
 At every price range – generic
Shaw’s brand ice cream to Ben
and Jerry’s premium brand !
1. Seasonality
 More lemonade
will be demanded
 More bathing
suits will be
demanded
 More sun tan
lotion will be
demanded
2. Trends


Advertising creates
trends
Gap
Everybody in vests!
 Everybody in leather
 Everybody in stripes


Some advertising can
decrease demand

SUV = Terrorism
3. Change in Income


A raise in income will
increase demand for
superior goods ( Rolex)
and decrease demand
for inferior goods
( Timex watch)
Conversely, a decrease
in income will increase
demand for inferior
goods ( Timex) and
decrease demand for
4. Expectations

If the Farmer’s
Almanac forecasts a
cold winter people
may demand more
snow tires and rock
salt
5. Price of Related Goods



Substitute Goods
A rise in the price of one
(e.g. butter) may
increase the demand for
the substitute (
margarine)
This is a direct
relationship



Complementary
Goods
An increase in the
price of one good ( e.g
cameras) will decrease
the demand for the
complementary good
(film/memory cards).
This is an inverse
relationship
6. Demographics



Number and Kinds of
Buyers in the Market can
change demand
Baby Boomers are getting
ready to retires
Increased Demand for:




More housing in Florida and
Arizona
Assisted Living Complexes
Walkers
Wheelchairs
Determinants of Supply
What could cause a huge increase or decrease in
supply across the board ( and a change in price is
not a factor !)
 Resource prices ( raw materials)
 Technology (produce more products faster & more
efficiently
 Taxes
 Subsidies ( Gov’t grants)
 Related Goods ( e.g corn, wheat)
 Expectations
 Number of Sellers in the Market
Elasticity of Demand
 Elasticity
of
Demand describes
the percentage
change in quantity
demanded that
follows a price
change
Elasticity of Demand
Demand is elastic if a rise in price results in a
large drop in demand and demand is inelastic if
a rise in price results in a relatively small or no
drop in demand
Milk: Elastic or Inelastic ?
Inelastic
 Why?
 The population as a
whole can do without
steak….but can not
do as easily without
milk…especially
families with children

Gasoline: Elastic or Inelastic ?
What Products are Subject to Elastic
Demand ?


Luxury Items – Most customers want luxuries
and will consider buying them if price drops
If Price Represents a Large Portion of
Family Income


Availability of Substitute Items


e.g. Mortgage Rates drop from 6.5 to 5.5% people
will “refinance”
e.g. Steak /chicken
Durable Goods

Computers, cars, washers, dryers will be in greater
demand if the price drops
What do you think?
Supply and Demand is taking
place…



What is likely to happen to the price of air
conditioners in December? Why?
What would happen to the price of basketball
tickets if the Pistons made it to the playoffs?
Why?
What happened to the price of the XBox4
during Christmas time? Why?
What Products are Subject to
“Inelastic Demand”?
 Necessities
(milk, gasoline)
 Drugs
 Legal
(heart medicine antibiotics)
 Illegal (heroin, cocaine)
 Products


with no good substitute
insulin, cancer drugs, etc.
salt in Middle Ages (preservative)