Supply, Demand and Competition
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Transcript Supply, Demand and Competition
Supply,
Demand and
Competition
Essential Question:
How are prices set?
Both
Buyer
and
Seller
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
Basic facts
Consumers
have a great influence
on the price of goods and services.
Why?
Market: Represents the freely
chosen action between buyers and
sellers.
Voluntary exchange: Buyers and
sellers work out a deal that suits
both sides.
Demand
Demand
shows consumers ability and
willingness to buy goods and services.
e.g. Swimming suits have a different
price and quantity demanded in
summer vs. winter
How many of you would like a new car?
How many of you are able?
Law of Demand
Explains
the amount people are willing to
buy as prices change.
Demand can only occur if a buyer is
willing and able to buy.
Three factors that affect what and how
much people buy are diminishing
marginal utility, real income, and
substitution.
Price goes up – Demand goes down
Price goes down – Demand goes up
Diminishing Marginal Utility
(DMU)
Utility:
Power of a good or service
to satisfy.
People will buy until price exceeds
satisfaction.
Price decreases, people will buy
more.
Real Income Effect
Income
limits the amount of money
people can spend.
People cannot keep buying the same
amount if price increases and income
stays the same. (Real income effect).
People are forced to trade-off if price
increases.
If price decreases and you buy the
same amount, your real income has
increased.
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
p
D
Qd
Law of Demand
As
price decreases, the quantity demanded
increases. As the price rises, the quantity
demanded decreases
P
QD
Price per gallon Bottles per week
of water
$
Jo
Pat
.75
90
50
.50
130
70
.35
180
100
.25
290
130
Demand for hot chocolate in
December at the skating rink
Price
$.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
Quantity
Demanded
30
25
20
15
10
5
0
Demand Determinants
Characteristics
that will affect the amount
people will buy. Includes changes in
population, income, and personal
preferences.
Prices of related goods, income,
preference/taste, consumer expectations,
population change
Demand Determinants
Prices
of Related Goods
Substitutes: Goods that are related in
such a way that an increase in the price
of one leads to an increase in the
demand for the other [goods that can be
consumed in place of one another]
(Pepsi and Coke)
Compliments: Goods that are related in
such a way that an increase in the price
of one leads to a decrease in the
demand for the other [goods that are
normally consumed together]
(hamburgers and hamburger buns)
Determinants cont.
Income
Normal
Good: a good for which demand
increases as consumer incomes rise (milk)
Inferior Good: A good for which demand
decreases as consumer incomes rise
(ground chuck, bus rides)
As income rises consumers tend to switch
from consuming these inferior goods to
consuming normal goods (ex. steak,
car/plane)
Determinants cont.
Preference/Taste
Likes
and dislikes in consumption
Consumer Expectations
Change in future price of goods
Change in future income
Population Change
As the number of consumers in a market
changes the demand will change
Supply
Explains
the amount producers are willing
to provide at various prices.
Law
of Supply As price increases, supply increases.
As price decreases, supply decreases..
Supply Schedule & Curves
A
Supply Schedule displays the
quantity of a product supplied at
each price
Price Per
Bottle
Bottles
Supplied
.75
.50
.35
.25
200
130
75
50
Supply of shovels before a large
snowstorm sold at Lowes
Price
$4.00
$8.00
$12.00
$14.00
Quantity
Supplied
5
10
15
20
Determinants of Supply
Technology
If
more efficient technology is
discovered production costs will fall
So suppliers will be more willing and
able to supply more of the good at
each price
Price of Relevant Resources
Those resources employed in the
production of a good.
Determinants con’t
Prices
of Alternative Goods
Price of a good that uses some of the
same resources as used to produce the
good in question
Producer Expectations
Shift production according to future
prices
Number of Producers
# of Prod. Increases # of supply
Government Restrictions
Taxes, quotas, licenses, etc.
Supply and Demand
If
price falls, demand will increase and
supply will decrease.
If price rises, demand will decrease and
supply will increase.
Equilibrium price: Point where supply and
demand meet.
Shortage and surplus:
When demand is greater than supply, a
shortage occurs.
When supply is greater than demand, a
surplus occurs.
Prices will rise in a shortage and fall in a
surplus.
Price Controls
Price
Ceiling – Gov’t set maximum
price that can be charged for a
good or service
Price
Floor -- Gov’t set minimum
price that can be charged for a
good or service
Price Elasticity
How
consumers react when prices
change.
Elasticity
is determined by:
Existence of substitutes.
Percentage of income spent on a
good or service.
Time allowed to adjust to a
change.
Types
Elastic:
Many competing brands.
Price increases, people choose a
substitute.
Inelastic:
Not much competition.
Price increases, demand does not
change.
Steak: Elastic or Inelastic ?
Elastic
Why?
People as
a whole can do
without steak
and will
substitute
chicken or other
protein for
expensive steak
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
e.g. Mortgage Rates drop from 6.5 to 5.5% people
will “refinance”
Availability of Substitute Items
e.g. Steak /chicken
Durable Goods
Computers, cars, washers, dryers will be in greater
demand if the price drops
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)
Why is Elasticity of Demand
Important ?
What
happens if a florist increases the price
of roses 400 % in October ? Will sales go up
or down ?
A. Probably, down
What happens if a florist increases the price
of roses on February 14th? Will sales go
down or up?
A. Probably up Why ? Frantic husbands
and boyfriends will pay exorbitant prices for
a dozen roses on Valentine’s Day.
In
groups of 3-4, explain supply and
demand to first graders. They need to
understand the basic concepts and
terms of supply and demand and how
they work in a market economy.
This
can be done on paper or computer
and will be presented to the class.
This
should be appropriate for 6
year olds.
Competition
Competition will exist if different
businesses produce similar products.
Perfect Competition
1. Large Market
2. Similar Product
3. Easy entry and exit
4. Information obtainable
5. No control over price
Market Price is equilibrium price.
(decided by supply and demand)
Imperfect Competition
One
group can have an impact on price.
Monopoly
Oligopoly
Monopolistic Competition
Barriers to entry:
Government regulations: Some goods
and services are protected from
duplication by the government.
Cost of getting started: Large amount of
capital is needed to begin.
Ownership of raw materials: Companies
control materials and do not sell to
competitors.
Monopoly
One group controls the market.
1. Single seller
2. No substitutes
3. No entry
4. Complete control over price
Suppliers can raise prices without
losing business.
Types of Monopoly
1.
Natural: Control of resources.
Water company
2.
Geographic: Control of location
Dick’s is the only sports store in the area
3.
4.
Technological: Patent on
technology
Government: Created by the
government. Illegal to enter. Post
office
5.
Cartel: International form of
monopoly (OPEC).
Oligopoly
A few businesses in competition.
1. Domination of a few sellers
2. Barriers to entry
3. Identical or slightly different products
4. Some control of price
Price wars are common place.
Oligopoly Examples
Movie
Studios
Columbia, 20th Century Fox, Warner Bros.,
Paramount, Universal, and MGM
Television
Disney/ABC, CBS Corp., NBC Universal,
Time Warner, and News Corporation
Food Processing
Kraft Foods, PepsiCo, and Nestle
Telecommunications
AT&T, Verizon, Sprint, and T-Mobile
Monopolistic Competition
Numerous sellers
2. Easy entry
3. Different products
4. Competition
5. Some control of price
Substitution and advertising are
factors.
1.
Mergers
One
company joins with another.
Horizontal: Companies in the
same business.
Vertical: Company joins with one
it buys from.
Conglomerate: Buying of unrelated businesses.
Vertical or Horizontal?
Google
and Bing
Horizontal
Paper
Company and Saw Mill
Vertical
Tostitos
and Corn Fields
Vertical
Harris
Teeter and Ace Hardware
Conglomerate
Pepsi
and Coke
Horizontal
Government policies
Late
1800’s the railroad industry was
the biggest in the United States.
Theodore Roosevelt set out to stop
monopolies with his “trust-busting”
policy, which would break up large
businesses.
All
mergers must be approved by
the Government.
Exit Ticket
Using complete sentences, explain (in paragraph
form) the following terms as they relate to
government’s role in the economy –
Private good
Public good
Monopoly
Recall
Antitrust law
Merger
Natural monopoly
Your book could be helpful. Especially pages 633-635.
Underline/highlight and number the terms when they
are first explained in your writing.