2 The “Marketplace” Demand: Supply: Market: All consumers have influence on the price of goods and servicesHow people in the marketplace decide what to buy and at what priceSupply:How the people who are selling those things decide how much to sell and at what priceMarket:Freely chosen actions between buyers and sellers of goods and servicesIndividuals decide the answers to WHAT? HOW? And for WHOM?
3 Voluntary ExchangeA buyer and seller use their economic freedom to decide on terms and conditions of an exchangeSupply and Demand is a model of how buyers and sellers operate in the marketCause and Effect in relation to price
4 Law of DemandAll the different quantities of goods and services that consumers will purchase at different pricesWillingness and ability“As price goes up, quantity demanded goes down”“As price goes down, quantity demanded goes up”Inverse relationship between quantity demanded and price
5 Con’t.3 Factors are:1. Real Income Effect2. Substitution Effect3. Diminishing Marginal UtilityWhat does each factor mean and how does it effect the relationship between the quantity demanded and the price of a good or service?
6 The Demand Curve and Elasticity of Demand Price per CDQuantity Demanded (millions)$20100$19200$18300$17400$16500$15600$14700$13800$12900$111000$101100
7 Con’t.Demand Schedule: Table of prices and quantity demanded at that pricePlotting Quantity Demanded: On horizontal axis is the quantity demanded and on the vertical axis is the pricePlot the quantity demanded based on the price in the demand scheduleDemand Curve: The downward sloping line that connects the plotted points from the demand schedule
8 Determinants of Demand Group Work: You will be divided into 5 groups. Each group will be assigned one of the five determinants of demand:1. Change in population2. Change in income3. Changes in tastes and preferences4. Substitutes5. Complementary goodsEach group will tell us what their determinant means and then one member will come up and draw on the board how their determinant will effect the demand curve based on an example you choose.
9 Price Elasticity of Demand How much consumers respond to a given change in priceEx. Certain brand of cereal increases in price, consumer will probably buy another brand that is comparableInelastic DemandWhen a price change does not effect the quantity demanded3 factors: substitutes, % of a persons total budget devoted to that good, and time consumers are give to adjust to price changeExamples please?
11 Law of Supply and Supply Curve Supply: willingness and ability of producers to provide goods and services at different prices in the market“As the price rises for a good, the quantity supplied generally rises”“As the price falls, the quantity supplied also falls”Direct relationship between price and quantity suppliedThe higher the price the greater the incentive for the producer to produce moreTurns higher profits and covers the costs of producing more
12 Supply Curve Price per CD Quantity Supplied (millions) $10 100 $11 200 $12300$13400$14500$15600$16700$17800$18900$191000$201100
13 Con’t.Supply Schedule: Table that shows that as the price increases so does the quantity suppliedPlotting Quantity Supplied: On horizontal axis is the quantity supplied and on the vertical axis is the pricePlot the quantity supplied based on the price in the supply scheduleSupply Curve: The upward sloping line that connects the plotted points from the supply schedule
14 Determinants of Supply Group Work: You will be divided into 4 groups. Each group will be assigned one of the four determinants of supply:1. Price of Inputs2. Number of firms in the industry3. Taxes4. TechnologyEach group will tell us what their determinant means and then one member will come up and draw on the board how their determinant will effect the supply curve based on an example of your choice. You may choose if the supply increases or decreases and you only have to demonstrate one.
15 Law of Diminishing Returns Adding units of one factor of production to all other factors of production increases total outputBut after a certain point, extra output for each additional unit will begin decreaseEx. If you hire one or two more people to do a job you will increase your output, but adding anymore might begin to decrease your output
16 Supply and Demand Together Demand and Supply work togetherAs the price of a good goes down, quantity demanded rises and quantity supplied goes downEquilibrium priceWhere the quantity supplied and thee quantity demanded meet
19 Prices Serve as Signals Rising prices signal producers to produce more and consumers to consume less, falling prices signal producers to produce less and consumers to purchase moreShortages: at the current price, quantity demanded is greater than quantity suppliedSurpluses: at prices above the equilibrium price, suppliers produce more than consumers want to purchaseMarket Forces: when operating without restriction, it eliminates shortages and surpluses
20 Price ControlGovernment gets involved in setting prices when it believes that the market forces of supply and demand are operating unfairlyPrice Ceiling: a government set maximum that can be charged for goods and services (ex. Rent in NY City)What role does rationing and the black market play in the economy when the gov’t sets ceilings?Price floors: a government set minimum that can be charged for goods and services (ex. Minimum wage