Presentation on theme: "T HE U NITED S TATES M ARKET S YSTEM Consumers and the Law of Demand; Firms and the Law of Supply, Market Equilibrium, and Market Structure."— Presentation transcript:
T HE U NITED S TATES M ARKET S YSTEM Consumers and the Law of Demand; Firms and the Law of Supply, Market Equilibrium, and Market Structure
LAW OF DEMAND Demand: How much of a product consumers are both willing and able to purchase at each possible price during a given period Law of Demand: the quantity demanded varies inversely with the price Individual Demand = demand of an individual consumer Market Demand = total demand of all individual consumers in a market
L AW OF DEMAND Consumers try to maximize their utility, this affects demand: (unlimited wants, scarce resources) 1. Money Income v. Real Income - Use your money income to maximize real income 2. Substitution Effect: Change in prices of related goods can effect the demand 3. Law of Diminishing Marginal Utility: (Marginal Utility: satisfaction you derive from an additional unit of a product) - The more of a good an individual consumes per period the smaller the marginal utility of each unit consumed (since each unit is worth less to you, you are therefore willing to pay less for it) - first slice, second slice, third slice of pizza - second ½ off, Buy 3 get the 4 th free All of this results in the quantity demanded varying inversely with the price
D EMAND S CHEDULE AND C URVE Shows the relationship between price and quantity demanded for a given period
Demand Schedule Price of Root BeerAmount John would buy per month.1025.2020.3015.4010.505 Demand Curve
M ARKET D EMAND Graph the demand curve of lbs. of beef per week of the following members of the Social Studies Department: Mr. Foley Ms. Hart Mr. Rupertus Lbs. Price Lbs. Price Lbs. Price 1 $8 0 $8 0 $8 2 $6 0 $6 1 $6 3 $4 1 $4 2 $4 4 $2 2 $2 3 $2 Market Demand of Beef
Graph both the individual demands and market demands for Aquinas students demand of birthday balloons per school year. Student A # of Balloons Price 30 $1 25 $1.50 20 $2 15 $2.50 10 $3 5 $3.50 0 $4 Student B # of Balloons Price 40 $1 35 $1.50 30 $2 25 $2.50 20 $3 15 $3.50 10 $4 Student C # of Balloons Price 15 $1 10 $1.50 5 $2 1 $2.50 0 $3 0 $3.50 0 $4 Student D # of Balloons Price 25 $1 20 $1.50 15 $2 10 $2.50 5 $3 1 $3.50 0 $4
Graph both the individual demands and market demand for gallons of gas per week. Individual A # of Gallons Price 20 $2 17 $2.50 14 $3 11 $3.50 8 $4 5 $4.50 2 $5 Individual B # of Gallons Price 12 $2 10 $2.50 8 $3 6 $3.50 4 $4 2 $4.50 0 $5 Individual C # of Gallons Price 30 $2 26 $2.50 22 $3 18 $3.50 16 $4 12 $4.50 8 $5
P RICE E LASTICITY OF D EMAND Measures the percentage change in quantity demanded divided by the percentage change in price Based on the idea that when prices drop, quantity sold will increase and vice versa Used by suppliers to determine if it is profitable to change prices If the demand is elastic (above 1.0) that means that it will be beneficial to change the price because overall revenue increase If the demand is inelastic (below 1.0) suppliers should not change the price because revenue will fall
E LASTICITY OF D EMAND Is the demand elastic if the price changes from $12 to $9? Is the demand elastic if the price changes from $6 to $3?
E LASTICITY OF D EMAND Is the demand elastic if the price changes from $28 to $24? Is the demand elastic if the price changes from $16 to $12?
Is the demand elastic if the price changes from $30 to $25? Is the demand elastic if the price changes from $20 to $15?
E LASTICITY OF D EMAND Elasticity can depend on: 1. The availability of substitutes - more competition=more elastic – Dollar Menus 2. The cost of the item – the greater portion of a persons income the object is the more elastic – When housing prices drop, demand increases dramatically 3. How long the price change lasts – elasticity is greater in the long run than in the short run – consumers have more time to adjust
L AW OF S UPPLY Law of Supply: the quantity supplied is usually directly related to the price (The higher the price, the larger quantity supplied) Supply Curve: Quantities of a particular good supplied at various prices during a given time period (all other things constant) Individual Supply v. Market Supply
L AW OF S UPPLY Producers try to maximize profits (Profit= Total Revenue – Total Cost), in order to do so, they control the supply Total Cost = Fixed Costs + Variable Costs Fixed Cost = Costs that dont change regardless of output Variable Costs = Cost that increase with production Supply = How much a good producers are willing and able to offer for sale per period at each possible price Firms will increase their supply as long as their marginal revenue for each unit sold is more than the marginal cost is takes to produce Marginal Revenue = market value of the unit Marginal Cost = Change in Total Cost/ Change in Quantity
Once you have completed the worksheet on costs, answer the following questions. 1. If the average costs are decreasing how do you explain the trend in marginal costs? 2. Would the average costs continue decreasing indefinitely? 3. How does this information on costs help explain the law of supply?
S UPPLY S CHEDULE AND C URVE Graph the supply curve for each of the following t-shirt companies. Then graph the market supply curve. Toms Terrific Ts Quantity Price 50 $5 60 $6 70 $7 80 $8 90 $9 Tee-rriffic Quantity Price 30 $5 40 $6 50 $7 60 $8 70 $9 Tee-Time Quantity Price 60 $5 70 $6 80 $7 90 $8 100 $9
E LASTICITY OF S UPPLY - The Percentage change in quantity supplied divided by the percentage change in price - Used to determine whether a company will respond to an increase in price by increasing supply - Companies want to supply more at higher prices – but will consumers buy more? - If the supply is elastic (above 1.0), producers are willing to raise production because it will increase total profits - If the supply is inelastic (below 1.0), producers will not raise production because a change in supply will not increase profits
E LASTICITY OF S UPPLY Is the supply elastic if the price changes from $24 to $28? Is the supply elastic if the price changes from $12 to $16?
M ARKET E QUILIBRIUM Consumers and Producers therefore work opposite one another (i.e. – if the price goes up, consumer demand decreases but producer supply increases ) Market forces resolve this conflict by working towards equilibrium Market Equilibrium = The quantity that consumers are willing and able to buy equals the quantity that producers are willing and able to sell at a given price - there is no incentive for a change in quantity or price In order to reach equilibrium: - If there is a surplus (at a given price, the amount supplied exceeds the quantity demanded) prices are forced down - If there is a shortage (at a given price, the quantity demanded exceeds the amount supplied) prices go up
E QUILIBRIUM P RICE Demand Curves and Supply Curves meet at an equilibrium point which leads to an equilibrium price and quantity Adam Smiths Invisible Hand: millions of individuals and firms acting individually eventually promote the common good by encouraging producers to use resources for the products consumers most value – although in competition, both producers and consumers can win in a market
E QUILIBRIUM P RICE G raph the supply and demand curve using the information below. Quantity Demanded Price Quantity Supplied 50.1010 40.2020 30.3030 20.4040 10.5050 What is the equilibrium price? What is the equilibrium quantity? Why cant the supplier demand $.50? Why cant the buyer pay only $.10?
Graph the supply and demand curve using the information below. Quantity Demanded Price Quantity Supplied 180 $530 150 $1060 120 $1590 90 $20120 60 $25150 30 $30180 What is the equilibrium price? What is the equilibrium quantity? E QUILIBRIUM P RICE
S HIFTS IN D EMAND C URVE When there are shifts in supply and demand, adjustments need to be made in the market in order to reach a new equilibrium point If the demand increases (demand curve shifts rightwards) – a shortage is created and producers raise prices and quantities If the demand decreases (leftwards)– a surplus is created and prices and producers reduce prices and quantities
S HIFTS IN D EMAND Besides Price and Quantity, Demand is affected by: 1. Changes in consumer income – i.e. if income increases - increases demand for normal goods and decreases demand for inferior goods 2. Changes in the price of related goods – - If the price of substitutes drops, demand drops - If the price of complements drop the demand increases and vice versa 3. Changes in the size or composition of the population 4. Changes in consumer expectations about future income and future prices 5. Changes in consumer tastes
S HIFTS IN S UPPLY C URVE If the supply increases (supply curve shifts rightwards) - quantities increase causing a surplus, producers will reduce prices If the supply decreases (leftwards) – quantities decrease causing a shortage, producers will increase prices
S HIFTS IN S UPPLY Besides the price, supply is affected by: 1. The cost of the resources used to make the good (if the cost of resources drops, supply increases) 2. The price of other goods these resources can make 3. Changes in the technology used to make the good – if technology improves production, supply can be increased 4. Producer expectation about future shifts in prices 5. The number of sellers in the market
M ARKET S TRUCTURE Market structure includes the number of buyers and sellers, the uniformity of the item, the ease of entry into the market and the amount of competition between firms How much of a role the laws of supply and demand have over a specific market depends largely on the structure of the market Four market structures exist in the United States: 1. Perfect Competition 2. Monopoly 3. Monopolistic (Imperfect) Competition 4. Oligopoly In order to encourage a competitive market, the US government has antitrust laws
M ARKET S TRUCTURE Number of Buyers and Sellers Uniformity of Product Ease of entry into Market Control over prices and supply Examples in the United States Perfect Competition Many buyers and sellers Complete uniformity No barriers to entry No control- 1 firm tiny part of market Farmers – Bushel of Wheat MonopolyOne seller, many buyers Unique product, no substitutes Large barriers to entry- legal + financial Complete control Electric Company, Post Office Monopolistic (Imperfect) Competition Many buyers and sellers Some differentiation in products No barriers to entry Limited Control – Market Forces Grocery Stores, Restaurants, Clothing OligopolyFew sellers, many buyers Some differentiation in products Substantial barriers to entry Some Control Automobiles, Electronics