1. Unit 4, Lesson 10 Demand and Pricing
AOF Business Economics
Unit 4, Lesson 10 Demand and Pricing
Copyright © 2008–2011 National Academy Foundation. All rights reserved.
Copyright © 2008–2011 National Academy Foundation. All rights reserved.

2. A business is motivated by profit
Firms will grow avocados only if they can make a profit
To make a profit, the price must exceed the cost of growing them
How much does price need to exceed cost to entice a firm to enter the market?
Copyright © 2008–2011 National Academy Foundation. All rights reserved.

3. Breaking even isn’t enough
Firms won’t grow avocados unless their return on investment (ROI) is positive.
One way to assess ROI is through a yearly “rate of return”: total profits divided by total investments.
Production Cost +
Opportunity Cost
How much profit =
To invest or not to invest, that is the question
How much more would you have to make above total costs to launch a business?
Copyright © 2008–2011 National Academy Foundation. All rights reserved.

4. Increased demand creates profit opportunities
The low-calorie avocado increases demand
People will buy more of them at any price
$1.09
0.99
0.89
D2009 (low-cal introduced)
D2008
When demand increases, what signal does this send to the marketplace?
Copyright © 2008–2011 National Academy Foundation. All rights reserved.

5. When demand changes, so do price and supply
When demand goes up, the supply and demand equilibrium changes, and prices rise, at least at first
Increased price means increased profit
Firms already producing avocados will produce more, AND new firms will start to grow avocados
When demand goes up
Price goes up
Then supply goes up
How might the production from these new firms impact avocado prices?
Copyright © 2008–2011 National Academy Foundation. All rights reserved.

6. Low-calorie avocados increase demand
Firms respond only to the increase in price that leads to an increase in profit
$ S
0.99
D2009 (low-cal arrive)
0.79
D2008
How might this impact revenue and profit next year?
Copyright © 2008–2011 National Academy Foundation. All rights reserved.

7. Supply and demand continually adjust
Profits provide an incentive for firms to start producing avocadoes, which increases supply
Increased supply means prices will fall
$ S2008,2009
S increase
0.89
D2009 (low-cals appear)
D2008
Copyright © 2008–2011 National Academy Foundation. All rights reserved.

8. The competitive market is self-balancing
As Adam Smith wrote in Wealth of Nations, the competitive marketplace can regulate the use of resources for production, and which products and services are produced, with economic efficiency.
Firms devote resources to products and services that are in demand. Pressure from competitors forces firms to be efficient.
Copyright © 2008–2011 National Academy Foundation. All rights reserved. 8