2. Buyers DON’T Compete With Sellers

3. Buyers Compete with Other Buyers

4. Sellers Compete with Other Sellers

5. Market Competition: Win-Win Both buyers and sellers value what they received more than what they voluntarily gave up.

6. How are prices set? By the Market!

7. Supply and Demand!

8. 1. DEMAND Japanese gamers await Playstation 3 going on sale.

9. What Is the Law of Demand? The law of demand states that consumers buy more of a good when its price decreases and less when its price increases.

10. What influences demand? (Demand Shifters) Taste and preference (advertising helps) Taste and preference (advertising helps) Substitutes Substitutes Income Income Population Population

11. The substitution effect occurs when consumers react to an increase in a good’s price by consuming less of that good and more of other goods. The substitution effect occurs when consumers react to an increase in a good’s price by consuming less of that good and more of other goods. The income effect happens when a person changes his or her consumption of goods and services as a result of a change in real income. The income effect happens when a person changes his or her consumption of goods and services as a result of a change in real income. The Substitution Effect The Income Effect

12. A demand curve is a graphical representation of a demand schedule, representing price and quantity A demand curve is a graphical representation of a demand schedule, representing price and quantity Market Demand Curve 3.00 2.50 2.00 1.50 1.00.50 0 050100150 200250 300 350 Slices of pizza per day Price per slice (in dollars) Demand

14. Complements are two goods that are bought and used together. Example: skis and ski boots Complements are two goods that are bought and used together. Example: skis and ski boots Substitutes are goods used in place of one another. Example: skis and snowboards Substitutes are goods used in place of one another. Example: skis and snowboards The demand curve for one good can be affected by a change in the demand for another good.

15. Change in Demand Consumer Income Consumer Tastes Prices of Substitutes Price of Complements Expectations Number of Substitutes

16. Demand for a good that consumers will continue to buy despite a price increase is inelastic. Demand for a good that consumers will continue to buy despite a price increase is inelastic. Elasticity of demand is a measure of how consumers react to a change in price. Demand for a good that is very sensitive to changes in price is elastic. Demand for a good that is very sensitive to changes in price is elastic.

17. Elastic Demand If demand is elastic, a small change in price leads to a relatively large change in the quantity demanded. Follow this demand curve from left to right. Price Quantity $7 $6 $5 $4 $3 $2 $1 Elastic and Inelastic Demand 0 51015202530 Demand The price decreases from $4 to $3, a decrease of 25 percent. $4 – $3 $4 x 100 = 25 The quantity demanded increases from 10 to 20. This is an increase of 100 percent. 10 – 20 10 x 100 = 100 Elasticity of demand is equal to 4.0. Elasticity is greater than 1, so demand is elastic. In this example, a small decrease in price caused a large increase in the quantity demanded. 100% 25% = 4.0 Price Quantity $7 $6 $5 $4 $3 $2 $1 0 51015202530 Demand HamburgersID card processing fee

18. Factors Affecting Elasticity

22. DEMAND: REVIEW 1. Describe the law of demand. 2. What is the substitution effect? 3. What is the income effect? 4. Give an example of a complement (one we haven’t used). 5. Give an example of a substitute (one we haven’t used). 6. What is elasticity? 7. Give an example of an elastic good. 8. Give an example of an inelastic good. 9. What is the demand dance?

23. 2. SUPPLY. McDonald’s looks to increase revenues, by increasing the supply of the ever popular coffee products. the supply of the ever popular coffee products.

24. According to the law of supply, suppliers will offer more of a good at a higher price. Law of Supply Price As price increases… Supply Quantity supplied increases Price As price falls… Supply Quantity supplied falls Math Term: DIRECT RELATIONSHIP

25. How Does the Law of Supply Work? Economists use the term quantity supplied to describe how much of a good is offered for sale at a specific price. Economists use the term quantity supplied to describe how much of a good is offered for sale at a specific price. The promise of increased revenues when prices are high encourages firms to produce more. The promise of increased revenues when prices are high encourages firms to produce more. Rising prices draw new firms into a market and add to the quantity supplied of a good. Rising prices draw new firms into a market and add to the quantity supplied of a good.

26. Supply Curve

27. $.501,000 Price per slice of pizzaSlices supplied per day Market Supply Schedule A market supply schedule is a chart that lists how much of a good all suppliers will offer at different prices. A market supply schedule is a chart that lists how much of a good all suppliers will offer at different prices. $1.001,500 $1.502,000 $2.002,500 $2.503,000 $3.003,500

28. Supply shifters costs of production costs of production resource availability changes resource availability changes technology changes technology changes policies change (taxes, for example) policies change (taxes, for example) numbers of suppliers: (zune + ipod= more mp3s) numbers of suppliers: (zune + ipod= more mp3s)

29. Price Quantity S S S D E E E

30. APPLE’S GROWTH THINKING ABOUT SUPPLY: HOW DID APPLE INCREASE ITS REVENUE FROM 5 BILLION to 43 BILLION in 8 YEARS? HOW DID APPLE INCREASE ITS REVENUE FROM 5 BILLION to 43 BILLION in 8 YEARS?

31. Supply Curves A market supply curve is a graph of the quantity supplied of a good by all suppliers at different prices. A market supply curve is a graph of the quantity supplied of a good by all suppliers at different prices. Chapter 5, Section 1 Market Supply Curve Price (in dollars) Output (slices per day) 3.00 2.50 2.00 1.50 1.00.50 0 0500100015002000250030003500 Supply

32. If supply is not very responsive to changes in price, it is considered inelastic. If supply is not very responsive to changes in price, it is considered inelastic. An elastic supply is very sensitive to changes in price. An elastic supply is very sensitive to changes in price. Elasticity of supply is a measure of the way quantity supplied reacts to a change in price.

33. What Affects Elasticity of Supply? Time. In the long run, firms are more flexible, so supply can become more elastic. In the long run, firms are more flexible, so supply can become more elastic. In the short run, a firm cannot easily change its output level, so supply is inelastic. In the short run, a firm cannot easily change its output level, so supply is inelastic.

34. Government Influences on Supply By raising or lowering the cost of producing goods, the government can encourage or discourage an entrepreneur or industry. Subsidies: $ from gov. Regulation: rules from gov. Taxes: $ to gov.

35. Other Factors Influencing Supply 1. The Global Economy The supply of imported goods and services has an impact on the supply of the same goods and services here. The supply of imported goods and services has an impact on the supply of the same goods and services here. Government import restrictions will cause a decrease in the supply of restricted goods. Government import restrictions will cause a decrease in the supply of restricted goods. 2. Future Expectations of Prices Expectations of higher prices will reduce supply now and increase supply later. Expectations of lower prices will have the opposite effect. Expectations of higher prices will reduce supply now and increase supply later. Expectations of lower prices will have the opposite effect. 3. Number of Suppliers If more firms enter a market, the market supply of the good will rise. If firms leave the market, supply will decrease. If more firms enter a market, the market supply of the good will rise. If firms leave the market, supply will decrease.

36. STARTER: SUPPLY REVIEW 1. Describe the law of supply. 2. Once prices goes _____, the quantity supplies goes _____. 3. What is the elasticity of supply? 4. Give an example of a good with an inelastic supply. 5. Give an example of a good with an elastic supply.

38. YOU ARE THE CEO OF: INGREDIENTS: MILK CHOCOLATE (SUGAR, COCOA BUTTER, CHOCOLATE, SKIM MILK, LACTOSE, MILKFAT, SOY LECITHIN, ART. FLAVOR), PEANUTS, CORN SYRUP, SUGAR, MILKFAT, SKIM MILK, PARTIALLY HYDROGENATED SOYBEAN OIL, LACTOSE, SALT, EGG WHITES, CHOCOLATE, ARTIFICIAL FLAVOR.

44. 3. PRICES

45. Price per slice Equilibrium Point Finding Equilibrium Price of a slice of pizza Quantity demanded Quantity supplied Result Combined Supply and Demand Schedule $.50300100 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $.50 Slices of pizza per day 0 50100150200250300350 Supply Demand Balancing the Market The point at which quantity demanded and quantity supplied come together is known as price equilibrium. The point at which quantity demanded and quantity supplied come together is known as price equilibrium. $2.00 $2.50 $3.00 150 100 50 250 300 350 Surplus from excess supply $1.50200 Equilibrium Equilibrium Price a Equilibrium Quantity $1.00250150 Shortage from excess demand

47. Market Disequilibrium If the market price or quantity supplied is anywhere but at the equilibrium price, the market is in a state called disequilibrium. There are two causes for disequilibrium:

48. A price ceiling is a maximum price that can be legally charged for a good (ex. rent control) A price ceiling is a maximum price that can be legally charged for a good (ex. rent control) In some cases the government steps in to control prices. These interventions appear as price ceilings and price floors. Rent Control Apartments in NY

49. Price Floors A price floor is a minimum price, set by the government, that must be paid for a good or service. A price floor is a minimum price, set by the government, that must be paid for a good or service. One well-known price floor is the minimum wage, which sets a minimum price that an employer can pay a worker for an hour of labor. One well-known price floor is the minimum wage, which sets a minimum price that an employer can pay a worker for an hour of labor.

50. $800 $600 $400 $200 0 Price Output (in millions) Graph A: A Change in Supply 12345 Analyzing Shifts in Supply and Demand Graph A shows how the market finds a new equilibrium when there is an increase in supply. Graph A shows how the market finds a new equilibrium when there is an increase in supply. Graph B shows how the market finds a new equilibrium when there is an increase in demand. Graph B shows how the market finds a new equilibrium when there is an increase in demand. Original supply Demand a New supply b c Graph B: A Change in Demand Output (in thousands) $60 $50 $40 $30 $20 $10 0 900800700600500400300200100 Price Supply Original demand a New demand c b

51. Advantages of Prices: Prices provide a language for buyers and sellers.

52. Defining Monopoly A monopoly is a market dominated by a single seller. A monopoly is a market dominated by a single seller. Monopolies form when barriers prevent firms from entering a market that has a single supplier. Monopolies form when barriers prevent firms from entering a market that has a single supplier. Monopolies can take advantage of their monopoly power and charge high prices. Monopolies can take advantage of their monopoly power and charge high prices. Under Anti-Trust laws, most monopolies are illegal in US Under Anti-Trust laws, most monopolies are illegal in US