Warm-Up What is price? Are prices negotiable? Explain. Who sets prices? If no one person sets prices, how are they determined? Do prices influence the decisions you make as a consumer? In what ways? What characteristics of a product make you willing to pay a higher price for it compared to other products? Describe a time when you felt that the price of a good you wanted was too high. How did this change your decision-making? What current events or events in recent history can you think of that relate to prices being to high or too low? How long did this event last? What caused this event?

Supply and Demand In order to understand how prices are set, you must first understand supply and demand. We will begin by learning about the force of demand and explain that market exchanges include two different parties: consumers and producers. Demand is focused on the decision-making of consumers, or individuals that buy goods/services.

Why do we choose what we choose? DEMAND !! Why do we choose what we choose?

consumers and producers come to an agreement when goods and services are exchanged. This is called voluntary exchange and is the basis of our market economy.

Voluntary exchange And I will sell those chips for one dollar I will buy these chips for one dollar

DEMAND All the different quantities of a good or service consumers will purchase at various prices. Includes ability and willingness to pay Several factors affect how much people will demand at a particular price.

The LAW of Demand As price goes UP, demand goes DOWN As price goes DOWN, demand goes UP

Three forces that make the law of demand real Diminishing marginal utility= your satisfaction goes down as you continue to consume Substitution effect= you look for alternatives Real-income=as prices go up, you feel poor, and you don’t like that.

Diminishing marginal utility In the blank space please copy this chart: # of M&M’s Well-being 0-100 (Total Utility) Change in well-being (Marginal Utility) ------------------------ 1 2 3 4 5 6 7

Diminishing marginal utility Rate your satisfaction level under the 2nd column from 1-100 (1=completely unhappy, 100=Happiest you’ve ever been) Please eat one M&M Now rank your satisfaction level again in the 2nd column In the 3rd column please subtract your original satisfaction level with your new one and place that # in the 3rd column (always subtract the one before with the new one) Repeat this until all M&M or lines are gone

Diminishing marginal utility As you consumed more M&M’s your the difference between your satisfaction levels each time went down. Proving that the more you had the less satisfaction it offered you. This is Diminishing marginal utility, the more you have of something the less satisfaction you get out of it.

Graphing the Demand Curve 1st draw X and Y

Graphing the Demand Curve Then label X and Y Price per candy bar Quantity demanded of CB’s

Demand Schedule Price Per Candy Bar Quantity demand of CB’s .75 10 1.00 9 1.50 7 2.00 5 2.50 3 3.00 1

Changes in DEMAND Population Income Substitutes Complements Expecs. of the future FADS

What changes demand? Population

What changes demand? Changes in Income:  

When income changes More money= more NORMAL goods Less money=more INFERIOR goods

Inferior goods VS Normal goods

What changes demand? Substitutes Chicken price goes up, buy more beef Complementary goods: Peanut butter and Jelly, price of one goes up=want less of the other

What changes demand? Expectations Of future income Of future prices

What changes demand? Changes in taste (fads)   Changes in clothing styles, music, and toys can happen overnight. These changes cause overall change in demand

Changes in Demand Once super popular, the demand for these as drastically gone down as they have gone out of style.

Elasticity of Demand Elasticity: To what degree do we respond to price changes? A little? A lot? Are there SUBS? What percentage of my INCOME is the item? Is it necessary? Can I change my habits?

https://www.youtube.com/watch?v=HHcblIxiAAk Elasticity of Demand

Why do producers make what they make? Supply Why do producers make what they make?

Supply The willingness and ability of producers to provide goods/services at different prices Law of Supply As prices increase, quantity supp. incr As prices decrease, quantity supp. decrease.

Why supply more with increased price? Increased profit potential If you expect to make more $ at a higher price, produce more goods/serv. More producers will enter the market at higher prices Examples: toys, technology Higher prices cover the costs of production

The Law of Supply As PRICE increases, supply increases As PRICE decreases, supply decreases

The Supply Curve First, you need a schedule How many C.B. will you produce at each price point? Now, draw x and y and label Add your values Plot points Connect the dots

C.B. Supply Schedule Price Per Candy Bar Quantity of CB’s produced .25 1 .50 2 1.50 5 2.00 7 2.25 9 2.50 10

What changes Supply? Imports Government: changes in taxes or regulations Inputs Changes in the price of FOPs Future expectations (of supply, price, demand) Technology improvement Suppliers increase the number of producing

Supply Elasticity How much will suppliers respond to price changes? It’s all about how much TIME it takes to make the product or service

Supply and Demand Working Together

Supply and Demand at Work Supply and Demand Schedule can be combined into one chart. Price per hog snout ($) Quantity Demanded of hog snouts per day Quantity Supplied of hog snouts per day $5 2 10 $4 4 8 $3 6 $2 $1

Supply and Demand at Work

Supply and Demand at Work A surplus is the amount by which the quantity supplied is higher than the quantity demanded. A surplus signals that the price is too high. At that price, consumers will not buy all of the product that suppliers are willing to supply. In a competitive market, a surplus will not last. Sellers will lower their price to sell their goods.

Supply and Demand at Work Suppose that the price in the hog snouts market is $4. At $4, Quantity demanded will be 4 hog snouts Surplus At $4, Quantity supplied will be 8 hog snouts At $4, there will be a surplus of 4 hog snouts.

Supply and Demand at Work A shortage is the amount by which the quantity demanded is higher than the quantity supplied A shortage signals that the price is too low. At that price, suppliers will not supply all of the product that consumers are willing to buy. In a competitive market, a shortage will not last. Sellers will raise their price.

Supply and Demand at Work Suppose that the price in the HS market is $2. At $2, Quantity supplied will be 4 HS At $2, Quantity demanded will be 8 HS At $2, there will be a shortage of 4 HS Shortage

Supply and Demand at Work When operating without restriction, our market economy eliminates shortages and surpluses. Over time, a surplus forces the price down and a shortage forces the price up until supply and demand are balanced. The point where they achieve balance is the equilibrium price. At this price, neither a surplus nor a shortage exists. Once the market price reaches equilibrium, it tends to stay there until either supply or demand changes. When that happens, a temporary surplus or shortage occurs until the price adjusts to reach a new equilibrium price.

Supply and Demand at Work Suppose that the price in the HS market is $3. At $3, Quantity supplied will be 6 HS At $3, Quantity demanded will be 6 HS. At $3, there will be neither a surplus or a shortage.

The Beautiful Price System PRICES are: neutral-favor neither producer or consumer Flexible-the system can absorb “shocks” and smooth out quickly Allows consumer choice Familiar It’s a free system…no need to hire a bunch of government workers to run it.

Does government ever control price? Yes Rent control- price ceiling=cannot go above

Does government ever control price? Yes Rationing during war

Does government ever control price? Yes Regulation of monopolies- sets price ceilings Time Warner Cable Minimum wage- price floor=cannot go below Benefits- more money to live off of…not much more Drawbacks- businesses will lose money, lay off workers

Supply and Demand Practice Answers

Supply Demand

Supply Equilibrium Demand

Supply Equilibrium Demand

Coffee Shop How did you decide on price? How did your price affect demand? What changed demand? What variable costs did you incur? What were your fixed costs? Why was it hard to control inventory?

Surplus-S>D-lower the price Shortage-D>S-increase the price