The Price System Chapter 21 Demand, Supply & Prices

Demand Demand is the amount consumers are willing to buy at all prices. Consumers control the demand-side of our economy. Must have want, willingness, & resources! The Law of Demand says as prices increase, the quantity demanded decreases. This principle is illustrated by an auction. The price increases until the number of buyers decreases to one. Do example!

Demand What is the difference between a demand schedule & a demand curve? ? Which way does the demand curve always slope? Why? Do Demand graphing exercises. Set up graph using equal intervals on both axes. Label P, Q, D, 0. Discuss the law of diminishing marginal utility with example.

Demand Schedule Vs.Demand Curve

Factors that change demand Changes in the population of consumers –Ship deployment/return Changes in tastes or trends –Beanie babies Changes in income –Minimum wage Changes in expectations –Gas prices Changes in substitutes –Coke vs. Pepsi Changes in complements –Peanut butter & jelly

Elasticity of demand Elastic demand means there is a great difference between quantity demanded and changes in price. –Lots of competition, substitutes causes elasticity (Pepsi, ex) Inelastic demand means quantity demanded varies little with changes in prices. –Usually lack of competition or substitutes cases inelasticity. (Gasoline, ex)

Assignment Read 21.3 & complete questions for p. 72. Due Tomorrow!

Supply Supply is the amount producers are willing to sell at all prices. Producers control supply-side of our economy. What is the difference between a supply schedule & a supply curve? ? Which way does the supply curve always slope? Why? The Law of Supply says as prices increase the quantity supplied increases. Do Supply Graphing Exercises, p. 73.

Supply Schedule Vs. Supply Curve

Supply How does profit motive relate to the law of supply? –Higher prices mean more profit Market supply is the amount of a product that all producers are willing to sell at all prices. Factors business consider include costs, competition, and consumer demand when businesses set prices.

Factors that change Supply Change in cost of resources: Cost of sugar (ex) Change in productivity: Labor slowdowns (ex) Change in technology: Check out scanners (ex) Change in government policies –Taxes –Minimum wage –Subsidies Change in expectations: Hurricane season (ex) Change in the number of suppliers or competition –Border Station vs. Southland –Food Lion

Elasticity of Supply Elastic supply means there is a great difference between quantity supplied and changes in price. –Lots of competition, substitutes causes elasticity (Gas stations in Moyock, ex) Inelastic supply means quantity supplied varies little with changes in prices. –Usually lack of competition or substitutes cases inelasticity. (Food Lion, ex)

Assignment Read 21.4 & complete questions for p. 74. Due Tomorrow!

Setting Prices Producers want high prices. Consumers want low prices. Prices must be high enough to make a profit and low enough to attract consumers. Shortages cause prices to increase. D>S Surpluses cause prices to decrease. D<S Where producers and consumers wants intersect is how prices are determined. This is called the market or equilibrium price. Graphing exercises.

Setting Prices Price ceilings are limits on businesses on how much they can charge for a good or service. These are VERY rare in our economy. Ex. Is rent controls in NYC Price floors are limits on how little businesses can charge for a good or service. These prices are kept low by subsidies to the industry. These are not very common any more. Ex. Is milk prices Consumers and producers largely determine prices in our economy today.

Setting Prices What are the advantages of our price system in Capitalism? –Prices are neutral –Prices are flexible –Prices offer choice –Prices are familiar

Practice and exit ticket Graph the chart at the bottom of p. 76. –Label all 10 points! –Discuss Graph one of the schedules on p. 77 & label correctly. Raise your hand when done to be checked. Complete the final graph on a separate sheet and turn in as your exit ticket.

Assignment Read 21.4 & complete questions for p. 74. Due Tomorrow!