1. Bellwork List 1 thing you already know about supply and demand.
How much would YOU pay for a pair of your favorite shoes? Explain.
What determines how much you would pay for them?
Did you know? The most expensive pair of shoes in the world are “Ruby Slippers” from the House of Harry Winston for $3 million

2. Yesterday
Which part of yesterday’s trading represented local trade? U.S. trade? International trade?
Tomorrow! Bring a pair of comfortable shoes and a shirt under your button up shirt (It’s going to be a fitness day  )
Also bring a few dollars with you.

3. Chapter 6
Supply and Demand

5. Economies Free enterprise system: anyone is free to start a business
Command economy: government sets prices, and tells people where they can work and how much they can earn.
Historically command economies have not been efficient.
Examples of a command economy: Cuba and the former Soviet Union, and China

6. Economies Most economies are a mix
No country has a PURE free market or command economy
For instance, in the U.S. the government regulates the postal service, transit, police
In the U.S. we have freedom of speech, and ownership are protected by law in the U.S. which gives up more rights.

7. Price Price relays information to the entrepreneur
When the price is too low, the product sells out quickly and consumers want more
but…
When the price is too high, consumers will refuse to buy it
…in most cases (we’ll find out why in a few minutes)

8. ??????????
What product or service what you stop buying if the price goes up, even a little?
What product or service would you continue to buy even if its price rose considerably?

9. Competition Versus Monopoly
Keeps prices down and quality high.
Gives consumer more choices and lower prices.
Encourages change and new ventures.
MONOPOLY
Keeps prices high and quality low or average.
Is bad for the consumer, who must pay higher prices for lower quality.
Discourages change and new business.

10. Setting an Economy’s Price System
To understand how a nation’s economy functions it is important to understand the nation’s price system
The forces that determine price are called the forces of supply and demand
The place where these two forces meet is called the marketplace

11. Supply and Demand
SUPPLY: The amount of a product or service sellers are willing to sell at specific prices.
Supply: the business (entrepreneurial) response to consumer demand.
DEMAND: the amount of a product or service that consumers are willing and able to buy at a specific price.
Demand: The desire for a product or service combined with the ability to pay for it.

12. Supply and Demand Determine Prices in a Free Market Economy.
PRICE RELAYS INFORMATION BETWEEN CONSUMER AND PRODUCER.
If everything else stays the same . . .
Law of Demand:
As the price goes up, the quantity demanded by consumers goes down.
Law of Supply:
Businesses will supply more of a product or service at a higher price.

13. Demand Curve
Demand Curve is a line graph that shows the amount of a product that will be purchased at each price; it shows an inverse relationship and is always downsloping D Qd

14. Supply Curve
Supply Curve will always be upsloping. S

15. Market Clearing Price
Market clearing price (also called equilibrium price): The point where supply and demand meet.
Together, supply and demand will determine how much will be sold and for how much.
For instance, if an apple cost $2.00 nobody would buy it…. and if an apply cost 5 cents the retailer wouldn’t make a profit….
So… the market and the consumer must come to a price that they both will benefit from.

16. Market Clearing Price

17. Aggregate (Market) Demand
What events would increase or decrease the aggregate or market demand for goods and services “across the board”
At every price range – generic Shaw’s brand ice cream to Ben and Jerry’s premium brand !

18. 1. Seasonality More lemonade will be demanded
More bathing suits will be demanded
More sun tan lotion will be demanded

19. 2. Trends Advertising creates trends Gap
Everybody in vests!
Everybody in leather
Everybody in stripes
Some advertising can decrease demand
SUV = Terrorism

20. 3. Change in Income
A raise in income will increase demand for superior goods ( Rolex) and decrease demand for inferior goods ( Timex watch)
Conversely, a decrease in income will increase demand for inferior goods ( Timex) and decrease demand for superior goods ( Rolex)

21. 4. Expectations
If the Farmer’s Almanac forecasts a cold winter people may demand more snow tires and rock salt

22. 5. Price of Related Goods Substitute Goods A rise in the price of one
(e.g. butter) may increase the demand for the substitute ( margarine)
This is a direct relationship
Complementary Goods
An increase in the price of one good ( e.g cameras) will decrease the demand for the complementary good (film/memory cards).
This is an inverse relationship

23. 6. Demographics
Number and Kinds of Buyers in the Market can change demand
Baby Boomers are getting ready to retires
Increased Demand for:
More housing in Florida and Arizona
Assisted Living Complexes
Walkers
Wheelchairs

24. Determinants of Supply
What could cause a huge increase or decrease in supply across the board ( and a change in price is not a factor !)
Resource prices ( raw materials)
Technology (produce more products faster & more efficiently
Taxes
Subsidies ( Gov’t grants)
Related Goods ( e.g corn, wheat)
Expectations
Number of Sellers in the Market

25. Elasticity of Demand
Elasticity of Demand describes the percentage change in quantity demanded that follows a price change

26. Elasticity of Demand
Demand is elastic if a rise in price results in a large drop in demand and demand is inelastic if a rise in price results in a relatively small or no drop in demand

27. Milk: Elastic or Inelastic ?
Why?
The population as a whole can do without steak….but can not do as easily without milk…especially families with children

28. Gasoline: Elastic or Inelastic ?

29. What Products are Subject to Elastic Demand ?
Luxury Items – Most customers want luxuries and will consider buying them if price drops
If Price Represents a Large Portion of Family Income
e.g. Mortgage Rates drop from 6.5 to 5.5% people will “refinance”
Availability of Substitute Items
e.g. Steak /chicken
Durable Goods
Computers, cars, washers, dryers will be in greater demand if the price drops

30. What do you think? Supply and Demand is taking place…
What is likely to happen to the price of air conditioners in December? Why?
What would happen to the price of basketball tickets if the Pistons made it to the playoffs? Why?
What happened to the price of the XBox4 during Christmas time? Why?

31. What Products are Subject to “Inelastic Demand”?
Necessities (milk, gasoline)
Drugs
Legal (heart medicine antibiotics)
Illegal (heroin, cocaine)
Products with no good substitute
insulin, cancer drugs, etc.
salt in Middle Ages (preservative)