SUPPLY AND DEMAND: HOW MARKETS WORK

MARKETS AND COMPETITION A market is a group of buyers and sellers of a particular good or service. 4

MARKETS AND COMPETITION Buyers determine demand. Sellers determine supply. 4

DEMAND Quantity demanded : the amount of a good that buyers are willing and able to purchase. Law of Demand The quantity demanded of a good falls when the price of the good rises. $ # Demanded 8

Ben’s Demand Schedule 17

Ben’s Demand Curve Price of Ice-Cream Cone $3.00 2.50 1. A decrease in price ... 2.00 1.50 1.00 0.50 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of 2. ... increases quantity of cones demanded. Ice-Cream Cones

Change in Quantity Demanded Movement along the demand curve. Caused by a change in the price of the product. 19

Change in Quantity Demanded Price of Ice-Cream Cones A tax that raises the price of ice-cream cones results in a movement along the demand curve. B $2.00 A 1.00 D 4 8 Quantity of Ice-Cream Cones

Changes in Demand!!! (Demand Shifters)

What is a change in demand? Any change that alters the quantity demanded at every price. A shift in the demand curve, either to the left or right. 19

Shifts in the Demand Curve Price of Ice-Cream Cone Increase in demand Decrease in demand D 1 D D 2 Quantity of Ice-Cream Cones

Demand Shifters: T - I - R - E - S - Income of Consumers Tastes & Preferences of Consumers Income of Consumers Related Goods: Substitutes & Complements Expectations of Future Price Changes Size of population/Market I - R - E - S -

Tastes & Preferences of Consumers As people’s tastes change in favor of a good, or an effective advertising campaign has been waged, demand increases (shifts to the right). As people’s tastes change against a good, or a good loses popularity, demand decreases (shifts to the left). P Q D D1 P Q D1 D

Example: When Michael Jordan began endorsing the products, demand for Nike & Gatorade increased.

Income of Consumers As income increases, consumer demand for goods and services increases (shifts to the right). As income decreases, consumer demand for goods and services decreases (shifts to the left).

Example: When Billy got laid off from his job, his demand for gourmet steak dinners decreased.

Related Goods: Substitutes Substitute goods can be easily used in place of one another. If two goods are SUBSTITUTES, when the price of Good A increases, demand for Good B increases (shifts to the right). If two goods are SUBSTITUTES, when the price of Good A decreases, demand for Good B decreases (shifts to the left).

Example: Demand for Starbucks changes when Caribou alters its prices

Related Goods: Complements Complementary goods are used WITH each other. If two goods are COMPLEMENTS, when the price of Good A increases, demand for Good B decreases (shifts to the left). If two goods are COMPLEMENTS, when the price of Good A decreases, demand for Good B increases (shifts to the right).

Example: Demand for ketchup changes when hamburger prices fluctuate

Substitute OR Complementary? Cars and Tires Corn and Beans DVD Players and DVD’s Natural Gas and Electricity Cereal and Milk Toast and Jam Sweatshirts and Sweaters

Expectations of Future Price Changes If consumers expect the price of a good to rise in the future, immediate demand increases (shifts to the right). If consumers expect the price of a good to decrease in the future, immediate demand decreases (shifts to the left).

Example: Demand for gas changes throughout the week

Size of Population/Market As the number of consumers in a given market increases, demand increases (shifts to the right). As the number of consumers in a given market decreases, demand decreases (shifts to the left).

Example: Demand for girl scout patches increases when more girls join girl scouts

Variables That Influence Buyers

Shifts in Demand A well known athlete who endorses a line of button down shirts is discovered to have been unfaithful to his wife. Demand Shift: Left

Shifts in Demand The number of Netflix rentals if movie tickets prices increase to $12.00 per person. Demand Shift: Right

“Analyzing Demand Headlines” Activity Instructions May work with your partner. In this activity, you will work with your partner to analyze a series of newspaper headlines. Based on information in each headline, you will investigate what happens to the demand curve for a related product.

Work with your group to analyze headlines that will likely affect demand by following these steps: Carefully read one of the demand headlines. Determine whether the information will Shift the entire curve to the left or to the right, or Not shift the demand curve, but change the quantity demanded along the original curve.

Summarize the headline in the corresponding row. On your worksheet… Summarize the headline in the corresponding row. Draw what will likely happen to the demand curve. Explain what happened to the demand curve & why. Cite & underline the shifter (TIRES), or explain why the curve did not shift, and whether quantity demanded increased or decreased. Wages Decline for U.S. Workers -Demand decreased (shifted left) -Income of consumers decreased D2

Summarize the headline in the corresponding row. Have your work checked by the teacher. Then repeat the process with a new headline until A-H are completed. Summarize the headline in the corresponding row. Draw what will likely happen to the demand curve. Explain what happened to the demand curve & why.

Elasticity OF DEMAND

WHAT WILL CONSUMERS DO WHEN PRICES CHANGE WHAT WILL CONSUMERS DO WHEN PRICES CHANGE??? How much more will consumers buy if the price falls? How much less will consumers buy if the price rises?

ELASTICITY OF DEMAND: Measurement of consumers’ sensitivity to price. Buyers are responsive to price changes. INELASTIC: Buyers are not responsive to price changes.

Determinants of Demand Elasticity: Availability of substitutes Price relative to income Necessities vs. Luxuries Time needed to adjust to a price change

Elastic or Inelastic? Sugar New furniture New car Gasoline Food Encyclopedia 2% Milk Sailboat Socks Aspirin Diet Coke Gold Jewelry Insulin

SUPPLY Quantity supplied is the amount of a good that sellers are willing and able to sell. Law of Supply The quantity supplied of a good rises when the price of the good rises. $ # supplied 25

Jerry’s Supply Schedule Price of Ice cream cone Qty. of Cones supplied 29

Jerry’s Supply Curve Price of Ice-Cream Cone $3.00 2.50 1. An increase in price ... 2.00 1.50 1.00 0.50 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of Ice-Cream Cones 2. ... increases quantity of cones.

Change in Quantity Supplied Movement along the supply curve. Caused by a change in the price of the product. 30

Change in Quantity Supplied Price S C $3.00 A rise in the price of ice cream cones results in a movement along the supply curve. A 1.00 Quantity of Ice-Cream Cones 1 5 30