Supply & Demand (8.04) J. Worley

Law of Supply & Law of Demand Supply is how much a certain good is available to consumers Law of Supply states that producers will only produce a good that will yield them a profit Demand is how much a consumer wants a particular good Law of Demand states that consumers will only buy a product for which they have a need or want & that is set at a price they can afford

Law of Supply- Explained Producers must feel certain that producing a product will make them a profit –They have no incentive to produce a produce that will cost them money Producers must also look at the problem of producing much more than the people will buy causing them to lose money or to have the drop the price of the product –This is where marginal cost comes into play

Law of Demand- Explained The more consumers want a product and the more scarce it gets, the more consumers will be willing to pay (Gas) The more available a product is or the less desirable the product, the less consumers are willing to pay

Law of Supply and Demand Supply (What is produced) is determined by what is demanded (What consumers will buy). –If a product is in high demand, producers will supply it as long as they make a profit –If there is no demand for a product or not great enough for producers to make a profit, producers will not supply it If the profit of a company is considered really high, many others will enter the market to produce that product –Consumers will cut back on production once supply begins to exceed demand

Influences of Supply and Demand Price –Equilibrium (Market) Price- The price at which producers are willing to make the same amount of product that consumers demand Income –Personal- All the money received into household –Disposable- All of the income a household after paying taxes Competition –How many producers are supplying a particular good Substitute Goods –Goods that can be used in place of other goods

Supply and Demand Curve

Supply and Demand Curve (cont.) Supply Curve/Schedule –Tells us how much of the product that sellers are willing to part with at various price levels Demand Curve/Schedule –Tells us how much of the product buyers are willing to purchase at various price levels

How Prices Change (8.05)

Factors that Affect Prices Shortage –Supply of certain goods fall short of demand Surplus –Supply of certain goods exceeds demand

Factors that Affect Prices (cont.) Consumer Tastes –Refers to individual consumers’ preferences What is desirable to one may not be to another Inflation –General rise in prices of products Deflation –General fall in prices of products Interest Rates –Amount paid to a lender in exchange for the use of that lender’s money (AKA- Interest)

Government Impact on Prices Wage and Price Controls –Minimum Wage- Minimum amount that producers must pay employees for their labor Price Ceilings –Maximum price above which the price of a good or service is not permitted to rise Price Floor –Minimum price below which the price of a good or service is not permitted to drop

Reagan’s Supply-Side Economics Economic approach that seeks to increase production by cutting corporate taxes so that businesses can have more money to spend on production and labor Reagan believed that by enabling businesses to spend more on capital and labor, it would have a “TRICKLE DOWN EFFECT” by which everyone in society would benefit

How Can Competition Affect Price and Output (8.06)

Competition in the Market Buyers vs. Sellers –Come together to change things of value –Buyers use money while Sellers use the good/service 4 Factors of a Competitive Market –Large number of buyers and sellers –Products must have the same quality –No major barriers to enter the market –Free exchange of price info between producers

Monopolies vs. Oligopolies Monopolies –Market structure under which there is only one producer of a give good or service & there are no substitutes Oligopolies –Market in which there are only a few producers –Form in industries that are usually large (Electric) –Operate in a manner between competitive markets and monopolies

Conglomerates and Mergers Conglomerates –Large companies that consist of several businesses, many of which may be unrelated in what they produce (GE owns NBC) Mergers –Vertical- When a company buys out another company that was previously it supplier or that it previously supplied for (Ford & Firestone) –Horizontal- Merging of 2 firms that make similar products (BP bought out Amoco) –Multinational- Companies operate in more than one country