Supply and Demand Aka Capitalism

Vocabulary terms to copy Price is what you pay. Cost is what the manufacturer spends to produce the product. Supply is what is produced & offered for sale and how much is produced Demand is how much of the product is wanted by Consumers

Vocabulary terms to copy Producers are the owners of business and the creators of Supply. Consumers are the people who buy what is produced Price Equilibrium is when supply equals demand and price stabilizes Rational Choice is when people will make a decision based on their best self-interest.

Directions: Fill in the blanks as needed We will discuss some questions. Some answers are easy, others require extended discussion You will listen to the answers of your class You will add any additional comments to your outline.

How do you think price is set? You go to Walmart to buy a shirt. You find one you like. The shirt has a price sticker on it. Why that price for that shirt?

What four things go into setting the price? 1. Cost of materials (CoM) 2. Cost of labor (CoL) 3. Cost of doing business (CoB) called “overhead” – building rental, utilities, taxes and government fees 4. Profit

What is the price of a pencil? For 1? For a dozen?

What are the parts of a pencil? Wood Graphite Metal Eraser chemicals Paint Glue Ink (for the label?) What else?

What is the process of making a pencil? Build a pencil factory, build machinery, connect electricity, water & sewer, build roads to it, hire factory workers Hire lumberjacks. Cut the tree down. Hire truck drivers, transport it to the mill (oh, this has to be build too) where it is cut into shape, transport it to the pencil factory Hire mine workers, dig out the mineral graphite, crush it and mix with other chemical (these have to be made too) to make it solid. Transport to the pencil factory. Do I have to go on?

Adding both labor and materials, what is the cost to produce a single pencil? It would take $10,000,000 for one pencil Profit is price minus cost. What is the profit on a pencil? How can they sell them for so cheap? Because they make 100,000,000 pencils every year!

If the price of a pencil was $100.00, would you buy one, why or why not?

When things get too expensive, what do you do? 1. find an alternative to that product. 2. repair the old one 3. borrow one from a friend 4. DON’T BUY IT! 5. When people stop buying, this is called a “drop in demand”.

When demand drops, what will the producer do? Try to get people to start buying again This is called “stimulating demand” Improve his product – “The new and improved…” Advertise Offer deals Put things on sale! In other words he must lower his price.

What can a producer do to lower the price? What are the 4 things that make up price? CoM, CoL, CoB, Profit Use cheaper materials Make it smaller Get a discount from his suppliers of the materials In other words, he must try to cut the cost of materials.

If he can’t cut his material costs what then? He must cut the cost of labor. How? Cut benefits, cut hours, cut wages Lay off some workers Fire everybody & move the factory to a low wage country He could always cut his profits…some.

What happens when profit is cut to zero? Simple. The producer goes out of business. All the workers are fired. Any person who invested in that business, loses their money. Any other business that was owed money for things they sold him, loses their money too.

If the price gets too high, and the demand drops, and the producer cannot stimulate demand, nor cut costs and cannot make profit, the producer stops making the product, maybe even goes of business. What happens to supply? Here is where the beauty of capitalism starts…. Supply goes down (Supply shrinks).

What happens when the supply shrinks? This is called “Scarcity”. The produces become in “short supply” People cannot find them in the stores. If you really want a product, and there aren’t many to be bought, would you pay a higher price to get one? Demand starts to rise again

If a producer could get a higher price for their produce, what would that make him want to do? An increase in demand, plus higher price (and of course PROFITS!!!), he would… Start making more (increase supply) Reopen the factory, hire workers Other producers switch and start making the product

So supply increases to meet demand, and the price rises at first (if not, there wouldn’t be any increase in supply) but then stabilizes. What is this called? “Price Equilibrium”

But what happens if the prices go too high? Then demand falls & Producers stop making the product Supply falls & Scarcity happens Price rises & demand increases Producers respond with an increased supply This is called the “Self-Regulating Market” It actually works until the stupid government gets involved.