1. Supply, Demand and Competition

2. Both Buyer and Seller Essential Question: How are prices set? Seller??

3. 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

4. Basic facts
Consumers have a great influence on the price of goods and services.
Why?
Market: Represents the freely chosen action between buyers and sellers.
Voluntary exchange: Buyers and sellers work out a deal that suits both sides.

5. Demand
Demand shows consumers ability and willingness to buy goods and services.
e.g. Swimming suits have a different price and quantity demanded in summer vs. winter
How many of you would like a new car?
How many of you are able?

6. Law of Demand
Explains the amount people are willing to buy as prices change.
Demand can only occur if a buyer is willing and able to buy.
Three factors that affect what and how much people buy are diminishing marginal utility, real income, and substitution.
Price goes up – Demand goes down
Price goes down – Demand goes up

7. Diminishing Marginal Utility (DMU)
Utility: Power of a good or service to satisfy.
People will buy until price exceeds satisfaction.
Price decreases, people will buy more.

8. Real Income Effect Income limits the amount of money people can spend.
People cannot keep buying the same amount if price increases and income stays the same. (Real income effect).
People are forced to trade-off if price increases.
If price decreases and you buy the same amount, your real income has increased.

9. 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 p D Qd

10. Law of Demand Price per gallon of water Bottles per week
As price decreases, the quantity demanded increases. As the price rises, the quantity demanded decreases
P QD
Price per gallon of water
Bottles per week $ Jo
Pat
.75 90 50
.50
130 70
.35
180
100
.25
290

11. Demand for hot chocolate in December at the skating rink
Price
Quantity Demanded
$.50 30
$1.00 25
$1.50 20
$2.00 15
$2.50 10
$3.00 5
$3.50

12. Demand Determinants
Characteristics that will affect the amount people will buy. Includes changes in population, income, and personal preferences.
Prices of related goods, income, preference/taste, consumer expectations, population change

13. Demand Determinants Prices of Related Goods
Substitutes: Goods that are related in such a way that an increase in the price of one leads to an increase in the demand for the other [goods that can be consumed in place of one another] (Pepsi and Coke)
Compliments: Goods that are related in such a way that an increase in the price of one leads to a decrease in the demand for the other [goods that are normally consumed together] (hamburgers and hamburger buns)

14. Determinants cont. Income
Normal Good: a good for which demand increases as consumer incomes rise (milk)
Inferior Good: A good for which demand decreases as consumer incomes rise (ground chuck, bus rides)
As income rises consumers tend to switch from consuming these inferior goods to consuming normal goods (ex. steak, car/plane)

15. Determinants cont. Preference/Taste Likes and dislikes in consumption
Consumer Expectations
Change in future price of goods
Change in future income
Population Change
As the number of consumers in a market changes the demand will change

16. Supply
Explains the amount producers are willing to provide at various prices.
Law of Supply -
As price increases, supply increases.
As price decreases, supply decreases..

17. Supply Schedule & Curves
A Supply Schedule displays the quantity of a product supplied at each price
Price Per Bottle
Bottles Supplied
.75
200
.50
130
.35 75
.25 50

18. Supply of shovels before a large snowstorm sold at Lowes
Price
Quantity Supplied
$4.00 5
$8.00 10
$12.00 15
$14.00 20

19. Determinants of Supply
Technology
If more efficient technology is discovered production costs will fall
So suppliers will be more willing and able to supply more of the good at each price
Price of Relevant Resources
Those resources employed in the production of a good.

20. Determinants con’t Prices of Alternative Goods
Price of a good that uses some of the same resources as used to produce the good in question
Producer Expectations
Shift production according to future prices
Number of Producers
# of Prod. Increases # of supply
Government Restrictions
Taxes, quotas, licenses, etc.

21. Supply and Demand
If price falls, demand will increase and supply will decrease.
If price rises, demand will decrease and supply will increase.
Equilibrium price: Point where supply and demand meet.
Shortage and surplus:
When demand is greater than supply, a shortage occurs.
When supply is greater than demand, a surplus occurs.
Prices will rise in a shortage and fall in a surplus.

23. Price Controls
Price Ceiling – Gov’t set maximum price that can be charged for a good or service
Price Floor -- Gov’t set minimum price that can be charged for a good or service

24. Price Elasticity How consumers react when prices change.
Elasticity is determined by:
Existence of substitutes.
Percentage of income spent on a good or service.
Time allowed to adjust to a change.

25. Types Elastic: Many competing brands.
Price increases, people choose a substitute.
Inelastic:
Not much competition.
Price increases, demand does not change.

26. Steak: Elastic or Inelastic ?
Why? People as a whole can do without steak and will substitute chicken or other protein for expensive steak

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 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)

31. Why is Elasticity of Demand Important ?
What happens if a florist increases the price of roses 400 % in October ? Will sales go up or down ?
A. Probably, down
What happens if a florist increases the price of roses on February 14th? Will sales go down or up?
A. Probably up Why ? Frantic husbands and boyfriends will pay exorbitant prices for a dozen roses on Valentine’s Day.

32. This should be appropriate for 6 year olds.
In groups of 3-4, explain supply and demand to first graders. They need to understand the basic concepts and terms of supply and demand and how they work in a market economy.
This can be done on paper or computer and will be presented to the class.
This should be appropriate for 6 year olds.

33. Competition
Competition will exist if different businesses produce similar products.
Perfect Competition
Large Market
Similar Product
Easy entry and exit
Information obtainable
No control over price
Market Price is equilibrium price. (decided by supply and demand)

34. Imperfect Competition
One group can have an impact on price.
Monopoly
Oligopoly
Monopolistic Competition
Barriers to entry:
Government regulations: Some goods and services are protected from duplication by the government.
Cost of getting started: Large amount of capital is needed to begin.
Ownership of raw materials: Companies control materials and do not sell to competitors.

35. Monopoly One group controls the market. Single seller No substitutes
No entry
Complete control over price
Suppliers can raise prices without losing business.

36. Types of Monopoly Natural: Control of resources. Water company
Geographic: Control of location Dick’s is the only sports store in the area
Technological: Patent on technology
Government: Created by the government. Illegal to enter. Post office
Cartel: International form of monopoly (OPEC).

37. Oligopoly A few businesses in competition. Domination of a few sellers
Barriers to entry
Identical or slightly different products
Some control of price
Price wars are common place.

38. Oligopoly Examples Movie Studios
Columbia, 20th Century Fox, Warner Bros., Paramount, Universal, and MGM
Television
Disney/ABC, CBS Corp., NBC Universal, Time Warner, and News Corporation
Food Processing
Kraft Foods, PepsiCo, and Nestle
Telecommunications
AT&T, Verizon, Sprint, and T-Mobile

39. Monopolistic Competition
Numerous sellers
Easy entry
Different products
Competition
Some control of price
Substitution and advertising are factors.

40. Mergers One company joins with another.
Horizontal: Companies in the same business.
Vertical: Company joins with one it buys from.
Conglomerate: Buying of un-related businesses.

41. Vertical or Horizontal?
Google and Bing
Horizontal
Paper Company and Saw Mill
Vertical
Tostitos and Corn Fields
Harris Teeter and Ace Hardware
Conglomerate
Pepsi and Coke

42. Government policies
Late 1800’s the railroad industry was the biggest in the United States.
Theodore Roosevelt set out to stop monopolies with his “trust-busting” policy, which would break up large businesses.
All mergers must be approved by the Government.

43. Exit Ticket
Using complete sentences, explain (in paragraph form) the following terms as they relate to government’s role in the economy – Private good Antitrust law Public good Merger Monopoly Natural monopoly Recall Your book could be helpful. Especially pages Underline/highlight and number the terms when they are first explained in your writing.