1. What determines price in a Market & Mixed Economy?
Supply & Demand
What determines price in a Market & Mixed Economy?

2. Review
Market Economies have very little government control (ownership), and resources are mostly controlled by Private Businesses (individuals)
Mixed Economies like Canada have both private business and government (public) ownership.
Governments want to make goods & services accessible to all people (keep prices low or even “free”). But what determines the prices of goods and services being offered by private businesses?

3. What is Supply & Demand?
P. 210

4. Key Definitions Supply Demand Equilibrium Surplus Shortage
The products (goods) and services being produced
Demand
The wants and needs of the consumer
Equilibrium
When the supply of a product can meet (match) the demand at a certain price
Surplus
When there is more supply than demand
Shortage
When there is more demand than supply

5. Theory Behind Supply and Demand
In theory, the phenomena of equilibrium prices ensures that in a free market system:
There are no surpluses
There are no shortages
Businesses are encouraged to make the goods people want most
Goods are made available at the cheapest possible price

6. How Does It Work?
p & Pepsi vs Coca-Cola

7. Step 1: Equilibrium PRICE SUPPLY DEMAND $1.65 $1.69
At first, there is so little difference in price that there is equilibrium between supply, demand and price for both products.
SUPPLY
DEMAND
PRICE

8. Step 2: Demand for One Product Increases
SUPPLY
$1.40
SUPPLY
$1.69
DEMAND
To compete more effectively with Pepsi, Coca-Cola may decide to lower their price to increase demand for their product.

9. Step 3: The Equilibrium Has Been Disturbed
Since people are buying Coke, supply of Pepsi has gone up. To compete with Coca-Cola, Pepsi reduces the price of its cola.
Now, Coca-Cola are faced with a drop in demand for its cola, as it’s now more expensive. The supply increases.
SUPPLY
However, the increase in demand for Pepsi creates a drop in supply.
DEMAND
SUPPLY
DEMAND
$1.40
$1.29

10. Step 4: Pepsi Becomes More Expensive
Reduced demand for, and increased supplies of, Coca-Cola, has caused the price to fall to $ However, increased demand for, and reduced supplies of, Pepsi, has caused the price to rise to $1.35.
Remember! This is a simplified version of reality: a model. It does not take into account other variables such as personal preference.
$1.35
$1.35
It may take several cycles in fluctuation in supply and demand for the prices to come closer to each other, but this is achieved eventually. Now, there is so little difference in price between the products that competition no longer affects supply and demand significantly. Equilibrium has been restored between supply, demand and price.
SUPPLY
DEMAND
PRICE

11. In Summary: When Demand Goes Up….
When demand for a product goes up, it means more consumers are buying the product
As consumers buy, the availability of the product drops
Which in turn drives up the price
Ex. Tickle Me Elmo, or Wii fit
Demand = Supply = Price
(Consumers) (Producers)

12. …But, When Price Goes Up….
When the price of a product goes up, fewer customers can afford to pay it, which drives the demand down, leaving an increase availability of the product.
Ex. Cars and Housing
Price = Demand = Supply
(Consumers) (Producers)

13. ….and Finally, when Supply does up….
When supply of a product goes up, so does the availability.
When there is more available, the price of the product goes down (producers are encouraging consumers to buy more)
With the lower price, this encourages consumers to buy more, which in turn increases demand
Ex. Walmart
Supply = Price = Demand
(Producers) (Consumers)

14. Real Life Examples of S & D (and of People losing their minds)
Tickle Me Elmo Craze:
Black Friday Crazies:

15. Milk, Eggs, and Pickles
Read the scenarios and identify how Supply, Demand, and Price would be effected.