1. SUPPLY & DEMAND: THE MARKET LECTURE 3

2. INTRODUCTION TO SUPPLY & DEMAND Questions? Why does it cost thousands of dollars to buy a little stone known as a diamond? Why are most doctors paid such high incomes? Why did the price of tomatoes increase from.50 per pound to $4.00 per pound in the spring of 1992? Why did a herd of Arabian horses owned by a famous singer go from an appraised value of $11 million to less than $1 million in three years? Why does a Mickey Mantle baseball card that originally cost a few cents now sell for thousands of dollars?

3. ANSWERS The law of supply & demand!

4. WHAT IS THE LAW OF S & D? It’s an economic tool. It determines prices. It analyzes profits. It sets future price movements. It is a serious step in EWOT!

5. LAW OF DEMAND The relationship between prices of goods and the quantity demanded. When the price of a good decreases the quantity demanded increases. (electronics) When the price of a good increases the quantity demanded decreases. (energy)

6. NEED vs. WANT Products can be needed. Food Clothing Shelter

7. NEED vs. WANT (continued) Products that are wanted. – Mercedes – Rolex – Diamonds

8. NEED vs. WANT Demand is not to be confused with words like need or want!.

9. DETERMINANTS OF DEMAND TTastes & preferences IIncome NNumber of people in market. PPrices EExpectations AAdvertisement

10. TASTES & PREFERENCES It’s personal. Influenced by: Family Gender Age Peers Religion

11. INCOME As your income changes your demand changes. UP or Down!

12. PEOPLE A population base is the first step in trying to determine a viable marketplace. More people can equal more success.

13. PRICE Price can refer to the actual product. Price can refer to a substitute product. An example is as simple as bacon & eggs!!!!

14. PRICE (continued) EXAMPLE: When the price of eggs rises this might cause the demand for bacon, a complement of eggs, to decrease.

15. EXPECTATIONS Factors affecting expectations: – Friends – Literature – Advertisements

16. ADVERTISEMENT Why spend money on advertising?

17. ADVERTISING (continued) Because it WORKS! This is why some producers spend huge sums of money to promote their products thus increasing sales which translates to increase demand.

18. ADVERTISING (continued) More money is spent advertising Cheerios than is spent actually producing it.

19. MARKETING PRICE PROMOTION PRODUCT DISTRIBUTION

20. MARKETING (continued) THE FOUR ELEMENTS OF THE MARKETING MIX. General Foods spends more on promotion (advertising) and less on product (production).

21. DEMAND A change in demand refers to a complete shift of the demand curve. This happens because -------------- A change in demand is caused by a change in any of the determinants of demand (TINPEA).

22. VEBLEN GOODS & GIFFEN GOODS Two exceptions to the Law of Demand

23. VEBLEN GOODS When people buy more of a good at a higher price than a lower price. Theory by Thorstein Veblen; an American economist. Veblen goods are usually associated with status symbols.

24. VEBLEN GOODS (continued) Veblen goods are bought not for their utilitarian value, but for the statement the good makes.

25. GOLDEN NUGGET! VEBLEN GOODS ARE MINOR EXCEPTIONS TO THE “LAW OF DEMAND”.

26. GIFFEN GOODS Consumers buy less as the price falls. Usually related to fluctuations in income. Named after Sir Robert Giffen, 19 th century economist.

27. NORMAL GOODS vs. INFERIOR GOODS Normal goods – products for which demand increases as your income increases. Inferior goods – products for which demand decreases as your income increases.

28. GOLDEN NUGGET! Normal goods and inferior goods are goods for which demand changes as income changes. UP or DOWN!

29. LAW OF SUPPLY As the prices for your product increase, so too will the quantity that you are willing to supply.

30. ANOTHER GOLDEN NUGGET! When profits increase, the businessperson will try to expand production in order to capture ever more profits.

31. EXCEPTIONS Usually involves a unique circumstance. – Limitations (numbers) – Seasonal (weather) – Rare (scarce or one of kind)

32. YET, ANOTHER GOLDEN NUGGET! A change in demand is caused by a change in one or more of the determinants of demand. (TINPEA)

33. DETERMINANTS OF SUPPLY T – Technology I – Input P – Price E – Entry T - Taxes For now, just know this acronym.

34. MICKEY MANTLE? What did the “Mick” have to do with economics? Needed a liver transplant. Shortage of vital organs. He needed a liver. It was not a want! Price was not an issue, only supply.

35. MARKET EQUILIBRIUM Equal is the key word. The market equilibrium price is the price where the quantity demanded is equal to the quantity being supplied. A perfect situation.

36. MARKET EQUILIBRIUM (continued) Concept: The market forces of supply and demand interact to determine the price of any good – This is a critical part of EWOT.

37. THE BIG GOLDEN NUGGET!!! THE LAW OF SUPPLY & DEMAND. When supplies are low and demand is high PRICES RISE. When supplies are high and demand is low PRICES FALL.

38. SHORTAGE & SURPLUS When is there a shortage? When the consumer has the money for an item but the store doesn’t have it.

39. SHORTAGE & SURPLUS When is there a surplus? It’s the opposite of shortage. When there is more on the shelf than the consumer wants to purchase, even if they have the money to do so.

40. EWOT TRUE or FALSE. All market prices are determined by the interaction of supply and demand.

41. SIMPLE ANSWER TRUE

42. EWOT (continued) Why are we concerned with the law of supply and demand as students? Because the law of supply and demand is a critical part of our economy and it will be one of the forces that helps determine wages.

43. EWOT (continued) Supply & demand is a life long tool. Supply & demand is the closest thing we have to a “crystal ball”. Supply & demand helps in decision making.

44. KEY TERMS Law of S & D. Demand. Supply. Equilibrium Giffen goods. Veblen goods.

45. LECTURE 3 THE END