1. © 2007 Thomson South-Western Unit II: The Price Discovery Mechanism

2. © 2007 Thomson South-Western Consumer Activity This requires full class participation All you need to do is raise your hand I will be polling the class on their willingness to pay for a certain good or service We all will copy the data down in our notes…

3. © 2007 Thomson South-Western

4. A market is a group of buyers and sellers of a particular good or service. What Is a Market? Apple Store: I-Phone 4 Launch

5. © 2007 Thomson South-Western Competitive Markets A market in which there are many buyers and sellers so that no individual has an impact on the market price.

6. © 2007 Thomson South-Western Market’s in 100% Perfect Competition Products are the same Numerous buyers and sellers so that each has no influence over price Firms are price takers

7. © 2007 Thomson South-Western Demand and supply in a market Buyers determine demand. Sellers determine supply

8. © 2007 Thomson South-Western Demand!!!!

9. © 2007 Thomson South-Western Demand Shows the amount people are willing to buy at every price

10. © 2007 Thomson South-Western Quantity Demanded The amount of a good that buyers are able and willing to purchase at a specific price. You want the good, and you can afford it

11. © 2007 Thomson South-Western Would this factor into your quantity demanded?

12. © 2007 Thomson South-Western The Law of Demand When a good’s price is lower, consumers will buy more of it. When the price is higher, consumers will buy less of it.

13. © 2007 Thomson South-Western The Demand Curve: The Relationship between Price and Quantity Demanded Demand Schedule The demand schedule is a table that shows the relationship between the price of the good and the quantity demanded.

14. © 2007 Thomson South-Western Catherine’s Demand Schedule

15. © 2007 Thomson South-Western The Demand Curve: The Relationship between Price and Quantity Demanded Demand Curve The demand curve is a graph of the relationship between the price of a good and the quantity demanded.

16. © 2007 Thomson South-Western Catherine’s Demand Schedule

17. © 2007 Thomson South-Western Figure 1 Catherine’s Demand Schedule and Demand Curve Price of Ice-Cream Cone 0 2.50 2.00 1.50 1.00 0.50 1234567891011 Quantity of Ice-Cream Cones $3.00 12 1. A decrease in price... 2....increases quantity of cones demanded.

18. © 2007 Thomson South-Western Market Demand versus Individual Demand Market demand refers to the sum of all individual demands for a particular good or service.

19. © 2007 Thomson South-Western Brain Busta! Can you draw the market demand curve for ice-cream cones?

20. © 2007 Thomson South-Western The Market Demand Curve Price of Ice- Cream Cone 2.00 4 3 7 1.00 8 5 13 Quantity of Ice-Cream Cones Catherine’s Demand Nicholas’s Demand Market Demand + = When the price is $2.00, Catherine will demand 4 ice-cream cones. When the price is $2.00, Nicholas will demand 3 ice-cream cones. The market demand at $2.00 will be 7 ice-cream cones. When the price is $1.00, Catherine will demand 8 ice-cream cones. When the price is $1.00, Nicholas will demand 5 ice-cream cones. The market demand at $1.00, will be 13 ice- cream cones. The market demand curve is the horizontal sum of the individual demand curves!

21. © 2007 Thomson South-Western Shifts in the Demand Curve 0

22. © 2007 Thomson South-Western First know this!! Quantity Demanded and Demand are two different things! Quantity Demanded is referring to the amount of demand at a give price Demand refers to the actual curve itself Let’s take a look…

23. © 2007 Thomson South-Western 0 D Price of Ice- Cream Cones Quantity of Ice-Cream Cones A $1 tax on sellers of ice-cream cones raises the price of ice-cream cones. What will happen to the quantity demanded? A B 8 1.00 $2.00 4 Changes in Quantity Demanded

24. © 2007 Thomson South-Western Does a change in the price of goods shift the demand curve? NO!!!

25. © 2007 Thomson South-Western Shifts in the Demand Curve This is called a “change in Demand” A shift in the demand curve, either to the left or right. Caused by a change in a quantity at every price other than a change in the price of the good/service. “Only 2 people would buy a dog for $200. Now, because something changed other than price, 10 people would buy a dog for $200.” Day 1 Day 2 Day 3 If a Jimmy John’s cookie was $1, 2 people would buy one. A new study has proven eating Jimmy John’s cookies makes you 20% more intelligent After the study was released, now 20 people would buy the cookie for $1

26. © 2007 Thomson South-Western Figure 3 Shifts in the Demand Curve Price of Ice-Cream Cone Quantity of Ice-Cream Cones Increase in demand Decrease in demand Demand curve,D 3 Demand curve,D 1 Demand curve,D 2 0

27. © 2007 Thomson South-Western What causes a shift in the Demand Curve Anything that changes Qd other than a price change of the good/service Consumer income Prices of related goods Tastes & Advertisements Expectations Number of buyers

28. © 2007 Thomson South-Western Normal Goods vs Inferior Goods Normal Goods a good that consumers demand more of when their income increases Inferior Goods A good that consumers demand less of when their incomes increase Since you make more money, you can afford something better.

29. © 2007 Thomson South-Western Normal or Inferior Good?

30. © 2007 Thomson South-Western 1,800 1,500 1,200 900 600 300 213456789101211 Price of Crappy Televisions Quantity of Crappy Televisions 0 Decrease in demand An increase in income... D1D1 D2D2 Consumer Income Inferior Good

31. © 2007 Thomson South-Western

32. $3.00 2.50 2.00 1.50 1.00 0.50 213456789101211 Price of Apples Quantity of Apples 0 Increase in demand An increase in income... D1D1 D2D2 Consumer Income Normal Good

33. © 2007 Thomson South-Western

34. 1,800 1,500 1,200 900 600 300 213456789101211 Price of Crappy Car Quantity of Crappy Car 0 Decrease in demand An increase in income... D1D1 D2D2 Consumer Income Inferior Good

35. © 2007 Thomson South-Western Shifts in the Demand Curve Prices of Related Goods When a fall in the price of one good reduces the demand for another good, the two goods are called substitutes. When a fall in the price of one good increases the demand for another good, the two goods are called complements.

36. © 2007 Thomson South-Western Substitute Example

37. © 2007 Thomson South-Western If price goes up in…

38. © 2007 Thomson South-Western You may purchase the cheaper alternative…

39. © 2007 Thomson South-Western $3.00 2.50 2.00 1.50 1.00 0.50 213456789101211 Price of Totino’s Quantity of Totino’s 0 Increase in demand D1D1 D2D2

40. © 2007 Thomson South-Western Complement Example If price goes down ???

41. © 2007 Thomson South-Western $3.00 2.50 2.00 1.50 1.00 0.50 213456789101211 Price of Mustard Quantity of Mustard 0 Increase in demand D1D1 D2D2

42. © 2007 Thomson South-Western Consumer Expectations Expectations about the future What if someone told you a bike would be on sale in a week, which way would the demand curve shift on that day you found out about the impending sale?

43. © 2007 Thomson South-Western

44. Amount of Buyers An increase in population causes an increase in demand for most goods

45. © 2007 Thomson South-Western Consumer Tastes and Advertising Fads affect demand

46. © 2007 Thomson South-Western

47. Advertisements Good advertisements can increase demand

48. © 2007 Thomson South-Western

51. Table 1 Variables That Influence Buyers

52. 51 SUPPLY

53. © 2007 Thomson South-Western Quantity Supplied The amount of a good sellers are willing and able to sell Flu Shot

54. © 2007 Thomson South-Western Law of Supply When Price Increases Quantity Supplied Increases

55. © 2007 Thomson South-Western Ben’s Supply Schedule No-Friends Rabbit

56. © 2007 Thomson South-Western The Supply Curve: The Relationship between Price and Quantity Supplied Supply Curve The supply curve is the graph of the relationship between the price of a good and the quantity supplied.

57. © 2007 Thomson South-Western Figure 5 Ben’s Supply Schedule and Supply Curve Price of No-Friends Rabbit 0 2.50 2.00 1.50 1.00 1234567891011 Quantity of No-Friends Rabbit $3.00 12 0.50 1. An increase in price... 2.... increases quantity of cones supplied.

58. © 2007 Thomson South-Western Market Supply versus Individual Supply Market supply refers to the sum of all individual supplies for all sellers of a particular good or service. Graphically, individual supply curves are summed horizontally to obtain the market supply curve.

59. © 2007 Thomson South-Western Figure 7 Shifts in the Supply Curve Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 Supply curve,S 3 curve, Supply S 1 curve,S 2

60. © 2007 Thomson South-Western First know this!!! Quantity Supplied and Supply are two different things! Quantity Supplied is referring to the amount of supply at a given price Supply refers to the actual curve itself Let’s take a look…

61. © 2007 Thomson South-Western 1 5 Price of Ice- Cream Cone Quantity of Ice-Cream Cones 0 S 1.00 A C $3.00 A rise in the price of ice cream cones results in a movement along the supply curve. Change in Quantity Supplied

62. © 2007 Thomson South-Western Shifts in the Supply Curve Change in Supply A shift in the supply curve, either to the left or right. Caused by a change in a quantity at every price other than a change in the price of the good/service. January May June-July At $3 each, I will put 5 mini American flags on my store shelf The 4 th of July holiday is approaching At $3 each, I will put 100 mini American flags on my store shelf

63. © 2007 Thomson South-Western Figure 7 Shifts in the Supply Curve Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 Increase in supply Decrease in supply Supply curve,S 3 curve, Supply S 1 curve,S 2

64. © 2007 Thomson South-Western Shifts in the Supply Curve Input prices Technology Expectations Number of sellers Government

65. © 2007 Thomson South-Western Input Costs Any change of an input cost (production costs) will affect supply

66. © 2007 Thomson South-Western Lets say you produce these…

67. © 2007 Thomson South-Western What would happen to supply if the price of steel went up? Supply of buses would decrease

68. © 2007 Thomson South-Western Technology Example

69. © 2007 Thomson South-Western Early 1900’s Assembly Line

70. © 2007 Thomson South-Western Today’s Assembly Line

71. © 2007 Thomson South-Western Technology and Supply If technology increases, supply increases (shift to the right)

72. © 2007 Thomson South-Western Government’s Influence on Supply Subsidy –Government payment that supports a business market –Increases supply/shift to the right

73. © 2007 Thomson South-Western True Subsidy Story Tax authorities in the Netherlands agreed to provide an education subsidy to a Dutch woman who was studying and training to be a witch. The woman’s attendance at the 13-weekend witchery program, which cost $3,003, was ruled a legitimate tax- deductible schooling expense by government officials. Students in the program reportedly learned to cast spells, prepare herbs and potions, and to use crystal balls while generally using magic as “a force for good.”

74. © 2007 Thomson South-Western Other Examples Expectations –If you expect the price of an input cost to rise in the future, than you current supply will increase and shift to the right Number of Sellers –If a new hospital in Plainfield opens, the following supply will increase and shift to the right: doctors, hospital beds, MRI machines, vaccinations, etc…

75. © 2007 Thomson South-Western Table 2: Variables That Influence Sellers

76. © 2007 Thomson South-Western Market Equilibrium

77. © 2007 Thomson South-Western Market Equilibrium Market for a good is stable Price and quantity is exactly what both buyers and sellers are willing to give up Quantity supplied = Quantity demanded Equilibrium?

78. © 2007 Thomson South-Western SUPPLY AND DEMAND TOGETHER Equilibrium Price –The price that balances quantity supplied and quantity demanded. Equilibrium Quantity –The quantity supplied and the quantity demanded at the equilibrium price. Both are found where supply and demand intersect

79. © 2007 Thomson South-Western At $2.00, the quantity demanded is equal to the quantity supplied! SUPPLY AND DEMAND TOGETHER Demand ScheduleSupply Schedule

80. © 2007 Thomson South-Western Figure 8 The Equilibrium of Supply and Demand Price of Ice-Cream Cone 0123456789101112 Quantity of Ice-Cream Cones 13 Equilibrium quantity Equilibrium price Equilibrium Supply Demand $2.00

81. © 2007 Thomson South-Western

82. Disequilibrium When quantity supplied is NOT equal to quantity demanded in the market

83. © 2007 Thomson South-Western Two Types of Disequilibrium Shortage (excess demand) –When quantity demanded is more than quantity supplied –Price is below equilibrium price

84. © 2007 Thomson South-Western Figure 9 Markets Not in Equilibrium Price of Ice-Cream Cone 0 Quantity of Ice-Cream Cones Supply Demand (b) Excess Demand Quantity supplied Quantity demanded 1.50 10 $2.00 7 4 Shortage

85. © 2007 Thomson South-Western Two Types of Disequilibrium Shortage (excess demand) –When quantity demanded is more than quantity supplied –Price is below equilibrium price Surplus (excess supply) –When quantity supplied is more than quantity demanded –Price is above equilibrium price

86. © 2007 Thomson South-Western Figure 9 Markets Not in Equilibrium Price of Ice-Cream Cone 0 Supply Demand (a) Excess Supply Quantity demanded Quantity supplied Surplus Quantity of Ice-Cream Cones 4 $2.50 10 2.00 7

87. © 2007 Thomson South-Western Disequilibrium: Changes in demand and/or supply

88. © 2007 Thomson South-Western Table 3: Three Steps for Analyzing Changes in Equilibrium

89. © 2007 Thomson South-Western Figure 10 How an Increase in Demand Affects the Equilibrium Price of Ice-Cream Cone 0 Quantity of Ice-Cream Cones Supply Initial equilibrium D D 3....and a higher quantity sold. 2.... resulting in a higher price... 1. Hot weather increases the demand for ice cream... 2.00 7 New equilibrium $2.50 10

90. © 2007 Thomson South-Western Figure 11 How a Decrease in Supply Affects the Equilibrium Price of Ice-Cream Cone 0 Quantity of Ice-Cream Cones Demand New equilibrium Initial equilibrium S1S1 S2S2 2.... resulting in a higher price of ice cream... 1. An increase in the price of sugar reduces the supply of ice cream... 3....and a lower quantity sold. 2.00 7 $2.50 4

91. © 2007 Thomson South-Western Last one…. What happens to the equilibrium price and equilibrium quantity if BOTH supply and demand increase?

92. © 2007 Thomson South-Western Table 4: What Happens to Price and Quantity When Supply or Demand Shifts?

93. Summary © 2007 Thomson South-Western Economists use the model of supply and demand to analyze competitive markets. In a competitive market, there are many buyers and sellers, each of whom has little or no influence on the market price.

94. Summary © 2007 Thomson South-Western The demand curve shows how the quantity of a good depends upon the price. –According to the law of demand, as the price of a good falls, the quantity demanded rises. Therefore, the demand curve slopes downward. –In addition to price, other determinants of how much consumers want to buy include income, the prices of complements and substitutes, tastes, expectations, and the number of buyers. –If one of these factors changes, the demand curve shifts.

95. Summary © 2007 Thomson South-Western The supply curve shows how the quantity of a good supplied depends upon the price. –According to the law of supply, as the price of a good rises, the quantity supplied rises. Therefore, the supply curve slopes upward. –In addition to price, other determinants of how much producers want to sell include input prices, technology, expectations, and the number of sellers. –If one of these factors changes, the supply curve shifts.

96. Summary © 2007 Thomson South-Western Market equilibrium is determined by the intersection of the supply and demand curves. At the equilibrium price, the quantity demanded equals the quantity supplied. The behavior of buyers and sellers naturally drives markets toward their equilibrium.

97. Summary © 2007 Thomson South-Western To analyze how any event influences a market, we use the supply-and-demand diagram to examine how the event affects the equilibrium price and quantity. In market economics, prices are the signals that guide economic decisions and thereby allocate resources.

98. © 2007 Thomson South-Western Supply or Demand Activity On a separate sheet of blank paper, please do the following: –Write a specific market at the top (Shoes for example) –Write a scenario that will affect that market (Adidas spends 50 million dollars on a new advertisement campaign). –MAKE IT UNIQUE (take your time thinking) –Pass the paper behind you (group at the end…walk to the front)

99. © 2007 Thomson South-Western Partner Activity Read your market and the scenario. Determine if the scenario would have an impact on supply or demand. Then, graph and provide a written description of the market change

100. © 2007 Thomson South-Western Bringing it Back Each group will read their market and scenario they received. –Every student must write the market and scenario they hear in their notes Each group will then explain the affect the scenario had on their demand. –Every student must write the effect in their notes.