Download Chapter 3 "Supply, Demand, and Price"

DEMAND, SUPPLY, AND PRICE
CHAPTER 3- ECONOMICS
DEMAND
• Demand is the desire to purchase a
particular item at a specified price
and time, accompanied by the ability
and willingness to pay
IN LIFE… AND ECONOMICS…
SOMETIMES YOU HAVE TO GET IN THERE…
… and just BLOW IT UP!!!
Did You Just Say
Blow It Up Coach
Newman?!?!?!?
DEMAND
• Demand is the desire to purchase a particular item
at a specified price and time, accompanied by the
ability and willingness to pay
DEMAND
• Demand is the desire to purchase a particular item
at a specified price and time, accompanied by the
ability and willingness to pay
DEMAND
• Demand is the desire to purchase a particular item
at a specified price and time, accompanied by the
ability and willingness to pay
DEMAND ( BLOWN UP!!!)
• Demand is:
• the desire to purchase a particular item…
• …at a specified price
• … and time,
• …accompanied by the ability…
• …And willingness to pay...
THANK YOU CLAY MATTHEWS!!!
Your welcome!
Ok… um look… we need
to get our Demand notes
done… Please… go…
OH GOD!!! WE’VE ANGERED HIM!!!
I THINK HE’S GONE…
OK WELL, LETS GET DEMAND SCHEDULE IN
QUICK!!!
• Demand varies with the price of an item
• For an example what would the demand of pizza be like at
certain prices?
At a Price of
Number of Slices students would buy
$2.75
1
$2.50
2
$2.25
6
$2.00
12
$1.75
23
$1.50
45
The Chart Above is Our Demand Schedule
• This is where we insert demand data into a
table and we can see what people would
buy at various price levels
DEMAND CURVE
Oh God… Clay Matthews is stalking us like a lion...
Ok well…
With the demand schedule shown in a table, now we
can plot a demand curve…
$3.00
DEMAND
CURVE
$2.75
$2.50
Price of Slices $
$2.25
$2.00
$1.75
$1.50
$1.25
0
10
15
20
30
Number of Slices Sold
40
50
At a Price of
$2.75
$2.50
$2.25
$2.00
$1.75
$1.50
Number of Slices
students would buy
1
2
6
12
23
45
$3.00
DEMAND
CURVE
$2.75
$2.50
Price of Slices $
$2.25
$2.00
$1.75
$1.50
$1.25
0
10
15
20
30
Number of Slices Sold
40
50
$3.00
DEMAND
CURVE
$2.75
$2.50
Price of Slices $
$2.25
$2.00
$1.75
$1.50
$1.25
0
10
15
20
30
Number of Slices Sold
40
50
$3.00
DEMAND
CURVE
$2.75
$2.50
Price of Slices $
$2.25
$2.00
$1.75
$1.50
$1.25
0
10
15
20
30
Number of Slices Sold
40
50
$3.00
DEMAND
CURVE
$2.75
$2.50
Price of Slices $
$2.25
$2.00
$1.75
$1.50
$1.25
0
10
15
20
30
Number of Slices Sold
40
50
$3.00
DEMAND
CURVE
$2.75
$2.50
Price of Slices $
$2.25
$2.00
$1.75
$1.50
$1.25
0
10
15
20
30
Number of Slices Sold
40
50
$3.00
DEMAND
CURVE
$2.75
$2.50
Price of Slices $
$2.25
$2.00
$1.75
$1.50
$1.25
0
10
15
20
30
Number of Slices Sold
40
50
$3.00
DEMAND
CURVE
$2.75
$2.50
Price of Slices $
$2.25
$2.00
$1.75
$1.50
$1.25
0
10
15
20
30
Number of Slices Sold
40
50
LAW OF DEMAND
• The Law of Demand Tells us that
buyers will buy more of an item at a
lower price and less at a higher
price
REASONS WHY THE LAW OF DEMAND WORKS
The reason for why the law of demand works is
because at a lower price:
1. People can afford to buy the product
2. People tend to buy larger quantities of a product
3. People tend to substitute the product for similar
items that are either more expensive or less
desirable
EXAMPLES:
BUTTTTTT… AS PRICE GOES UP
Similarly , the law of demand changes as price
goes up:
1. Fewer people can afford to buy the product
2. Buyers tend to purchase smaller quantities
3. People tend to substitute products for that
product
The Law of Demand works here
because as the price went up,
people bought less pizza slices
because they didn’t want to pay
the price for those pizza slices,
they bought a smaller amount of
pizza slices, or found another
lunch item to buy instead of pizza
$3.00
$2.75
$2.50
Price of Slices $
$2.25
$2.00
$1.75
$1.50
$1.25
0
10
15
20
30
Number of Slices Sold
40
50
DEMAND
CURVE
PRINCIPLE OF DIMINISHING MARGINAL UTILITIES
• Economists have devised the concept of marginal utility to
help explain the spending patterns of consumers
• Marginal utility is the degree of satisfaction or usefulness
a consumer gets for each additional purchase of good or
service ( Marginal meaning 1)
• The Principle of Diminishing Marginal Utility is a
phenomenon where each additional purchase of a
product or service by a given consumer will be less
satisfying than the previous product
PRINCIPLE OF DIMINISHING MARGINAL UTILITY
CONTINUED…
• This applies to almost any product, after you’ve had one of
something, buying another will have less utility
• What if you bought 4 or 5 of these?
ELASTICITY OF DEMAND
Some products, regardless of price, will ALWAYS BE DEMANDED
Products that are always in high demand: “milk ,gasoline, oil,
etc”, are known to have:
INELASTIC DEMAND… this means that even when price rises or
falls, the demand for these products stays them same, but
with a lower price comes HAPPIER CUSTOMERS!!!
ELASTIC DEMAND – is when there is a rise or drop in price, the
demand for that product can go from unaffordable or not
worth buying to buying many just because you can with the
cheaper price
REASONS FOR A PRODUCT TO BE ELASTIC?
1. The Item is considered a luxury
Luxuries are goods or services that consumers regard
as something they can live without. If the price is too
high, people will live without it.
2. The price represents a large portion of the family
income and therefore alternatives are found
Buying a car, or home (the biggest investment in most
families’ lives), could be diminished if prices go up.
REASONS FOR A PRODUCT TO BE ELASTIC?
3.
Other products can easily be substituted for it
Some products like steak or food can be easily
subbed out. Others like steel or gasoline cannot
without expensive alternatives.
4. The items are durable or quality
Furniture, appliances, and automobiles are relatively
long lasting. Many consumers will buy more/ replace
existing ones if the price is right. If not, they will
make due with the ones they already have
SUPPLY
Economists use the word “supply” to
describe the amount of goods and
services offered for sale at a particular
price
SUPPLY SCHEDULE
• Supply varies with the price of an item
• For an example why would the supply of pizza increase at higher
prices?
At a Price of
Number of Slices sellers make
$2.75
$2.50
$2.25
$2.00
55
45
33
21
$1.75
$1.50
14
2
The Chart Above is Our Supply Schedule
-This is where we insert supplied data into a table and we
can see what suppliers would sell at various price levels
$3.00
SUPPLY
CURVE
$2.75
$2.50
Price of Slices $
$2.25
$2.00
$1.75
$1.50
$1.25
0
10
15
20
30
Number of Slices Sold
40
50
LAW OF SUPPLY
• The Law of Supply States:
• The Quantity of a good or service supplied varies directly
with price.
• That is, the number of units something offered for sale
increases as the price increases, and decreases as the
price decreases…
• This makes Nintendo go from a playing card company
to a video game giant
• This makes Apple go from a personal computer giant to
the worlds largest seller of music…
$3.00
SUPPLY
CURVE
$2.75
$2.50
Price of Slices $
$2.25
$2.00
$1.75
$1.50
$1.25
0
10
15
The Law of Supply works here because
as the price went up, suppliers want to
make more pizza slices because they
believe the risk of making more slices
with worth the sales they can make off
these higher priced slices. With this
said, perhaps other sellers would come
into the pizza market and also sell pizza
20because
30 of their
40own profit
50 motive.
Number of Slices Sold
LAW OF SUPPLY
• The Law of Supply tells us that sellers
will sell more of an item at a higher
price and less at a lower price
• A key reason is a higher price could
bring in more sellers to sell that good
or service
ELASTICITY OF SUPPLY
ELASTIC SUPPLY– If a change in price causes a larger
percentage change in supply, supply is said to be
elastic.
• For example: Most manufactured goods are subject
to larger supply elasticity than natural goods. Why?
• Employees can work overtime to make more of a
manufactured good
VERSUS
• Dairy Farmers could not expect such cooperation
from their herds
YES!!! WORK!!! WOOOOOOOOOOOOOOOORK!!!
NO!!! THERE IS NO MORE AFTER A WHILE!!!
EXAMPLES OF ELASTICITY OF SUPPLY
Example of ELASTIC SUPPLY- Any manufactured good
due to the fact that producers can work more hours,
use better technologies, new methods of production,
faster transportation systems, communications, etc.
Examples: iPods, cosmetics, skateboards, action
figures, desks, concrete mix, hammers, metal
detectors, boots, hockey sticks, books, etc etc etc etc
etc etc etc
EXAMPLES OF ELASTICITY OF SUPPLY
Example of INELASTIC SUPPLY- Any natural
product due to the limited amount that the earth
has and the time it takes to grow or renew that
product
(if that’s possible)
Examples: Oil (OBVVVVVVVVVVVVVVVVVVVVVVVI),
milk, lumber, and spring water
PRICE
The point in which goods and services
are exchanged between supply and
demand
As price increases, the number of items offered for
sale (supply) increases….
BUT
As the price increases the quantity that buyers are
willing to buy (demand) decreases…
$3.00
SUPPLY
CURVE
$2.75
$2.50
Price of Slices $
$2.25
$2.00
$1.75
$1.50
$1.25
0
10
15
20
30
Number of Slices Sold
40
50
As price
increases,
the
number of
items
offered for
sale
(supply)
increases…
.
$3.00
DEMAND
CURVE
$2.75
$2.50
Price of Slices $
$2.25
$2.00
$1.75
$1.50
$1.25
0
10
15
20
30
Number of Slices Sold
40
50
As the price
increases he
quantity that
buyers are
willing to buy
(demand)
decreases…
PRICE IS WHERE THE LINES INTERSECT
Price is found where our Supply Curves and
Demand Curves Meet…
$3.00
PRICE
$2.75
$2.50
Price of Slices $
$2.25
$2.00
$1.75
$1.50
$1.25
0
10
15
20
30
Number of Slices Sold
40
50
WHAT IFS…
When looking at “Price”, “ceterus paribus”
must be used to discuss the theories
and terms associated with price…
• This means NO WHAT IFS… right not at
least…
• We can have no “what if’s” if we talk
about “Perfect Competition”
PERFECT COMPETITION
Perfect Competition, which cannot exist in the
real world, is the best way to talk about supply,
demand, and market price. Under perfect
competition, the following conditions exist
1. There are many buyers and sellers acting
independently. No single buyer or seller is big
enough to influence the market price…
PERFECT COMPETITION
Perfect Competition, which cannot exist in the
real world, is the best way to talk about
supply, demand, and market price. Under
perfect competition, the following
conditions exist
2. Competing products are practically
identical, so that buyers and sellers of a
given product are not affected by variations
in quality or design.
PERFECT COMPETITION
Perfect Competition, which cannot exist in the
real world, is the best way to talk about
supply, demand, and market price. Under
perfect competition, the following
conditions exist
3. All buyers and sellers have full knowledge
of prices being quoted all over the market
PERFECT COMPETITION
Perfect Competition, which cannot exist in the
real world, is the best way to talk about supply,
demand, and market price. Under perfect
competition, the following conditions exist
4. Buyers and sellers can enter and leave the
market at will. That is, buyers are free to buy
or not to buy, sellers are free to sell or not to
sell
PERFECT COMPETITION
Perfect Competition, which cannot exist in the real world, is the best way to
talk about supply, demand, and market price. Under perfect competition,
the following conditions exist
1. There are many buyers and sellers acting independently. No single buyer or
seller is big enough to influence the market price…
2. Competing products are practically identical, so that buyers and sellers of a
given product are not affected by variations in quality or design.
3. All buyers and sellers have full knowledge of prices being quoted all over the
market
4. Buyers and sellers can enter and leave the market at will. That is, buyers are
free to buy or not to buy, sellers are free to sell or not to sell
EQUILIBRIUM PRICE/ MARKET PRICE
The maximum number items demanded,
meets the maximum items supplied, in
“perfect competition”
EQUILIBRIUM PRICE
With our chart for pizza, the supply and demand
curves show us that the “Market Price” or
“Equilibrium Price” is selling 17 slices for around
$1.85.
 However, will this price be offered? Will this
market price always be the same? What might
change this price with regards to supply or
demand?
THEREFORE… CAN EQUILIBRIUM/ MARKET
PRICE EXIST?
NO!!!
SO… LETS MESS UP “PERFECT COMPETITION”!!!
OH HELL
YEAH COACH
NEWMAN!!!
LETS DO IT!!!
PERFECT COMPETITION
Perfect Competition, which cannot exist in the real world,
is the best way to talk about supply, demand, and
market price. Under perfect competition, the
following conditions exist
1. There are many buyers and sellers acting
independently. No single buyer or seller is big enough
to influence the market price…
HOW IS THIS COUNTERED IN THE REAL WORLD?
PERFECT COMPETITION
Perfect Competition, which cannot exist in the real world,
is the best way to talk about supply, demand, and
market price. Under perfect competition, the
following conditions exist
2. Competing products are practically identical, so that
buyers and sellers of a given product are not affected
by variations in quality or design.
HOW IS THIS COUNTERED IN THE REAL WORLD?
PERFECT COMPETITION
Perfect Competition, which cannot exist in the
real world, is the best way to talk about supply,
demand, and market price. Under perfect
competition, the following conditions exist
3. All buyers and sellers have full knowledge of
prices being quoted all over the market
HOW IS THIS COUNTERED IN THE REAL WORLD?
PERFECT COMPETITION
Perfect Competition, which cannot exist in the real
world, is the best way to talk about supply,
demand, and market price. Under perfect
competition, the following conditions exist
4. Buyers and sellers can enter and leave the
market at will. That is, buyers are free to buy or
not to buy, sellers are free to sell or not to sell
HOW IS THIS COUNTERED IN THE REAL WORLD?
SO PERFECT COMPETITION CANNOT EXIST, AND
PRICE IS CONSTANTLY FLOWING BACK AND
FORTH BETWEEN BUYERS AND SELLERS
THROUGH THE BUSINESS DAY, WEEK, MONTH,
YEAR, DECADE, CENTURY, ETC…
PRICE CEILING AND PRICE FLOOR
Sometimes governments attempt to control the market by imposing
ceilings and floors on prices
 A price ceiling sets a maximum price that sellers may charge for
their products
Price ceilings are set up to make sure people can afford items like
bread/ food for survival
 A price floor guarantees sellers a minimum price for their products
Price floors have been set up by the US government to help
farmers by guaranteeing a minimum price on one or more of their
crops.