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Free Markets • People have choice – they buy what they want • Profit is the motivation for sellers • If you didn’t make a profit, you wouldn’t want to waste your time providing the good or service • Competition is the rivalry between sellers to gain a market advantage – to sell the most and make the highest profit Supply and Demand • The relationship between sellers and buyers is called Supply and Demand • Supply – the quantity of goods or services that producers are willing to provide at various prices • Demand – the amount of goods or services that a consumer is willing to buy at various prices Supply and Demand • The Law of Supply states that suppliers will supply more at high prices than at low prices • There is a direct relationship between price and quantity of goods that producers will supply • If you keep supply low, you can charge a higher price – iPhone 6 - $199 with a plan, $649 without I Have Candy • How much do you want it? – Each person will get money – Do I have to sell it to you? – Why would I give it to the lowest bidder? – What if I said you would lose points on a test if you didn’t throw away the wrapper? • Incentives – What induces us to act • Can be financial, moral Price • If there is an ample supply but no demand, what will happen to your price? – Amazon Fire Phone - $0.99 Price • If producers cannot make a profit at the market price, they have to reduce their costs – Use cheaper materials • Bendy iPhone • Send production overseas – iPhone is assembled in Korea, otherwise it would be even more expensive Supply Wrap-Up • If supply increases while demand remains constant, what happens to price? • What happens to price when supply is low? • How do producers know how much supply is in the marketplace? • If the price is high, what are suppliers likely to do? The Law of Demand • A change in the demand for a good will cause a change in the market price – More people want the iPhone 6 • If supply remains the same, a surge in demand will cause the price to rise – You can charge customers more because it is scarce The Law of Demand • If demand remains the same, an increase in supply will cause price to fall – I have too many Fires – so I have a fire sale! ($0.99) • If demand remains the same, a decrease in supply will cause prices to rise – Fewer iPhones are available – People will pay more to get one on Amazon, eBay, Craig’s List Demand Wrap-Up • List some events that affect demand • How do manufacturers know when demand will change? • How does a change in demand affect price? • How does a change in demand affect the quantity that manufacturers are willing to supply? • What if there is a natural disaster? – How does that affect demand for certain products? Activity – Supply/Demand? Price? • What if? – College has 80% male/20% female ratio – The best SAT tutor in the world has limited time to meet with students – Paris Hilton pays $13,000 for a puppy Activity – Supply/Demand/Price? • What if? – Tesla makes a $35,000 electric car that is even cooler than the current model? • Supply/Demand/Price for gasoline • Supply/Demand/Price for charging stations • Supply/Demand/Price for think of other inputs and outputs related to the car – Hint: Gas Stations, car parts suppliers, our environment – Come up with significant ramifications