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Supply and Demand Chapter 5 You’re Deman(d), David Cook! • How does winning American Idol effect supply and demand? • http://www.youtube.com/watch?v=iANuTVi2FcI • Ticket prices, appearances, t-shirts, etc. How Do Demand and Price Interact? • Would you buy it for: – 399.99? – 299.99? – 199.99? • What are we WILLING and ABLE to buy? – Buying one Nintendo Wii at 299.99 is your quantity demanded » You were WILLING and ABLE to buy it at 299.99 as opposed to 399.99 (Perhaps you were willing but not able) What About Competition? • What if a different store sells the Wii for 199.99? • Selling 10 units at 199.99 = quantity demanded • What will happen to the store that sold one unit for 299.99? – Demand: » What happens to price after many units have been sold? The Usage of a Demand Schedule • Demand Schedule: Visual of what one person will buy at various prices (ceteris paribus) • Demand Curve: Shows the relationship between price and the quantity buyers are WILLING and ABLE to buy – i.e. the cheaper a something is, the more consumers are going to buy of it Why Market Demand • M.D. - Medical Doctor • Market Demand: sum of all individual quantities demanded in a market • When refer to demand, generally it is market demand; how often do we care about ONE guy buying tacos?!?! » Usually there is a clear relationship between price and demand. » Exceptions to the rule? The Law of Demand • This is the strongest of economic relationships: • Price goes up / Demand goes down • Price goes down / Demand goes up • INVERSE RELATIONSHIP • Why do they move in opposite directions? – Well, I’m glad you asked… The Reasons • 1. The law of diminishing marginal utility » Consuming just one more… » The Dave Matthews Band • 2. The income effect » People only have so much money • 3. The substitution effect » People will substitute cheaper goods • Only a change in price causes a change in quantity demanded – Ahhh…but what about the tipping point? What Can Cause Demand To Change? • 3 Scenarios For a Hot Dog Stand – – A Carnival – A Blizzard – Hot Dogs Cause Cancer Graphing Changes in Demand • When quantities demanded increase or decrease at EVERY PRICE… – Shift to the right… – Shift to the left… What does this show?? • There are 6 DEMAND SHIFTERS… Demand Shifters • 1. Changes in income… – With more money, we buy more things » Conservative v. Liberal outlook • 2. Changes in the number of consumers… – Summer resort towns » What other examples are there? • 3. Changes in taste and preference… – We do not buy the same products year after year » Sushi Demand Shifters • 4. Changes in Consumer Expectations – Expectations of price changes » It’s going to go on sale next week… (NFM) • 5. Changes in the Price of Substitutes – Substitute goods may cost less » DVD’s / Movie Tickets • 6. Changes in the Price of Complimentary Goods – Consumed with other goods » Video game systems and games How Do Supply and Price Interact • The lower the price, the fewer goods the producer is willing to sell – Quantity Supplied: the amount of a good or service producers are willing and able to offer for sale at a given price • Supply is usually expressed in a time period (such as weeks or months) Supply Schedule • As price increases, so does the amount of (x) someone is willing to sell • From a supply schedule, you can create a supply curve » Supply curves are the inverse of demand curves • Market Supply: The Law of Supply • Direct Relationship • Why do they move in the same direction? • 1. Production decisions by existing producers » “strike while the iron is hot” (revenue) • 2. Market entries and exits » Producers will react in predictable ways » Changes in quantity supplied What Can Cause Supply to Change? • Changes in the cost of inputs • Cost of factors of production • Profit is the key to success (duh) • Changes in the number of producers • Producers enter a market when they think there is a profit to be made » Personal music devices • Changes in conditions due to natural disasters or international events » A cold snap in Florida » Civil War in African countries Supply Shifters Con’t • Changes in Technology • This would probably cause a reduction in production cost » Robots building cars • Changes in Producer Expectations • Make decisions based on the rise and fall of price of certain goods » Farm prices • Changes in Government Policy • Subsidy / Excise Tax