Supply and Demand Two factors that make marketbased economies work Consumer is on the DEMAND side of the market Producer is on the SUPPLY side of the market Supply amp Demand Price ID: 650831
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Slide1
Check In Question
I will be playing a clip from a movie. After it is finished, I want you to write down what happened and how it relates to economics. What is a modern example of this concept?Slide2Slide3
Supply and Demand
Two factors that make market-based economies work:Consumer
is on the DEMAND side of the market
Producer
is on the SUPPLY side of the marketSlide4
Supply &
Demand
Price
Quantity
Demand
SupplySlide5
DEMAND:
ConsumersSlide6
Price (per burrito)
Quantity (burritos per week)
$1.00
11
$3.00
9
$5.00
7
$7.00
5
$9.00
3
$11.00
1
Douglass’
Demand
ScheduleChipotle Burritos
Create the
Demand Curve
for my burrito consumption.
Assume that PRICE is my only consideration when deciding how many burritos to consume. I am the only customer in this market example.
Quantity I am willing and able to buy at the given priceSlide7
Douglass’ Burrito Demand CurveSlide8
DEMAND
The amount of a good/service that consumers are willing and able
to buy at all price points in a given
period of time.
WILLING
–
You’re not going to buy something for kicks, you have to actually want/need it!
ABLE
–
You can’t buy something if you don’t have enough cash.
TIME FRAME
–
always expressed in terms of timeSlide9
Law of Demand
Inverse RelationshipAs price goes UP, demand goes DOWN
As price goes DOWN, demand goes UP
P
Q
DSlide10
Reasons for the Inverse Relationship
The Law of Diminishing Marginal UtilitySlide11
EXAMPLE:Even if the burrito is AMAZING, at a certain point the price to buy another isn’t worth it.Slide12
Reasons for the Inverse Relationship
The Law of Diminishing Marginal UtilityThe Income EffectScarcity forces tradeoffsSlide13
EXAMPLE:The
more expensive the burrito, the less I am able to buy at that price. Slide14
Reasons for the Inverse Relationship
The Law of Diminishing Marginal UtilityThe Income EffectScarcity forces tradeoffs
Substitution Effect
Sometimes
two different goods can satisfy the same
wantsSlide15
EXAMPLE:If Qdoba’s
burrito was only $5 when Chipotle’s is $7, I might go over there to save a few bucks.Slide16
v
s.Slide17
Demand Shifters
Change in income of consumerChanges in the number of consumersChanges in tastes & preferences
Changes in expectations
Changes in price of
SUBSTITUTE GOODS
Changes in price of COMPLEMENTARY GOODSSlide18
Less demand
More
demandSlide19Slide20
Price
Total Quantity Demanded
1
2
3
$1
$0.50
$0.25
$0.10Slide21
Check In Question
Please pull out your check in question sheets. We will be watching another video clip.Slide22
Based on what we learned yesterday, what do you think happens when all of the tickets are found?
What do you think would happen if a rival chocolate company (also with a reclusive business owner) ended up having a similar contest?Slide23
Demand Review
AxesLaw of DemandReasons for inverse relationship?Change in Quantity Demanded vs. Change in DemandDemand ShiftersSubstitution goods vs. Complimentary goodsSlide24Slide25Slide26
Analyzing Demand Headlines
Complete the worksheet with a partner:
Record the headline in the correct row
Draw what will likely happen to the demand curve based on the headline
Explain your graph
LEFT (decreases)
RIGHT (increases)
Cite the demand shifter
CheckSlide27Slide28
Check In Question
Do you think creating an appearance of scarcity, like Apple did during its iPhone launches, increases demand or makes the seller look like it doesn’t know how to supply a product?Slide29
Demand Review
Describe what happens to the whole demand curve in the following situations about Nike running shoes.
Socks go on sale.
An article about barefoot running makes the front page of Runner’s World Magazine.
Workers at the Nike factory will go on strike tomorrow.
BECK wins the lottery.
Doylestown Running Company has a sale on all Nike running shoes.Slide30
CHECK
RIGHT (decrease in price of comp good)LEFT (decrease taste/preference)
RIGHT (price is expected to rise)
RIGHT
(increase in income)
NO SHIFT “moves along the curve”Slide31
Supply:
ProducersSlide32
Neighborhood Girls’ Lemonade Stand (supply schedule)
Price (per cup)
Quantity
(cups per day)
5
¢
10
10
¢
20
15
¢
30
20
¢
40
25¢
50
30
¢
60
35
¢
7040
¢
80
45
¢
90
50
¢
100
Quantity they are willing and able to OFFER at these given prices
Create the
SUPPLY Curve
for their ice cold lemonade.
They are the only producers in this market example.Slide33
Neighborhood Girls’ Lemonade Supply CurveSlide34
SUPPLY
The amount of a good/service that producers are willing
and
able
to offer for sale at all prices in a given
period of time.Slide35
Law of Supply
As price goes UP, quantity supplied goes UPAs price goes
DOWN,
quantity supplied goes DOWN
P
Q
SSlide36
Production Decisions
Producer’s have only one goal…MAXIMIZE PROFITSRevenue vs. Profits
Revenue = total amount of $ made before paying for the factors of production
Profit = what’s left after paying for the factors of production
P
Q
SSlide37
Market Entries and Exits
New firms will enter into a market because they think they will profitFirms will exit the market when they no longer make a profit (decreases the Q supplied at certain prices)
P
Q
SSlide38Slide39Slide40Slide41Slide42
Supply Shifters
Change in the cost of inputsChanges in the number of producersChanges in conditions due to natural disasters or international eventsChanges in technology
Changes
in producer
expectations
Changes in government policy Slide43
Less supply
More
supplySlide44
Analyzing Supply Headlines
Complete the worksheet with a partner:
Record the headline in the correct row
Draw what will likely happen to the supply curve based on the headline
Explain your graph
LEFT (decreases)
RIGHT (increases)
Cite the supply shifter
CheckSlide45
Create Your Own…
1 question “What happens to the demand curve?” & demand shifters
1
question “What happens to the supply curve?” & supply shifters
1 graphing question using BOTH supply and demand
What is the product?
Set 6 price levels
Set demand and supply quantities at each price level
(create demand/supply schedule)…
remember the laws of supply and demand!!!!!!
ALL answers on back…yes, you have to graph your own problem!Slide46
Ch
eck I
n
Q
u
e
s
t
i
o
n
If
Facebook, Twitter,
Instagram, etc. started requiring accounts to pay for usage, would you pay for them? How much?Slide47
Supply Review
AxesLaw of Supply
Producer’s goal…
Revenue vs. Profits
Market Entries & Exits
Change in Quantity Supplied vs. Change in Supply
Supply
ShiftersSlide48
Supply Practice
Describe what happens to the whole supply curve
in the following situations about Chevrolet.
Government provides Chevy with a subsidy to manufacture fewer Suburban SUVs and manufacture more energy efficient Volts. What happens to the Suburban supply curve?
Chevy lowers the cost of the Spark.
The
Lordstown
, OH plant shuts down.
The cost of leather rises. (Leather is used in some models).
The Arlington, TX plant develops a new way to manufacture engines.Slide49
CHECK
LEFT (gov policy forcing them to supply less)
NO SHIFT (price “moves along the curve”)
LEFT (decreased producers)
LEFT (cost of input increases)
RIGHT (new technology)Slide50
ElasticitySlide51
Elasticity
Degree to which QD or QS
changes in response to a change in price
P
Q
D
P
Q
SSlide52
Demand Elasticity
How sensitive is the consumer to a change in price???
Inelastic = Q
D
insensitive to change in price
Elastic = Q
D
sensitive to a change in priceSlide53
Inelastic Demand
QD generally unaffected by a change in price
P
Q
D
Notice that even though price changed significantly, Q
D
did not see a big change.
V
ertical line =
perfectly inelasticSlide54
Examples of Inelastic
Goods/ServicesGive me some….
Milk Baby formula Internet
Medicine Toothpicks Salt
Gas Eggs Tobacco
Electricity Cell phone service
Commodities
(very useful items, we need them)
Anything without a good substitute!!!Slide55
Elastic
Demand
Q
D
affected by changes in price
P
Q
D
Notice that even small price changes will have a significant impact on Q
D
.
Horizontal line =
perfectly elasticSlide56
Examples of Elastic
Goods/Services
Give me some…
Movie tickets Vacations Soda
Maid service Makeup CDs
Luxury
items Designer Products
Anything with a lot of good substitutes.
Slide57
Total Revenue Test
How producers can calculate elasticity of demandQsold
x
P
good
= Total RevenueSlide58
Revenue Table : Product X
Price
(per)
Quantity
(sold per week)
TOTAL
REVENUE
(per week)
$22.00
20,000
$24.00
19,000
$26.00
18,000
$28.00
17,000
$30.0016,000
Revenue Table : Product
Y
Price
(per)
Quantity
(sold per week)
TOTAL
REVENUE
(per week)
$1.00
20,000
$1.25
16,000
$1.50
12,000
$1.75
8,000
$2.00
6,000
Calculate the total revenue for Product X & Y.
Which is elastic? Inelastic?Slide59
Product X = Pampers DiapersInelastic
Why are diapers generally inelastic?
Because as price of each box increases, it only sells 1,000 less units per week and still manages it make more revenue.
Revenue Table : Pampers Diapers
Price
(per box – 30 pack)
Quantity
(boxes sold per week)
TOTAL
REVENUE
(per week)
$22.00
20,000
$440,000
$24.00
19,000
$456,000
$26.00
18,000
$468,000
$28.00
17,000
$476,000
$30.00
16,000
$480,000Slide60
Product Y = Kit-Kat BarsE
lasticWhy are Kit-Kat Bars elastic?
Because as price per bar increases, 4,000 fewer are sold and total revenue decreases.
Revenue Table : Kit-Kat
Bars
Price
(per bar)
Quantity
(bars sold per week)
TOTAL
REVENUE
(per week)
$1.00
20,000
$20,000
$1.25
16,000
$20,000
$1.50
12,000
$18,000
$1.75
8,000
$14,000
$2.00
6,000
$12,000Slide61
Supply
ElasticityTells us how much a producer will change the quantity it supplies when there is a change in price
Inelastic
=
Q
S
insensitive to change in price
Elastic
=
Q
S
sensitive to a change in priceSlide62
Inelastic
QS insensitive to change in price
Elastic
Q
S
flexible
to a change in
price
P
Q
S
P
Q
S
Supply
ElasticitySlide63
Examples
Inelastic
Goods that are difficult to produce
Availability of inputs low and/or hard to get from place to place
Elastic
Easily produced goodsSlide64
Q
S > QD
P
Q
D
S
Excess Supply
(Surplus)
PricesSlide65
QS
< QD
P
Q
D
S
Excess Demand
(Shortage)
PricesSlide66
Markets are governed by the Laws of DEMAND
& SUPPLY
P
Q
D
S
Q
S
=
Q
D
Equilibrium