Unit II: How Markets WorkUnit II: How Markets Work

Part I – Supply and DemandPart I – Supply and Demand

DemandDemand

The desire, willingness and ability to The desire, willingness and ability to buy a good or servicebuy a good or service

Affective DemandAffective Demand

Must Must wantwant to buy to buyMust Must be willing be willing to buyto buyMust have the Must have the resources resources to buy to buy

What is market demand?What is market demand?

The total amount of demand created by The total amount of demand created by all consumers for a productall consumers for a product

Demand ScheduleDemand Schedule

A table that lists the various quantities A table that lists the various quantities of a product that will be bought at of a product that will be bought at different pricesdifferent prices

$50$50

$40$40

$30$30

$20$20

$10$10

$5$5

Demand CurveDemand Curve

A graph that shows the amount of a A graph that shows the amount of a product that will be bought at all product that will be bought at all possible pricespossible prices

Direction of the Demand CurveDirection of the Demand Curve

Downward SlopeDownward Slope

What does the What does the law of demandlaw of demand state?state?

As price goes UP demand goes DOWN As price goes UP demand goes DOWN and visa versaand visa versa

What does What does utility utility refer to?refer to?

SatisfactionSatisfaction

Diminishing Marginal UtilityDiminishing Marginal Utility

Principle that additional satisfaction Principle that additional satisfaction goes down as we consume more of a goes down as we consume more of a productproduct

Determinants of DemandDeterminants of Demandchanges in:changes in:

BBuyers (#of) – changes in populationuyers (#of) – changes in population

IIncome – people earn more they spend morencome – people earn more they spend more

TTastes – change in popularity or fadsastes – change in popularity or fads

EExpectations – feelings of the futurexpectations – feelings of the future

RRelated goodselated goods Substitutes – goods that can replace othersSubstitutes – goods that can replace others Compliments – goods that go along with anotherCompliments – goods that go along with another

Decrease in demand at every price Decrease in demand at every price will produce a will produce a Left Left shift in demand shift in demand

curvecurve

An increase in demand at every An increase in demand at every price will produce a price will produce a rightright shift in shift in

demand curvedemand curve

Demand ElasticityDemand Elasticity

How much demand for a product is How much demand for a product is affected by a change in priceaffected by a change in price

Factors affecting elasticityFactors affecting elasticity

Percentage of IncomePercentage of IncomeAvailability of substitutesAvailability of substitutesNecessity or LuxuryNecessity or LuxuryLength of timeLength of time

What is supply?What is supply?

The various amounts of a good or The various amounts of a good or service that service that producersproducers will supply at will supply at different pricesdifferent prices

The Law of SupplyThe Law of Supply

Suppliers will generally offer more for Suppliers will generally offer more for sale at higher prices and less at lower sale at higher prices and less at lower pricesprices..

What does a Supply Schedule What does a Supply Schedule illustrate?illustrate?

How much will be supplied at different How much will be supplied at different pricesprices

Supply Schedule for Video GamesSupply Schedule for Video Games

Price Per Video GamePrice Per Video Game Quantity SuppliedQuantity Supplied

$50$50 200200

$40$40 190190

$30$30 170170

$20$20 130130

$10$10 100100

$05$05 1010

What does a supply curve What does a supply curve illustrate?illustrate?

The amount of a good or service that The amount of a good or service that will be supplied at different priceswill be supplied at different prices

In what direction does the supply In what direction does the supply curve slope reading from left to curve slope reading from left to

right?right?

UpwardUpward

What can cause a shift in supply at What can cause a shift in supply at every price?every price?

The Cost of ResourcesThe Cost of Resources

The materials used to produceThe materials used to produce

ProductivityProductivity

How efficient the work force isHow efficient the work force is

TechnologyTechnology

The methods used to make goods and The methods used to make goods and servicesservices

Government PoliciesGovernment Policies

Gov regulations increase costs of Gov regulations increase costs of productionproduction

TaxesTaxes

Higher taxes = higher costsHigher taxes = higher costsLower taxes = lower costsLower taxes = lower costs

SubsidiesSubsidies

Government payment to help do Government payment to help do something (decreases costs)something (decreases costs)

ExpectationsExpectations

What owners believe demand will beWhat owners believe demand will be

Number of SuppliersNumber of Suppliers

More suppliers = more supplyMore suppliers = more supplyLess suppliers = less supplyLess suppliers = less supply

Shift in SupplyShift in Supply

Price of Video Price of Video GamesGames

Original Q Original Q SuppliedSupplied

Change in Q Change in Q SuppliedSupplied

$50$50 200200 300300

$40$40 190190 290290

$30$30 170170 270270

$20$20 130130 230230

$10$10 100100 200200

$05$05 1010 110110

When market supply increases at When market supply increases at every price the supply curve shifts every price the supply curve shifts

to the to the

RightRight

Now suppose the government Now suppose the government increases taxes on the industry.increases taxes on the industry.

It will decreaseIt will decreaseLabel this on the graph assuming that 100 Label this on the graph assuming that 100

less will supplied label it S3less will supplied label it S3

What does supply elasticity mean?What does supply elasticity mean?

How much supply is affected by a How much supply is affected by a change in pricechange in price

Elastic Supply – Elastic Supply – quantity changes a quantity changes a great deal when price changesgreat deal when price changes

Inelastic Supply – Inelastic Supply – quantity changes quantity changes little when price changeslittle when price changes

What affects the elasticity of What affects the elasticity of supply?supply?

How quickly a company can change How quickly a company can change how much it produceshow much it produces

Equilibrium PriceEquilibrium Price

The price at which The price at which the amount the amount demanded is equal demanded is equal to the amount to the amount suppliedsupplied

What is the equilibrium price of What is the equilibrium price of video games in our market?video games in our market?

$25$25

What is a surplus?What is a surplus?

When there is more supply than When there is more supply than demanddemand

What is a shortage?What is a shortage?

When there is greater demand than When there is greater demand than supplysupply

If price was set at $40 in our video If price was set at $40 in our video game market what would exist?game market what would exist?

SurplusSurplus

What about $10?What about $10?

ShortageShortage

What impact will a shortage have What impact will a shortage have on price?on price?

Prices will go upPrices will go up

Surplus?Surplus?

Prices go downPrices go down

What are price controls?What are price controls?

When the government sets the price of When the government sets the price of goods and services because they feel goods and services because they feel forces of supply and demand are unfairforces of supply and demand are unfair

Price CeilingPrice Ceiling

Maximum price that can be charged set Maximum price that can be charged set by governmentby government

Example = Example = Rent ControlRent Control

Price FloorPrice Floor

Government set minimum priceGovernment set minimum priceExample = Example = minimum wageminimum wage

Price as SignalsPrice as Signals

Determine Determine What to produce What to produce by telling by telling producers what they can make a profit producers what they can make a profit off ofoff of

Determine Determine How to produceHow to produce – least – least costly means more profitcostly means more profit

Determines Determines Who gets whatWho gets what

Advantages of PriceAdvantages of Price

Prices are Neutral – Prices are Neutral – they do not favor they do not favor producer or consumerproducer or consumer

Prices are Flexible – Prices are Flexible – they can adjust to they can adjust to changes in the market quicklychanges in the market quickly

Prices provide Freedom of Choice – Prices provide Freedom of Choice – a a variety of products at different prices variety of products at different prices allows consumers to chooseallows consumers to choose

Prices are Familiar – Prices are Familiar – they are easily they are easily understoodunderstood