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THE PRICE SYSTEMEverything Demand and Supply
Why is te price of gas so low?
OPEC Members
Cartel More oil is
being released
Drives down prices
Price System
Compromise or balance Between consumers and producers Between demand and supply
Benefits? P. 97
Information Incentives Choice Efficiency Flexibility
Benefits? P. 97
Information Ability to gather information to make informed
decisions – how much to make/relative worth of a good Incentives
To participate in the market mostly based on price Choice
Choice of products supplied – competition Efficiency
Wise use of resources Efficiency – movement of information
Flexibility Ability to deal with change – adjusted prices
Limitations (Market Failures) p. 101
Externalities All costs and benefits not accounted for
- negative = pollution- positive = income from
Palmer H.S. Public Goods
Fire, police, schools Instability
Flexibility results in changes
Demand
The amount of a good or service that a consumer is willing and able to buy At a given price and given time
Law of Demand
The quantity of a good or service that consumers will buy varies inversely with the price of the good or service
PQD P
QD
Supply
The amount of a good or service that seller are willing and able to offer for sale At a given price and given time
Law of Supply
The quantity of a good or service that will be offered for sale varies in direct relation to the selling price
PQSP
QS
ARE YOU READY?
Stand up!
S and D Posse
Demand and Supply
P
Q
DS
-Market Clearing Price-Equilibrium
D<S - Surplus
S<D - Shortage
Where the Magic
Happens! S and
D unite
DEMAND DETERMINANTSForces that influence demand
other than price.
What other factors create a change in demand
besides price?
Determinants in Demand
Consumer tastes and preferences What people like and don’t like
Market Size The size of the population
Income The amount of money people have
Prices of Related Goods Substitute goods
Similar goods (peanut butter/Almond butter Complementary goods
Goods used with another good (Iphone/protective case) Consumer Expectations
Anticipation of a change in the money you have Anticipated price change
Shifts on the graph?
INCREASE IN DEMAND DECREASE IN DEMAND
D1
D2
P
Q
D1
D2
P
Q
Shifts to the right
Shifts to the left
Practice Demand Shifts
Directions: Read the problem Identify the determinant Draw the shift.
Practice Demand Shifts
To stimulate the economy the US government announced that all tax payers will receive an additional $5,000 deductible on their 2014 taxes.
There is a 10 for 10 sale on Doritos at King Soopers. How would this change the demand curve for the Kroger Brand flavored corn chips?
Victoria Secret airs its annual fashion show on December 9th. How will this impact the demand for VC products.
Practice Demand Shifts
Christy Sports is running a ½ off sale on all 2013 snowboards. What impact will this have on the demand for snowboard boots that they have in stock?
Today, the front page of the newspaper read, “Recording artist, Taylor Swift, busted for providing funds to terrorist groups in Germany, Syria, and Pakistan. Groups had plans to use weapons against the U.S. with the aid.” How does this impact the demand for Taylor Swift CDs?
What other factors create a change in supply besides
price?
Determinants in Supply
Change in the factors of production (resources) Any price change for a resource increases or
decreases a business’s production costs Government Tools
Taxes: required payment of money to the government to help fund government services
Subsidies: payments to private businesses by government.
Regulations: rules on how businesses can conduct business.
Technology Makes production more efficient and less expensive
Supply Determinants Cont.
Competition Competition tend to increase supply
Prices of Related Goods Prices of related goods can affect the supply
of another product Substitute Complementary
Producer Expectations Decisions based on expectation of future
income
Shifts on the graph?
INCREASE IN SUPPLY DECREASE IN SUPPLY
S1
S2
P
Q
S2
S1
P
Q
SHIFTS RIGHT
SHIFTS LEFT
Practice Supply Shifts
Last year Levi’s came out with a line of jeans made with organic cotton. In October the workers in India who harvested the organic cotton went on strike to fight for increased wages and won. Draw the shift in supply of Levi’s organic line.
There is a market shortage of gasoline and the government is expected to help with the crisis. The government decides to provide a cash incentive to any refinery that is willing to produce more gas. Draw the shift in supply of gasoline.
Practice Supply Shifts
Virus has always produced their snowboard line by hand. This year they decided to change their production to the assembly line method. Draw the shift in supply o f Virus snowboards.
Farmers all over the U.S. traditionally grew wheat. Over the past two years auto companies began making more alternative-fuel automobiles that use ethanol. Draw the supply shift for corn grown by U.S. farmers.
Practice Supply Shifts
Last month there were three burrito shops downtown. Over the past three weeks two for the burrito shops closed down. Draw the shift in the supply of burritos.
The Denver Nuggets are on the winning streak that is expected to continue through the season. Draw the supply curve and shift for Nuggets jerseys.
Shifts and Equilibrium
Increase in Demand
Result Price Increases Quantity Increases
D1 SD2
Shifts and Equilibrium
Decrease in Demand
Result Price Decreases Quantity
Decreases
D1 S
D2
Shifts and Equilibrium
Increase in Supply Result Price Decreases Quantity Increases
D S1
S2
Shifts and Equilibrium
Decrease in Supply Result Price Increases Quantity
Decreases
D S1S2
For Each Situation
Identify the determinant Is it a determinant of supply or demand?
Draw the graph Draw the shift that occurs Identify how it will impact the equilibrium
P? Q?
Sample Problems
It is reported in the news that Kelly Clarkson is associated with an extremist religious group who advocates for pluralism and human sacrifice. Her character is questioned and her popularity begins to fade.
Horizon milk company introduces a strawberry milk. People desire fewer hormones than are present in Nesquik.
Sample Problems Cont.
Due to a recent hurricane the tomato fields in Florida were demolished. How will this change the market of canned tomato?
The Toms manufacturer invested in the company by buying new equipment with quicker technology.