WHAT DETERMINES PRICES?

Supply and Demand

A Competitive Market

Any arrangement that brings buyers and sellers together

Physical or virtual

Since Economics is about Choices…

Demand Supply

We see how all buyers’ and sellers’ decisions interact in the market to create prices.

What is DEMAND?

Individual: how one person’s decisions affect price

Market: total sum of all buyers in a market

Consumers’ willingness and ability to buy an item at a given price Wants within budget constraints Refers to a behavior

THE LAW OF DEMAND

Shows an inverse relationship between price (P) and quantity (Q)

Price affects the quantity demanded Higher prices lower quantity

demanded Lower prices more quantity

demanded Sales!

THE LAW OF DEMAND

Why does the curve go down?

The Demand Law exists…

1. Income effect $ increase you feel poorer, you

buy less $ decrease you feel richer, you

buy more

2. Substitution effect Pepsi vs. Coke

3. Marginal Utility Ex. All You Can Eat Buffet

Each plate makes you less happy than the plate before

DemandSchedule vs. Curve

Schedule shows all of the combinations of quantities demanded at different prices, ceteris paribus

Curve

Plots the relationship between price and quantity demanded

Curve

How do you shift the Demand Curve?

Tastes or Preferences

Related Goods’ Prices

Income Population (# of

buyers) Expectations

The 5 Determinants of Demand

Affected by trends and health considerations

Complements Hot dogs and buns If P goes up of

complement, demand decreases and vice virsa

Substitutes

Pepsi vs. Coke If P of substitute

goes up demand increases

Tastes (Preferences)

Related Prices

The 5 Determinants of Demand

If income increases Buy more

luxury/normal goods

If income decreases Buy more

normal/inferior goods

More buyers = more demand

Less buyers = less demand

IncomePopulation (# of Buyers)

The Five Determinants of Demand

If P is expected to go up in the future, demand increases NOW

If P is expected to go down in the future, demand decreases NOW

Expectations

SHIFT IT…

Shift Vs. Change in Quantity Demanded

GROUP ACTIVITY

You are in charge of opening a firm offering a specific good or service. Decide on a product name, slogan, and then answer the three basic questions of production: what you will produce, how you will produce it, and for whom you will produce it. After, draw a potential demand curve for your expected market of the good or service. Explain how your demanders’ curves could shift in or out using the determinants of demand. Be prepared to justify your answers as expert economists.

Supply

Producers’ willingness and ability to sell a good or service

Refers to a behavior

THE LAW OF Supply

Shows a direct relationship between price (P) and quantity (Q)

Price affects the quantity supplied Higher prices higher quantity

supplied Lower prices less quantity

suppliedPRODUCERS LOVE HIGHER PRICES!

THE LAW OF SUPPLY

Why does the curve go up?

The law of Supply

Increasing Opportunity Costs Increasing production

Need more space Can’t add factories and

machines fast enough Labor is used

Crowding out results (too much congestion)

A “profit- maximizing” producer wants to produce more at a higher price.

Law of Increasing opportunity costsSupply Schedule

Movement along the Curve vs. ShiftChanges in the quantity supplied comes because of a price change

A shift in the Curve comes because of a change in a determinant of supply.

How do you shift the Supply Curve?

Sellers (#) Productivity Input Costs Expectations Related Prices Cash Change

Taxes or subsidies

The 6 Determinants of Supply

If more suppliers Shifts right

If less suppliers Shifts left

Increase supply Technology,

capital innovation Decrease supply

Natural phenomenon hinders productivity

Sellers Productivity

The 6 Determinants of Supply

If inputs price increases Shifts left

If inputs price decreases Shifts right

If price will go up in the future, the supply NOW decreases

If price will decrease in the future, the supply NOW increases

Input Prices Expectations

The 6 Determinants of Supply

If related price increases Shifts left

If related price decreases Shifts right

Subsidy Supply shifts right

Tax Supply shifts left

Related Prices Cash Change

Market Equilibrium

Click icon to add pictureP= $1.00Qs = 10 million bottles

WHEN SUPPLY MEETS DEMAND