Supply and Demand

Supply and Demand

Chapter 4 and 5

Demand: desire to own something and the ability to pay for it

• Law of Demand: price of a product is lower, demand is higher and vice versa.

– If a slice of pizza cost $1 = sell 100– If a slice of pizza cost $2 = sell 50– If a slice of pizza cost $10 = sell 0

• Ceteris paribus: all other things held constant

Substitution effect (income effect)

• Substitution effect: find something else to replace the product that is more reasonable. Demand drops; prices will be forced to drop.

• Cost of pizza is $1 = sell 100 slices

• Cost of pizza is $10 = buy a burger

• Cost of pizza must drop or the seller will go out of business

This works in reverse… if burger prices escalate, but pizza is $1 more people will buy pizza instead of a burger.

Demand Schedule: relationship between the price and demand of a productPrice of a slice of pizza Quantity of pizza demanded per day

$0.50 300

$1.00 250

$1.50 200

$2.00 150

$2.50 100

$3.00 50

Graph: Demand Curve

50 100 150 200 250 300$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

Demand of pizza

Changes in demand (no ceteris paribus)

• Normal goods: do we NEED pizza. Or are there other things we need to buy more with our limited income?– Normal goods: high demand– Luxury goods: We will give these up when money is tight

• Inferior goods: substitute the product for a cheaper product – Round Table versus Little Caesars– Steak versus Macaroni and Cheese

Population size and demographics

• Baby booms = more baby food

• Small town = 1 pizza joint instead of 20

• Sell to your market… how many Lamborghini’s will you sell to a poor rural farm town in Kentucky?

Consumer Expectations: ammunition and firearms

• Why are the prices of guns and ammo super high right now?

• Gun laws going into effect…– Get it now while you can = increased demand

– After laws are in effect = decreased demand

Consumer tastes

• People Change:– I don’t want pizza everyday– I don’t want to wear the same styles everyday– Advertising and technology changes and makes

me want new things

– We are all experienced with new products and wanting new stuff.

Elasticity of Demand (flexibility)

• Inelastic: demand for a good no matter how much it costs (gas, basic groceries)

• Elastic: demand will change based on the market price (luxury items)

• Total Revenue: the amount of money a company will try to make based on how far they can stretch their prices.

Supply: amount of goods and services available to be acquired

• Law of supply: the higher the price, the more suppliers are willing to produce to make profits

• Ceteris paribus: all things being constant…

• If a pizzeria can sell 100 slices of pizza for $1 they will try to sell 200 slices for $1 to make more money

Supply schedule: relationship between price and quantity of a product being supplied

Prices per slice of pizza Slices supplied per day

$0.50 100

$1.00 150

$1.50 200

$2.00 250

$2.50 300

$3.00 350

Supply curveWhat they are willing to make

100 150 200 250 300 350$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

Supply of pizza

Supply of pizza

Graph: Demand Curve: What we are willing to purchase

50 100 150 200 250 300$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

Demand of pizza

Elasticity of supply

• Flexibility in pricing and supply to maximize profits

• What affects supply?– Time… how many slices of pizza can you eat in a

week?– Market saturation: How many iPhones can you

use at once?– Increase in costs of production and rising prices

What are costs of production?

• Labor: employees and how much they make in income– how many people are needed and how many can a producer afford?

• Land: costs of natural resources to produce including raw materials, packaging,

• Capital: machinery, maintenance, rent

Costs of production

• Fixed costs: prices don’t change

• Variable costs: prices fluctuate

• Marginal costs: how much it takes overall to make a product at different quantities– Is it worth making 100 slices of pizza?– Is it better to make 1000 slices of pizza?

• Increasing marginal returns: hiring a person who specializes or finding better, cheaper resources may increase output which will increase profits

• Decreasing marginal returns: hiring more people than necessary increases output; minimum wage increases; costs of production increases (materials too expensive, gas prices go up, etc.)

• Negative marginal returns: the cost of production is higher than the profits being made during sales: – Close operations, shut down, and retire to Bahamas!

Besides cost of production, what else can affect supply?

• Technology: no one wants outdated technology

• Subsidies: governments regulate markets (like milk, eggs… farms are usually subsidized otherwise it isn’t worth being a farmer.

• Taxes: (excise taxes– kinda like a sales tax)

• Regulations: laws in effect that make sales difficult (background checks on gun purchases)

• Saturation of markets: if there are already 20 pizzerias within a mile of Franklin HS, it is not a good idea to open another one.

• Location, patriotism, transportation, etc.

CHAPTER 6Combining Supply and Demand

Combining Supply and Demand: How much to make? At what price?

Price of Pizza Demand at Price Supply at Price

0.50 300 50

1.00 250 100

1.50 200 150

2.00 150 200

2.50 100 250

3.00 50 300

Equilibrium: the point of balance:The most money for the best profit. Make 175 slices of pizza for $1.75 ea.

50 100 150 200 250 300$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

DemandSupply

Vocabulary:

• Equilibrium: the point of balance where supply meets demand in a perfect market.

• Disequilibrium: When supply and demand are not equal– unbalanced– Excess demand: Demand is higher than supply– Excess supply: Supply is higher than demand

– Surplus: excessive products that are not selling.

Changes in the market: what causes shifts in Supply and Demand?• Prices: the cost of a product to the consumer• Price changes: improved technology, more cost effective

production methods– 1st CD player = $1000 – Today, $20 for a basic CD player– can you even buy one anymore?

– Increase the supply because manufacturers can afford to make more.– Increased supply leads to surplus. Surplus leads to a price reduction. – Price reduction leads to a higher demand– The law will naturally find equilibrium:

(law of supply and demand)

Government intervention on S&D Equilibrium

• Price ceiling: Setting the highest price that can legally be charged for a product– Ex: milk prices– Ex: Rent control– Others?

• Price floor: setting the lowest price that can legally be charged for a product.– Ex: minimum wage– Ex: milk prices– Others?

Vocabulary:

• Supply shock: a sudden shortage of products or goods• Rationing: dividing up goods and services when a product

is needed but is in shortage– Gas rationing in the 1970’s– Raise prices (demand drops… this isn’t always possible)– Food rationing during war

• Black market: business is conducted without government controls (off the books)– Illegal (there I have made the statement)– Can drop prices (bootleg DVD’s)– Can raise prices (unlocked phones, Cuban cigars, illegal

products)• Spillover costs: costs that are part of production not

planned for (war, pollution, spills, weather)

Changes in Equilibrium• When supply output changes, demand will change.

• When demand for product changes, supply output will change.

• The market is constantly trying to find equilibrium

• When prices drop, production will change affecting supply and demand curves.

• When prices escalate (gas prices) production will drop affecting supply and demand curves

Chapter 7: Perfect Competition creates equilibrium in a market

1. Many buyers and sellers participate in the market

2. Sellers offer IDENTICAL products3. Buyers and sellers are well informed about

the products4. Sellers are able to enter and exit the market

freely

Competition is not perfect:

• Start up costs too high for some markets– Machines– Technology– Labor costs

• Products are not equal:– Samsung vs. Apple

• Resources are not equally allocated

Monopoly

• A single supplier dominates a market– Controls the market and sets whatever prices they

want– Technically illegal in the United States– PG&E, water utilities, railroads, medical

developments, gasoline– False monopolies: airlines, television, phone

carriers, cooperation between corporations to set pricing

Setting up a Business: Chapter 8

• Sole proprietor: single owner– Only one person makes the rules– One person assumes all liability (responsibility)

• Partnerships: owned by two or more people• A small group makes the rules• Liability is shared amongst all owners

– General partnership: all partners are equal– Limited partnership: one person takes the lead

with investors or silent partners

Corporation• Large “entity” controlled by stock holders and run by

a governing board– Limited liability of each stockholder– 20% of businesses are corporations– 90% of market controlled by corporations

• Private corporations• Public corporations (sell stocks, we can own shares)• Conglomerates• Franchise: individual owner follows corporate rules• Non-profit organizations (no profits but run business)

Monopolies and mergers– Monopolies develop when corporations merge

(combine) – Vertical Merger: Two companies merge that

compliment each other: • ex: AT&T merged with DirectTV and Uverse to control a

large portion of the telecommunications market.– Horizontal merger: two companies make the same

thing and merge together: • Ex: Chrysler and Dodge• Office Depot and Office Max• Various Airlines merge

Chapter 9: labor

• Labor force: non-military people who are eligible for employment– 16 years or older– Work at least one hour in a week for pay– Work at least 15 hours in a week for a family business without

pay– Held jobs but did not work due to illness, vacation, strikes, bad

weather, etc.• Unemployment: counts people who do not meet the above criteria

– Without work and looking for work• Outside labor force

– Permanently Disabled– Retired– Stay at home parents (controversial)– Students

Shifts in labor reflect American History

• Men were farmers• Technology development shifted economic

markets• Wartime shifted available labor• Women entered the work force• Migration/immigration• Blue collar versus white collar• Education and emphasis on secondary education

Labor and Wages

• Derived demand: demand is determined by the market – (how many pizza cooks depends on how many

pizzerias)• Labor Supply: the availability of people in a

particular market.– Wages determine willingness to work in a market• Higher wages, more likely to work in that industry• Fringe benefits: why do people become teachers?

Levels of Labor: generally the more skill required, the higher demand and less competition for that career.

the more pay…

• Unskilled labor : requires no specialized skills, training, or education

• Semi-skilled labor: minimal skills, training, or education for certain types of equipment or duties

• Skilled labor : requires specialized training for complicated duties or equipment

• Professional labor: demands advanced skills and education- white collar laborers.

Wage discrimination:• Minimum wage laws: sets a minimum amount of

money paid to a laborer• More danger, more pay • Unions (featherbedding: protecting unnecessary jobs)• Discrimination pay (glass ceiling) for:– Minorities– Women– Age

– Where do illegal aliens fit in this?

Organized labor: why unions?• 1800’s: no labor standards or protection– Unions organized to help protect unskilled

laborers who were forced to work in dangerous conditions.

– Strikes: refuse to work until changes are made– Collective bargaining: representatives negotiate

for the greater group for wages and benefits• Right-to-work laws: outlaw unions because

they protect corporations and weaken unions