1	Supply & Demand Supply- The relationship of price(s) to the quantities of goods or services sellers are willing to offer for sale at any given point in time. Demand- The relationship of price(s) to the quantities of goods or services buyers are willing to purchase at any given point in time.
2	Supply & Demand Supply Sellers – Offer Demand Buyers – Purchase DECISION DRIVEN BY OPPORTUNITY COST
3	Supply & Demand A person’s willingness to either buy/supply is situation specific. Each decision is unique. Prices provide information Prices reflect opportunity costs (not the same as opportunity costs)
4	Demand A rising price reflects a higher opportunity cost for buyers! What is the result? Purchase less A falling price reflects a lower opportunity cost for buyers! What is the result? Purchase more
5	Law of Demand The quantity demanded of a good will be higher at lower prices than will be demanded at higher prices. INVERSE relationship between price and quantity. PRICE QUANTITY PRICE QUANTITY
6	Law of Demand
7	Demand Curve A graphic illustration of the relationship between price and the quantity demanded at each price.
8	Market demand for CDs (monthly)
9	Market demand for CDs (monthly)
10	Market demand for CDs (monthly)
11	Factors that Impact Demand preferences (utility) number and price of substitute goods number and price of complementary goods Income effect distribution of income expectations
12	Factors that Impact Demand Preferences The strength of individual preference is described by Utility UTILITY: the satisfaction one receives from the consumption, use or ownership of a good or service (measured in utils). Do you want to maximize utility?
13	Factors that Impact Demand Diminishing Utility As an individual consumes more, the satisfaction gained from each additional unit consumed declines.
14	Factors that Impact Demand Substitute Products and Services The change in the mix of goods purchased as a result of increasing or decreasing prices.
15	Factors that Impact Demand Complementary Products/Services Products that are used together What relationship might be drawn?
16	Factors that Impact Demand Income As the price of a product changes, your buying power changes as well. A reason for the inverse relationship between demand and price. As price moves up, your buying power declines and the quantity demanded goes down as a result.
17	Effect of changing Income As income goes up, preference for certain goods changes… Normal Goods Goods for which demand increases as income increases, e.g., hamburger steak. Inferior Goods Goods for which demand decreases as income increases.
18	Factors that impact demand… Summary Law of Demand Price Quantity Price Quantity Normal Goods Inferior Goods Income Demand Income Demand Changing Attitudes Attitude Demand
19	Factors that impact demand… Summary Substitute Products Price Demand for Original Complementary Products Price Demand for Original
20	Changes in quantity demanded A change in quantity demanded is due to a change in price. Represented by movement along the demand curve
21	Market demand for CDs (monthly)
22	Changes in demand A change in DEMAND is due to a change in the quantity demanded at every price. Represented by a shift of the entire demand curve.
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24	Change in Demand An increase in overall demand is represented as a shift to the right in the demand curve A decrease in overall demand is represented as a shift to the left in the demand curve
25	Problem #1 Why do prices for roses always seem to rise just before Valentines Day? How would a freeze that killed one-half of the Rose crop impact prices? Why? What happens to the price of chocolates under the example above? Why?
26	Price Elasticity The sensitivity of the quantity demanded to a change in a products price. Elastic—responsive Inelastic—not sensitive
27	What determines price elasticity? Number of substitute products example: hair care products/specific gasoline stations Priority of product in budget (Income) Is it a large portion (elastic), such as, appliances or small, such as, salt (inelastic)? Time Period Short time frame—inelastic Long time frame—elastic
28	Calculating Price Elasticity
29	Sample Problems Problem #1 10% Change in Quantity Demanded 5% Change in Price Problem #2 1% Change in Quantity Demanded 4% Change in Price Problem #3 3% change in Quantity Demanded 3% change in Price
30	Elasticity
31	Problem #2 You’ve been called in by the manager of the local Blockbuster video store to solve a puzzle. National studies say the price elasticity of demand for videos is 0.80: A 10% increase in price decreases the demand by about 8%. Based on this information, the manager of the video store increased her price by 20%, expecting to rent fewer videos because consumers obey the law of demand. When her total revenue decreased instead of increasing she was puzzled? What happened?
32	Problem #2 Answer The key to this solution is to understand that a local outlet cannot use national statistics to predict results. If all video stores rose their prices by 20%--she would achieve her expected results. When a single video store increases its prices, consumers can easily switch to other stores. As a result, a 10% increase in price will decrease quantity demanded by greater than 8%
33	Review: Basic Economic Questions WHAT goods and services to produce HOW will these goods and services be produced WHO will consume the goods and services produced
34	Rationing Systems Ways of distributing goods that do not rely on prices? PRICE—provides the consumer with information regarding the relative scarcity of a good or service
35	Characteristics of a Good Rationing System Allows all to participate Allows consumers to match their willingness to pay and their desire to acquire the product; expands options and power Allows all to influence the outcome (transaction) Provides incentives for both buyer and seller to modify behavior in such a way as to reduce the impact of scarcity DOES FAIRNESS HAVE ANYTHING TO DO WITH IT?
36	Supply A falling price reflects a higher opportunity cost for sellers! What is the result? Supply less