Happy Austin 3:16 Day!

Chapter 4- Demand

Imagine the following scenario…

Your favorite team is playing in the Super Bowl in NYC (only 3 hours away). You just have to get to this game. Here are some things to consider…

How many other people are trying to get tickets? How many tickets are available? What determines the price of tickets? From whom are you going to buy your ticket? Is there more than one ticket outlet?

What do all of these questions have in common?

That’s right, they are all based on the laws of supply and demand- two of the most important tools of economic analysis.

Can you think of an event that is happening locally that will be in high demand and probably fetch a pretty price?

Could you make money off this event???

In a market economy, the interactions of buyers and sellers determine the price of most goods as well as the quantity that will be produced.

Buyers demand goods, sellers supply those goods, and the interactions between the two groups lead to an agreement on the price and the quantity traded.

Demand- the ability and desire of consumers to buy a good.

The law of demand: when a good’s price is lower, consumers will buy more of it. When the price is higher, consumers will buy less of it.

The price of a good strongly influences our decisions to buy goods.

Would you buy a slice of pizza for $1?Sure, pizza is good.

Would you buy a slice of pizza for $2?Sure, pizza is good but I probably wouldn't buy more than one.

Would you buy a slice of pizza for $10?$10!?!?!?!? What is it made of gold? Is it healthy and somehow zero calories? That better be some darn good pizza!

The law of demand states that as the price of pizza gets higher and higher, fewer of us are willing to buy it.

Even simple monkeys understand the law of demand. [Insert monkey story here].

What causes the law of demand?

Two Behavior patterns:

The substitution effect and income effect.

Two different ways that a consumer can change their spending habits.

The Substitution Effect

When the price of pizza rises and comparable goods stay the same, consumers are more likely to buy one of the alternatives (tacos, burgers, sandwiches, salads) as a substitute for pizza.

Can also apply when the price of a good drops. If the price of pizza is cheaper to comparable substitutes, consumers will now substitute pizza for tacos, salads or other lunch choices.

The Income Effect

Rising prices have another effect. They make us all feel poorer. When the prices of goods you usually purchase all increase, your budget won’t buy as much as it used to.If you buy fewer slices of pizza AND do not increase your purchases of other foods, that is the income effect.

Normal Goods: goods that consumers demand more of when their incomes increase.

Inferior goods: an increase in income causes demand for these goods to fall. Goods that you would buy in smaller quantities, or not at all, if your income were to rise and you could afford something better. Examples- macaroni and cheese, generic cereals, and used cars.

Complements: are two goods that are bought and used together.

Substitutes: goods used in place of one another.

Name of Product Type of Good(s) Normal, Inferior, Substitutes, Complements?

Why do you think it is this type of good?

What will happen to the demand of this good if the prices goes up? What will happen to demand if the price goes down?

PC Lemon Lime Soda Inferior Good Knock off of Sprite Income goes up, demand goes down. Income goes down, demand goes up

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Demand Schedules- A table that lists the quantity of a good that a person will purchase at each price in the market.

The Market Demand Schedule- shows the quantities demanded at each price by all consumers in the market. Useful information for business owners.

The Demand Curve- a graphic representation of a demand schedule.

Vertical axis with lowest prices at the bottom and highest at the top.

Horizontal axis- lowest quantities at the left.

Connecting the points creates a demand curve.

Limits of a Demand Curve Can change because of more circumstances other than just price.

Use the following demand schedule to create your own demand curve for miniature golf…

Cost to play a game Games Played Per Month$1.50 350$2.00 250$3.00 140$4.00 80

*What are some other factors that would affect the quantity of miniature golf rounds demanded?

Shifts of the Demand Curve

Changes in Demand- demand curve is only accurate as long as there are no changes other than price.

A sudden winter storm can increase the demand for snow shovels.

Movement along the demand curve is referred to as a change in the quantity demanded.

When the demand curve moves, it is referred to as a shift in demand.

What causes a shift in demand?

Income changes demand for normal and inferior goods Consumer expectations Population Consumer tastes and advertising

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Elasticity of demand: how drastically buyers will cut back or increase demand for a good when the price rises or falls.

Elastic demand- price is lowered, total revenue risesOr, price is raised total revenue falls

Inelastic demand- as price is lowered, total revenue falls.Or, if price is raised, total revenue rises.

Factors affecting elasticity:

Availability of substituteso Concert by your favorite band not a substitute so we call that inelastic demando Life saving medicine is inelastic think “Pharma Bro”

Lack of substitutes makes demand inelastic Lots of substitutes makes demand elastic or responsive to price changes.

Relative importanceo Gasoline = inelastic

If you need gas to get to work, a price change will not affect your demand=inelastic.

Necessities vs. luxurieso Milk= necessity. Necessity= inelastic demando Steak= luxury. Luxury = elastic demand.

Change over timeo Consumers are slow to react to price changes.o If gas prices stay high over a long period of time, consumers will slowly start to purchase

more fuel-efficient vehicles.

Total revenue- amount of money a company receives by selling its goods. Determined by: the price of goods and

The total quantity sold times the price of the good.

Ex: If a pizzeria sells 100 slices of pizza at $2.00/slice, its total revenue = $200.00

Elasticity of Demand- how much the change in price affects total revenue.

If a firm knows that its product has elastic demand, it will not raise its prices because it risks losing total revenue because there will be a lower quantity demanded at a higher price.

If a firm knows that its product has inelastic demand, it can raise its prices because it knows that the quantity demanded will stay the same even at a higher price.

4/5/2016

Imagine you owned a factory that produces sunglasses. Then, the prices of sunglasses starts to grow drastically. Would you want to produce more pairs, or less pairs in this situation?

Understanding Supply

We look at supply from an entrepreneur’s perspective.

If you were a producer of goods, if prices were higher than usual for the good you produced, would you try and produce more or less of that good?

Supply = the amount of goods available.

Law of supply = the higher the price, the higher the quantity produced.

Quantity supplied = how much of a good is offered for sale at a specific price.

If a firm, let’s say a pizzeria is already making a profit, and all of their costs stay the same, it would benefit them to produce more slices of pizza to make a larger profit.

How is the law of supply different than the law of demand?

Supply Schedule

Elasticity of supply = how suppliers respond to a change in price.

Timing important in understanding elasticity of supply

Short run vs. long run

In the short run, supply is inelastic whether the price increases or decreases.

Example= oranges.

Oranges take a long time to grow. Impossible for orange farmers to immediately produce more. This makes supply inelastic in the short run run.

Supply can become more elastic over time. Over time, the orange grower can grow more trees over time.

4/6/16

Changes in Supply

The Big Idea:

Changes in the costs of inputs can raise or lower the supply of a good at all prices. The number of firms in a market and the price and supply of other goods can also have an effect on the supply of a good.

When supply changes, it is shown as a shift to the right or left in the supply curve.

Input Costs

Examples- raw materials used to produce a good, machinery, labor, etc.When the rise in the cost of an input occurs, supply will fall at all price levels because the good has become more expensive to produce. In contrast, if the cost of an input falls, the supply will increase.

Technology

Technology can cause input costs to drop. Advances in technology can lower costs in many industries. Technology lowers costs and increases supply at all price levels. This is shown by a shift to the right in the supply curve.

Ex: Assembly lines and cars.

Government’s influence on Supply

Can raise or lower the cost of producing goods in different ways.

Subsidies

Subsidy = a government payment that supports a business or market. Typically, the government pays a producer a set subsidy for each unit of a good produced.

http://www.cheatsheet.com/business/high-on-the-hog-the-top-8-corporate-welfare-recipients.html/?a=viewall

https://www.youtube.com/watch?v=7Nqdi0LyHwo

Taxes

Government can reduce the supply of some goods through an excise tax- tax on the production or sale of a good.

Can be used to discourage the sale of goods the government thinks are harmful

Cigarettes Alcohol High-pollutant gasoline

Excise taxes are built into the prices of goods so it causes the supply to decrease at all levels; The supply curve with shift to the left.

Regulation

1970s, started limiting the amount of pollutants put into the atmosphere by factories. Regulations increase the cost of manufacturing automobiles, shift the supply curve to the left.

Future Expectation of Prices

If supplier expects prices to rise in the future, they can store or hoard goods to sell later at a higher price.

Number of Suppliers in the Market

Case Study- Are Baseball Players Paid Too Much?

1. What arguments might players make for free agency?2. How do the laws of supply and demand affect baseball players’ salaries?

NY Yankees luxury seatshttps://www.youtube.com/watch?v=6J9viOvUbOY

Are baseball players paid too much?

4/7/16

Combining Supply and Demand

The Big IdeaIn an uncontrolled market, the price of a good and quantity sold will settle at a point where the quantity supplied equals the quantity demanded. The government can set a maximum or minimum price, but that can lead to an imbalance between supply and demand.

Equilibrium- the point of balance between price and quantity. At equilibrium, the market for a good is stable. The point where the quantity demanded equals the quantity supplied.

disequilibrium- any price or quantity not at equilibrium; when quantity supplied is not equal to quantity demanded in a market.

Excess demand- when quantity demanded is more than the quantity supplied shortages.

Pizzeria

At $1.00/ slice, demand will exceed the equilibrium price. This will lead to excess demand and a shortage in the quantity supplied of slices. Long lines, not maximizing profits.

So what do you think the pizzeria owner should do?

Excess Supply- the quantity supplied exceeds quantity demanded.

Pizzeria- at a higher price, they won’t sell as much and will have lots left over.

Market forces will eventually push the market toward the equilibrium.

Government intervention: can intervene in one of two ways: by setting price ceilings or price floors.

Price ceiling: a maximum price that can be legally charged for a good.

Price floor: a minimum price for a good or service.

Price Ceilings

Typically set on goods that the government views as necessary or essential and might be too expensive for some consumers.

Example rent control- a price ceiling placed on rent.

Economic effects:

Higher demand Not enough supply Less profit for landlords Fewer apartment buildings built Convert older ones into offices or stores Fewer houses built Long waiting lists Housing discrimination Landlords cut costs on maintenance of their buildings If there are waiting lists, then there’s no incentive for landlords to do upkeep on buildings

Price Floors- a minimum price for a good or service.

Imposed by the government when they want sellers to receive some reward for their efforts.

Examples: minimum wage

If the minimum wage is set above the market equilibrium rate, employment will decrease.

Price supports in agriculture

Government can set minimum prices for crops. Would buy excess crops anytime the price fell below a certain level. FDR in the Great Depression.

Price Controls- https://www.youtube.com/watch?v=01lKDkYSFDg

Market Failures- https://www.youtube.com/watch?v=13JOGWzY8kE

The Role of Prices

Like a language for buyers and sellers.

The easiest way for producers to change the supply of goods.

Flexible

Free

A wide choice of goods

Businesses prosper by finding out what people want, and then providing it.