Demand for patio heaters? Demand for smoking cessatio

1
Exploring How Markets Work

• Economics 1
• ECOE103
• Semester A 2007

2
Exploring How Markets Work

• Think like an economist - consider the smoking
  ban in Scotland?
• Benefits???
• Improved health overall
• Cleaner environment?
• Better smoking prevention measure than increased
  taxes
• Child friendly pubs?
• Costs???
• Cigarette suppliers
• Reduced tax revenue?
• Global warming
• Child unfriendly homes?

3
Demand and Supply Issues

• Demand for beer?
• Demand for chefs?
• Demand for patio heaters?
• Demand for smoking cessation products?
• Supply of bar food?
• Supply of smoking shelters/furniture?
• Supply of online gaming sites?

4
Markets, Demand and Supply

• Examine Demand and Supply
• The laws of economics
• 1. Demand
• Help you understand
• What you are already doing day to day
• What makes you demand the goods and services
  you consume
• Why you may stick with some goods more than
  others, even if the price goes up (elasticity)
• How the government understands this and uses it
  in its approach to taxation (indirect taxes)

5
Markets, Demand and Supply

• 2. Supply
• Help you understand among other things
• What is it that makes businesses supply one thing
  rather than another in their business
• Why sometimes businesses make more money by
  reducing the prices of some goods, but
  increasing the prices of others
• 3. The Market
• 4. Explaining why governments sometimes intervene
• 5. Drawing diagrams of this
• to graphically illustrate your understanding of
  demand, supply and markets

6
Exploring How Markets Work

• What happens to demand
• For flights to Tbilisi from Glasgow on October
  17th 2007
• For beer in the students union in July and August
• For beer in the students union in September
• For MP3 players following the launch of the new
  iPhone in UK on 9th Nov 2007
• For Cds as more bands follow Radioheads example
  of offering latest albums as free downloads
• Decide on whether demand goes up ? or ? and why.
  Discuss with your neighbour

7
Exploring How Markets Work

• What happens to supply
• Of French wine following the wet summer this year
  
• Of bottles of Buckfast offered for sale in
  Glasgow following the imposition of an EU
  directive that classifies Monks as employees.
• Of cigarettes for sale in the Barras if customs
  seize a large quantity of illegally smuggled
  cigarettes at Dover
• Of costa coffee as fair trade coffee becomes
  increasingly profitable
• Decide on whether supply goes up ? or ? and why

8
Matching demand and supply(creating market
equilibrium)this is done by matching

• Buyers
• Consumers
• Demand
• Maximise Utility

• Sellers
• Producers
• Supply
• Maximise Profit

9
Examining demand and supply more closely

• Clearly price has an effect on the quantities you
  demand or supply
• Other non-price factors must also have an impact
  on demand and supply (effect of iPod phone on
  original iPod effect of smoking ban on
  cigarettes)
• We examine these systematically, first looking at
  price changes, then the effect of other changes

10
The Law of Demand - formally stated

• The relationship between quantity demanded and
   price - How much will people buy of any item ?
• the law of demand the quantity of a good
  demanded (Qd) per period of time will fall as
  price rises and will rise as price falls , other
  things being equal
• When we come to draw this we see this produces a
  demand curve/ demand line that slopes downwards -
  we say there is an inverse relationship between
  Quantity demanded (Qd) and Price
• (Note in relation to price we speak of quantity
  demanded not demand)

11
Graphing the law of demand 1
Weekly demand for wine from students when loan
cheque comes in
P
Price per bottle
5
Demand
Quantity (no of bottles)
4000 bottles
Q
12
Graphing the law of demand 2
Weekly demand for wine from students when loan
cheque comes in - after price changes
P
Price per bottle
7
5
Demand
Quantity (no of bottles)
4000 bottles
Q
2500
13
Illustrating the effect of a price change on
quantity demanded

• If no other factors change, we illustrate this on
  a diagram, by moving backwards up or forwards
  down on the same demand line/ curve.
• The demand line/ curve itself does not move
• A price increase means backwards up
• A price decrease means forwards down

14
What else might change how much wine students buy
per month, if the price of wine remains the same
(5?)

• How is student demand effected by
• The loan running out (up/down)
• The price of spirits going down (up/down)
• The price of pizza going through the roof (you
  always have pizza with your shiraz) (up/down)
• The chancellor announcing that the price of wine
  will double tomorrow (up/down)
• Decide on whether demand goes up ? or ?

15
Theory of Demand

• Determinants of Demand other than Price -
• tastes
• number and price of substitute goods
• number and price of complementary goods
• income
• distribution of income
• expectations

16
Theory of Demand
Market for Wine
P
Price per bottle
decrease
5
Demand 1
increase
Original Demand
Demand 2
4000
Q
Quantity (no of bottles)
6000
2000
17
Illustrating the effect of a non-price change on
demand

• If something other than price changes, we
  illustrate this on a diagram, by shifting the
  curve itself to the left or the right
• We say demand (not quantity demanded), has
  increased or decreased
• Anything that increases demand, shifts the curve/
  line out to the right
• Anything that decreases demand, shifts the curve/
  line back to the left

18
From demand to supply

• While consumers demand goods and services,
  producers supply them
• (It might be worth imagining yourself on the
  other side of the counter in a shop)
• Think what would make you want to supply more or
  less of any good

19
The law of supply - formally stated

• The relationship between quantity supplied and
   selling price - How much will producers supply
  of any item ?
• The law of supply the quantity of a good
  supplied (Qs) per period of time will rise as the
  selling price rises and will fall as the selling
  price falls , other things being equal
• (Think of the profit motive)
• When we come to draw this we see this produces a
  supply curve/ supply line that slopes upwards -
  we say there is an direct relationship between
  Quantity supplied (Qs) and selling price
• (Note in relation to price we speak of quantity
  supplied not supply)

20
Illustrating the effect of a price change on
quantity supplied

• Effectively this is a similar process to the
  result for quantity demanded, but in the opposite
  direction, and on a curve/line going up left to
  right, rather than down left to right
• If no other factors change, we illustrate this on
  a diagram, by moving backwards down or forwards
  up on the same supply line/ curve.
• The supply line/ curve itself does not move
• A selling price increase means forwards up
• A selling price decrease means backwards down

21
Graphing the law of supply 1
P
Supply
7
Price per bottle
5
Q
4000
6000
Quantity (no of bottles)
22
What else might change how much wine producers
supply per month, if the selling price of wine
remains the same (5?)

• How is producer supply effected by
• The cost of bottles decreasing?
  (up/down)
• The selling price of grape juice going up?
  (imagine you can produce grape juice or wine from
  your plantation) (up/down)
• The profitability of organised tours of the
  vineyard going up? (you always supply each
  tourist with half a dozen bottles of wine)
  (up/down)
• Government legislation introduces minimum wage to
  all workers? (up/down)
• Decide on whether supply goes up ? or ? and why

23
Theory of Supply

• Determinants of Supply other than Price -
• costs of factors of production/ components
• nature and other unpredictable events
• goals of producer
• expectations of future price changes
• profitability of other commodities that are
  alternatives to produce
• Profitability of other commodities that are
  by-products

24
Graphing the law of supply 2
Supply 2
Original Supply
Price per bottle
Supply 1
increase
5
decrease
4000
6000
Quantity (no of bottles)
25
Graphing Supply 3

• Which supply line (S1 or S2) represents
• The cost of bottles decreasing?
• The selling price of grape juice going up?
  (imagine you can produce grape juice or wine from
  your plantation)
• Decide on which supply line it is