Supply and Demand

1
Chapter 3

• Supply and Demand
• Defining a Market - Circular Flow Model

2
What is a Market?

• Any Place Where Goods and Services are
  Voluntarily Exchanged
• (brings together buyers and sellers)
• Price is a primary influence in determining
  allocation of resources in our free enterprise
  economy.
• Difference between Price, Value, Utility
• Price value of product in terms of money
• Value has to do with relative scarcity
  exchange value
• Utility satisfaction that good or service can
  provide

3
Four Market Models

• Pure Competition
• Monopoly
• Monopolistic Competition
• Oligopoly

4
What Determines a Persons Income in the Market?

• This means what is the value of the human being?
• Determined by
• a) value of their product. Rock singer,
  athlete, Shaq, Oprah, department store clerk,
  insurance salesman, teacher
• b) supply and demand. If lot of people doing
  same things you are not likely to be paid
  much.(underwater welders). As demand for
  product decreases, reduces number of available
  jobs gas station jobs!
• c) if demand for product lacking- rewards
  minimal and number of competing workers is few,
  demand high, wages high. 20 years ago heart
  surgeons

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Who Determines the value of a product?

• The value of the product is the worth that
  society puts on it.
• What worth does society put on sports?
• What worth does society put on music industry?
• What worth does society put on sport cars,
  SUVs, large houses, motorcycles, eating out,
  designer clothes, entertainment. Etc, etc. etc.
  Education?

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How does the market flow work?

• Two markets
• Two players
• Interact to balance the economy

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WORKING MODEL OF THE ECOMONY
International Participants

• Product Market

Payments for Goods Services
Receive Goods Services
Injection
Investment
Government
Banks
BUSINESS
HOME
Savings
Taxes
Leakage
Land,Labour, Capital, Entrepreneurs
Rent, Wages, Interest, Profit
Factor Market
ST gt IG Recession IG gt ST Inflation
International Participants
Leakage S T I G Injection
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Circular Flow Explanation

• Flow of resources in the market shows how the
  market works
• In market system, voluntary exchanges continually
  take place in circular flow model
• System works that what is an expense to one is
  ultimately an income to the other

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Two Leakages Explained

• Savings and Taxes
• Savings does not help unless it is invested back
  into the flow (economy).
• Financial intermediaries why are they called
  this?
• (because they take savings of one group and make
  it available to another to borrow or invest)
• Financial Intermediaries are banks, savings
  loan, credit unions, stock market, insurance
  companies.
• If savings is greater than investment..business
  expenses mount.

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• Taxes are also a leakage.
• Government injects tax dollars back into the
  economy (flow) by spending the money that taxes
  take out.
• What expenditures does government make into the
  flow?
• Money spent on redistribution of income or
  transfer payments is not productive into the
  flow. Why?This is where a lot of the
  controversy occurs about stimulus package.

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• S T greater than I G recession
• G I greater than S T inflation
• Supply-siders favor strong I
• Demand-siders (Keynesian economy) favor strong G
  this is where we are now for most of populous
  thinking

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What if???

• Banks will not loan money?
• People lose their jobs?
• Companies are not hiring?
• People are under-employed?
• Consumption decreases significantly?
• That describes the Great Recession.

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Characteristics of Recession/Inflation

• Recession
• Businesses not selling what it produces
• Inventories accumulate
• Businesses then cut down on employment (hence
  unemployment/layoffs)
• Inflation
• _____________________________
• Government and investors spending more
• Inventories begin to be depleted
• Prices increase
• Production increases
• More workers are hired

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What brand of basketball shoes?

• A. Nikes Kobe 8 brand 160
• B. LeBron 11 200

• C.LeBron 11 Graffiti 250

D. New Balance 54.99
Which of these would you buy? Get out your smart
phone and vote PollEv.com/karenhorn703
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How many Kobe Nikes sold?

• Depends on Price
• You are willing and ABLE to purchase
• Price of LeBrons Nikes (relative to Kobes)
• Other substitute options (Reeboks, etc)
• All other things being equal.

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Law of Supply

• As the price of the product increases, the
  quantity that the supplier tends to supply also
  increases.
• Ceteris Paribus Ceteris Paribus
  AssumptionKAY-ter-us PEAR-uh-bus
• Nothing changes except the factor or factors
  being studied.
• Other things constant equal

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Economics as a Science (cont'd)

• Ceteris Paribus AssumptionKAY-ter-us
  PEAR-uh-bus
• Nothing changes except the factor or factors
  being studied.
• Other things constant
• Other things equal

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Law of supply

• positive relationship between the quantity of a
  good supplied and price.
• PRICE IS THE INDEPENDENT VARIABLE

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Determinants of Supply

• Technique of production (technology)
• (ovens, organic farming)
• Resource Prices (Factor Costs) cost of inputs
• Taxes and Subsidies
• Prices of Other Goods (decline in wheat will
  cause farmer to shift to corn)
• Expectations- (farmers expect price to rise..
  Hold back production)
• Number of sellers in market more sellers,
  greater supply.

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Important Concepts

• Change in Supply (shifting of curve)
• Or
• Change in Quantity Supplied (movement along curve)

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Ability to Respond to Price varies

• Often the ability of an individual firm to
  respond to an increase in price is limited or
  constrained by its existing scale of operations,
  or capacity, or ability to obtain resources.. IN
  SHORT RUN
• Examples
• IN LONG RUN can adjust. The greater the amount
  of time producers have to adjust, the greater
  their output response.

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Law of Demand

• AS THE PRICE OF A GOOD DECREASES THE QUANTITY
  DEMANDED TENDS TO INCREASE.
• Ceteris Paribus
• Price once again is the independent variable!

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• Wishing for a new boat does not constitute
  demand one must be WILLING AND ABLE to purchase
  a boat.
• Generally speaking. The higher the price
  obstacle, the less of a product a consumers will
  buy.
• Bargain days are based on law of demand.

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Why Inverse Effect?

• 1.) Just common sense- at lower prices we buy
  more.
• 2.) The more we buy of one product, the less
  satisfied we are. Will only buy if price is
  continually lowered.
• 3.) The lower the price of an item, the more our
  income will buy.

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• The greater the want satisfaction. The greater
  the utility
• Marginal Utility How much more utility do you
  get adding or subtracting units (more doughnuts
  more cars more steak in one day)
• DIMINISHING MARGINAL UTILITY.
• As the number of units of a product a consumer
  has increases, the satisfying power for each
  extra unit decreases.

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Utility

• Purpose of Utility analysis is to study how
  people behave not how they think.
• Theory of consumer choice is based on the idea
  that each consumer spends his/her income in a way
  that yields the greatest satisfaction.

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Determinants of Demand

• 1.Preferences
• 2.Prices of Related Goods
• 3.Number of Buyers
• 4.Expectations of future price
• 5.Income

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Determinants of Demand

• Tastes and preferences
• Taste changes throughout our lifetime.

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2 Determinant Prices of Related Goods

• Your preference is Coke price skyrockets.
• Affected in the market by substitute goods and
  complimentary goods.
• Substitute goods anything that can be
  substituted for the product or service desired
• (Coke/Pepsi,
• Millers/Coors,
• potato chips/popcorn).
• If price of Coke rises and consumer doesnt feel
  strongly about brand preference will buy Pepsi
  until Coke price declines)
• When two products are substitutes, the price of
  one good and the demand for the other are
  DIRECTLY RELATED.

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• Complementary Goods Goods that go along with
  other goods consumers buy
• peanut butter/jelly, beer/pretzels,
  milk/cookies, golf balls/golf tees,
• When two goods are complements, an increase in
  the price of one good adversely affects the
  demand for the other and creates an inverse
  relationship.

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• Independent Goods No connection between price
  and demand (cars/bread)

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Determinants Continued

• 3. Number of buyers
• The number of buyers will increase demand for
  the product which (if supply is fixed) will drive
  up the price.)

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Determinant 4

• Income- RATHER OBVIOUS HERE.
• Show shifts
• Superior or Normal goods commodities whose
  demand varies DIRECTLY with money income.
• INFERIOR OR POOR MANS GOODS.
• Goods whose demand varies inversely with a change
  in money income.

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• 5. Expectations
• If you are in medical school or law school, the
  expectation of you getting a larger income when
  you get out of school will affect your demand for
  goods Inheriting money, winning the lottery!

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IMPORTANT CONCEPTS OF DEMAND

• Change in Demand
• OR
• Change in Quantity Demanded

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Terms to Remember

• Profit
• TR-TC
• Total Revenue
• P x Q
• Marginal Utility
• To maximize utility, consumers should choose
  that good which delivers the most marginal
  utility per dollar. Optimal utility is then
  achieved.
• Optimal consumption mix of output that maximizes
  total utility for the limited amount of income
  you have to spend.

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Equilibrium

• Equilibrium market clearing price supply and
  demand are in balance.
• Does not occur often if ever with the constantly
  changing invisible hand and the consumer
  fickleness.
• In our U.S. economy we have consumer
  sovereignty which tends to shift both curves or
  move along the curve almost continuously.

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Ceilings and Floors

• Price Ceiling-
• a legally established maximum price that sellers
  may charge (rent control)
• Direct effect of a price ceiling is a shortage
• Secondary effect- reduction in the quality of the
  good, inefficient use, lower future supply, black
  markets,

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• Price Floors
• Price floor is a legally established minimum
  price that buyers must pay. (minimum wage)
• Direct effect reduces employment of low-skilled
  labor
• Indirect effects reduction in nonwage component
  of compensation (perks), lesson-the-job training.

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Recap Ceilings and Floors
P
S
P
S

D
D
Q
Q
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Black Markets

• Markets that operate outside the legal system
• Have a higher incidence of defective products,
  higher profit rates, greater violence
  (cigarettes, drugs both prescription and
  illegal, Levis during cold war)

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Equilibrium Tutorial

• Equilibrium

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Supply and Demand for Cowboy Tickets

• http//www.tickco.com/schedule/dallas-cowboys/
• http//www.tickco.com/schedule/new-england-patriot
  s/

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Kiley is my best friend She Supplies a lot of
love! ?