Market EconomiesMarket Economiesat Work:at Work:

Supply and DemandSupply and Demand

DemandDemand$ The Desire for a Good or Service

and the Ability to Pay for It

Law of DemandLaw of Demand$ When Prices Fall Consumers Buy More

$ When Prices Rise Consumers Buy Less

Demand SchedulesDemand Schedulesand Curvesand Curves

The Law of Diminishing The Law of Diminishing Marginal UtilityMarginal Utility

$ The Benefit from each Individual Unit Tends to decline

Factors Affecting DemandFactors Affecting Demand

$ Income

$ Market Size

$ Consumer Taste

$ Consumer Expectations

$ Substitutes

$ Complements

Elasticity of DemandElasticity of Demand

The Responsiveness of Consumers to The Responsiveness of Consumers to Changes in Price in a MarketChanges in Price in a Market

What Determines ElasticityWhat Determines Elasticity

$ Substitute Goods/Services

$ Proportion of Income

$ Necessities vs Luxuries

Calculating ElasticityCalculating Elasticity

$ Businesses Have to Calculate Elasticity

$ Should they put Products on Sale? Will it increase the Number Sold?

$ Total Revenue Test: Will Selling MoreProducts at a Lower Price Make you More Money?

SupplySupply

$ The Willingness and Ability of Producers to Offer Goods and Services for Sale

Law of SupplyLaw of Supply$ Producers are Willing to Sell More of a Good/Service at a High Price than a Low One

Supply SchedulesSupply Schedulesand Curvesand Curves

Cost of ProductionCost of Production

$ Labor Affects Production:Efficiency and Utilization

Costs of ProductionCosts of Production

$ Fixed Costs

$ Variable Costs

Factors Affecting SupplyFactors Affecting Supply$ Input Costs

$ Labor Productivity

$ Technology

$ Government Action

$ Producer Expectations

$ Number of Producers

Elasticity of SupplyElasticity of Supply

The Responsiveness of Producers to The Responsiveness of Producers to Price ChangesPrice Changes

Demand, Supply & Demand, Supply & PricesPrices

Shortage vs SurplusShortage vs Surplus

Supply > Demand = SurplusSupply > Demand = Surplus

Demand > Supply = ShortageDemand > Supply = Shortage

PricesPrices

PricesPrices

Reaching Equilibrium PriceReaching Equilibrium Price

40 Salads40 Salads $10 each$10 each Sells only 10Sells only 10

15 Salads15 Salads $4 each$4 each 50 requests50 requests

25 Salads25 Salads $6 each$6 each Sells 25Sells 25

Equilibrium ReachedEquilibrium Reached

Equilibrium Price in Real Equilibrium Price in Real LifeLife

DemandDemandoror

SupplySupply

DemandDemandoror

SupplySupply

Equilibrium Equilibrium PricePrice

Equilibrium Equilibrium PricePrice

Prices as Signals & IncentivesPrices as Signals & Incentives$ Competitive Pricing

$ Prices and Producers

$ Prices and Consumers

$20$20 $13$13

Rising Rising Prices?Prices?

Enter Enter MarketMarket

Falling Falling Prices?Prices?

Leave Leave MarketMarket

LowLowPrice?Price? BUY!!!BUY!!! HighHigh

Price?Price? DON’T BUY!!!DON’T BUY!!!

High Price as Signal to Buy?High Price as Signal to Buy?

Intervention in the Price Intervention in the Price SystemSystem

$ Price Ceilings

$ Price Floors

Rationing Resources & Rationing Resources & ProductsProducts

$ World War II (other crises)

$ Black Markets

Unplanned Results of Rationing, or other Unplanned Results of Rationing, or other government regulationgovernment regulation