Supply and Demand Chapters 4 – 6, 9

UNIT II

SUPPLY AND DEMANDCHAPTERS 4 – 6, 9

UNIT 2 (DEMAND & SUPPLY: CH 4, 5, 6 & 9)

PAGE 13 – DEMANDDirections – Working with a partner, grab a textbook and define the following terms:1. Demand2. Law of Demand3. Demand Schedule4. Market Demand Schedule5. Demand Curve6. Market Demand Curve

DEMAND• Demand

• the desire for an item AND the ability to pay for it

• Law of demand• when price of good

or service goes up, quantity demand goes down

• when price of good or service goes down, quantity demand goes up

DEMAND• Demand schedule

• a table that summarizes one consumers’ behavior

• lists how much of an item an individual will buy at each price

• Market demand schedule• a table that summarizes

all consumers’ behavior• lists how much of an

item all consumers will buy at each price

Price ($) # of iPhones Demanded

500 4

400 6

300 8

200 10

100 12

DEMAND• Demand curve

• a graph that shows amount of an item a consumer will buy at each price

• Market demand curve• amount all

consumers will buy at each price

Both are a graphic representation of a demand schedule

Market Demand Curve for Shirts

20

15

10

5

1

0 1 2 3 4 5 6 7 8 9 10

Pric

e

DEMANDOn your paper draw the following schedules: Demand Schedule Market Demand Schedule

Price ($) # of Shirts Demanded

20

15

10

5

1


20

15

10

5

1

DEMANDGoal – Work with your group to create a demand schedule and a demand curve.Step 1: Assume you have $100 TOTAL dollars to spend on shirts for school.

Step 2: Fill in the individual demand schedule. What is the max amount of shirts you would purchase at $20 a piece? How about at $15?


20 X

15 X

10 X

5 X

1 X

DEMANDStep 3: Talk to three of your peers and find out how many albums they would purchase at each price point. Add these figures to your own.

Step 4: Fill in the market demand schedule.


20 3 + 2 + 1 + 2 = 8

15 5 + 2 + 4 + 3 = 14

10

5

1

DEMANDMarket Demand Curve for Shirts

20

15

10

5

1

01 2 3 4 5 6 7 8 9 10 11

Pric

e

Step 5: Translate the market demand schedule into a market demand curve on the other side of the paper.

CHANGE IN DEMAND KEY CONCEPTS

• CHANGE IN QUANTITY IS NOT THE SAME AS CHANGE IN DEMAND

• CHANGE IN DEMAND is caused by a change in the marketplace

• Something prompts people to buy different amounts at every price

• also called SHIFT IN DEMAND

Can you think of some factors that might cause a CHANGE IN DEMAND?

Factor 1

CHANGE IN DEMAND is caused by a change in the marketplace• Something prompts people to buy different amounts at every price

• also called SHIFT IN DEMANDFactor 2 Factor 3

Factor 4 Factor 6Factor 5DIRECTIONS:1. SET UP PAGE 14 LIKE THIS.2. USE PAGES 109 – 113 TO SUMMARIZE EACH FACTOR THAT

AFFECTS DEMAND.3. DRAW A SYMBOL OR GRAPHIC REPRESENTATION OF EACH

FACTOR.4. LIST THREE EXAMPLES OF EACH.5. YOU MAY WORK WITH A PARTNER. 25 MINUTES WILL BE ON

CLOCK.

CHANGE IN DEMANDFACTOR 1: Income

• A person’s ability to buy goods changes as his or her income changes

• As incomes of most consumers in a market change, so does total demand

• normal goods: demanded more when consumers’ incomes rises

• inferior goods: demanded less when consumers’ incomes rise

CHANGE IN DEMAND FACTOR 2: Market Size

• As number of consumers in an area changes, so does market size

• Demand for most goods changes as market size changes

• rise in population leads to increased demand

• decrease in population leads to decreased demand

CHANGE IN DEMAND

FACTOR 3: Consumer Tastes

• Consumer tastes change; products gain and lose popularity

• Consumers demand a greater amount of popular items at every price

• Sellers advertise to create demand for products

CHANGE IN DEMAND FACTOR 4: Consumer

Expectations• Expectations about future

price of items affect individual behavior

• expected rise or fall in price can decide whether to buy now or wait

• Expectations of all consumers in a market affect demand

• Ex: because cars go on sale at end of summer, demand goes up then

CHANGE IN DEMAND FACTOR 5: Substitutes

• Substitutes are products used in place of each other

• If price of substitute drops, people buy it instead of original item

• If price of original item rises, people will buy substitute

CHANGE IN DEMAND FACTOR 6: Complements

• Complements are goods that are used together

• Rise in demand for one increases the demand for the other

• If price of one product changes, demand for both changes in same way

• if price of one rises, demand for both will drop

ELASTICITY OF DEMANDWhat is elastic?Elasticity of demand is a measure of how responsive consumers are to price changes.

• Elastic—quantity demanded changes greatly as price changes

• Inelastic—quantity demanded changes little as price changes

ELASTICITY OF DEMAND

FACTOR 1: Substitute Goods or Services• No substitute for a product = inelastic

Examples?• Available substitutes = elastic

ELASTICITY OF DEMANDFACTOR 2: Proportion of Income

• Demand for expensive items is generally elastic

• Demand for inexpensive items tends to be inelastic

ELASTICITY OF DEMAND

FACTOR 3: Necessity or Luxury

• Necessity - something needed for life = usually inelastic

• Luxury - something desired but not essential = usually elastic

ELASTICITY OF DEMAND Four Steps for Calculating Elasticity:1. Calculate the percentage change in quantity demanded.

• oQ – nQ_ x 100 = % Change in Quantity Demanded oQ

2. Calculate the percentage change in price.• oP – nP_ x 100 = % Change in Price

oP3. Calculate elasticity. Use absolute value (disregard – sign).

• % Change in Quantity = Elasticity % Change in Price

4. Evaluate elasticity.• # > 1 = Elastic AND # < 1 = Inelastic

Keyo – Oldn – NewQ – QuantityP – Price

ELASTICITY OF DEMAND: PART IIWhy do we use elasticity?Knowing elasticity of demand tells sellers whether to cut prices.

Think about it:Should a business owner increase prices or decrease prices in

order to generate more revenue? What do you think?

Answer: It depends…• If demand is elastic, price cuts might increase earnings.• If demand is inelastic, price cuts will not increase earnings.

ELASTICITY OF DEMAND: PART II

• Total revenue—amount of money company gets for selling its products

• Formula: TOTAL REVENUE = P (price) x Q (quantity sold)

• Total revenue test—shows total revenue from item at various prices

• If total revenue increases after price drops, demand is elastic.

• If total revenue decreases after price drops, demand is inelastic.

ELASTICITY OF DEMAND: PART II

Price of a Movie Ticket ($)

Quantity Demanded per Month

Total Revenue ($)

14 1,000

12 2,000

10 6,000

8 12,000

6 18,000

Directions: Create the following chart in your notebook. Fill in the Total Revenue column, then use the figures to answer the questions below.

1. What is the total revenue at $10 per ticket?2. When price drops from $12 to $10, what happens to demand?3. Does this demand schedule show a positive or negative correlation?

Why?4. When the price changes from $8 to $6, is demand elastic or inelastic?

Explain.

SUPPLYDirections - Working with a partner, use pages 130-35 in the text to define and draw a pic for the following terms:

1. Supply (define + pic)

2. Law of Supply (define + pic)

3. Supply Schedule (define + pic)

4. Market Supply Schedule (define + create an example schedule)

5. Supply Curve (define + pic)

6. Market Supply Curve (define + plot your example schedule)

**When you are finished, read the short excerpt entitled The NBA Goes International on page 136.

7. How do price and quantity supplied affect who plays in the NBA?

8. If European teams offered higher salaries than the NBA, what might happen?

SUPPLYSupply –willingness and ability of producers to offer goods, services

Law of Supply – producers willing to sell more of product at higher price than at lower price

http://martinmorning.files.wordpress.com/2009/06/law-of-supply.jpg

SUPPLYSupply Schedule – amount of product individuals are willing, able to offer at each price

Market Supply Scheduleamount of product all producers willing, able to offer at each price

Why would producers want to use these?

some producers want to learn prices, amount offered by all in market

Price ($)

Quantity Supplied

0 0

500 1,000

700 3,000

900 7,000

SUPPLYSupply Curve and Market Supply Curves –• graphic

representations of the law of supply. Both show data on corresponding schedules.

COSTS OF PRODUCTION

• Fixed costs - expenses owners incur no matter how much they produce.

Ex. mortgage, insurance, manager salaries, machinery

• Variable costs - expenses that vary as level of output changes

Ex. workers’ wages, electricity, materials, shipping

COSTS OF PRODUCTION

• Total cost - the sum of fixed and variable costs

• Marginal cost - additional cost of making one more unit of the product

• Change in Total Cost/Change in Total Product

COSTS OF PRODUCTION

• Marginal revenue - money made from sale of each additional unit sold. Also referred to as price.

• Total Revenue - income from selling a product

• Total Revenue = P (price) x Q (quantity purchased at that price)

COSTS OF PRODUCTION

Maximizing Profit• Marginal Analysis

• Compares costs and benefits of adding a worker and making another unit

• Profit-Maximizing Output - Level of production yielding highest profit

marginal cost = marginal revenue

COSTS OF PRODUCTIONDiminishing Returns

• Adding workers does not always lead to an increase in production… WHY?

• At first, each additional worker causes increasing returns, but then output decreases and negative returns are experienced.

• Results in increased marginal costs

“Too many cooks in the kitchen.”

FACTORS AFFECTING SUPPLY• Divide page 19 into six boxes. You can use the entire

page.

• Use pages 148-150. Include an explanation of each term, two examples of each, and a picture or symbol.

Input Costs Labor Productivity

Technology Government Action

Producer Expectations

Number of Producers

If you finish early, read case study on 152 and answer question C at

bottom of page. You may record your answer

somewhere on page 19.

FACTORS AFFECTING SUPPLY Factor 1: Input Costs

• Input costs - price of resources needed to produce a good or service

Can you think of a business and an example input cost?

FACTORS AFFECTING SUPPLY

Factor 2: Labor Productivity• Labor productivity - amount of

product worker can produce in set time

• Rise in productivity lowers production costs; supply increases

Can you identify two factors that might increase productivity?

Specialization and better trained workers

FACTORS AFFECTING SUPPLY Factor 3: Technology

• Technology - use of scientific methods, discoveries in production to make goods more efficiently

Can you think of some improvements in technology that have made work easier?

FACTORS AFFECTING SUPPLY Factor 4: Government Action

• Excise Tax - tax on production or sale of specific good or service

• Sometimes placed on items that government wants to discourage use of

• Regulation - set of laws designed to control business behavior

• i.e. banning use of certain resources, worker safety laws, etc.

What happens to supply if cost increases?

FACTORS AFFECTING SUPPLY

Factor 5: Producer Expectations• Producers have expectations

about future price of their product - - How much will I supply?

• Expectations of higher price in future may lead to different actions

Can you think of some scenarios where business owners might want to

control supply?

FACTORS AFFECTING SUPPLY Factor 6: Number of Producers

• When one producer has successful new idea, others enter the market

• Increase in number of producers leads to increased competition• Less-efficient producers driven out of market

MARKET DEMAND AND SUPPLY1. Plot the following points on a graph:

2. Identify the following:

a. Market Equilibrium (specific point)

b. Shortage (area on graph)

c. Surplus (area on graph)

3. What is the quantity supplied at $6?

4. How do these market demand and supply curves illustrate the concept of equilibrium price?

Use page 167 as a reference

MARKET DEMAND AND SUPPLY

10 20 30 50 600

1

2

3

4

5

6

7

Quantity

Pric

e

X

X

= Quantity Supplied= Quantity Demanded

X

X

X

X

X

X

X

SUPPLY, DEMAND AND PRICE 1. Black Market2. Competitive pricing3. Incentive4. Minimum wage5. Price ceiling6. Price floor7. Rationing

Once you have completed this answer questions 1 – 8 on page 188.

Define the following terms and explain the

purpose of each.

*Use pages 174-183.

RATIONINGTop Half: World War II Food Rationing Video

1. What was the rationing board?

2. How many rationing boards were in the United States during World War II?

3. What were they trying to accomplish by setting price ceilings?

4. What happened to the economy without price ceilings?

Bottom Half: Draw and fill in the following table:

DEVELOPING A BUSINESS PLAN1. Create a Mission Statement.2. Describe your company and product or service.3. Complete a Market Analysis.4. Describe your management team.5. Explain how you plan to market the product or service.6. Analyze your company’s weaknesses.7. List your company’s costs.8. Develop a Production Cost Schedule.9. Create a Market Supply Curve.10. Create a name, slogan a logo for your company.

Copy these questions on to page 19 so that you can work on your

project on home.

BUSINESS PLAN EVALUATIONDirections: Look over the business plan for Honest Tea with your group. Then, answer the following questions.

1. Who started the business? When was it started? Why was it started?

2. Based on the market research, was this plan viable? Why or why not?

3. How did they advertise?

4. Summarize Honest Tea’s “Statement and Aspirations for Social Responsibility”.

5. Identify two potential risks associated with starting the business.

6. Based on this business plan, would you invest in Honest Tea? Why or why not?

Supply and Demand Chapters 4 – 6, 9

Documents

Transcript of Supply and Demand Chapters 4 – 6, 9