Transcript Supply Demand and Competition
Supply, Demand and Competition
Essential Question: How are prices set?
Both Buyer and Seller
Setting an Economy
’
s Price System
To understand how a nation nation ’ s price system ’ s economy functions it is important to understand the The forces that determine price are called the forces of supply and demand The place where these two forces meet is called the marketplace
Basic facts
Consumers have a great influence on the price of goods and services.
Why?
Market: Represents the freely chosen action between buyers and sellers.
Voluntary exchange: Buyers and sellers work out a deal that suits both sides.
Demand
Demand shows how many of a product consumers are period.
willing and able to buy at a particular price during a specified time e.g. Swimming suits have a different price and quantity demanded in summer vs. winter How many of you would like a new car?
How many of you are able?
Law of Demand
Explains the amount people are willing to buy as prices change.
Demand can only occur if a buyer is willing and able to buy.
Three factors that affect what and how much people buy are diminishing marginal utility, real income, and
substitution.
Price goes up – Demand goes down Price goes down – Demand goes up
Diminishing Marginal Utility (DMU)
Utility: Power of a good or service to satisfy.
Total satisfaction rises with additional units purchased, but additional satisfaction diminishes.
People will buy until price exceeds satisfaction.
Price decreases, people will buy more.
Real Income Effect
Income limits the amount of money people can spend.
People cannot keep buying the same amount if price increases and income stays the same. (Real income effect).
People are forced to trade-off if price increases.
If price decreases and you buy the same amount, your real income has increased.
Demand Curve
Demand Curve
is a line graph that shows the amount of a product that will be purchased at each price; it shows an inverse relationship and is always
downsloping
p D Qd
Remember:
A change along the curve indicates a change in price and a change in quantity demanded A change of the curve (right or left) indicates an across the board change in demand
Law of Demand
As price decreases, the quantity demanded increases. As the price rises, the quantity demanded decreases P QD Price per gallon of water Bottles per week $ .75
.50
.35
.25
Jo 90 130 180 290 Pat 50 70 100 130
Demand for hot chocolate in December at the skating rink
Price $.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
Quantity Demanded 30 25 20 15 10 5 0
Demand Determinants
Characteristics that will affect the amount people will buy. Includes changes in population, income, and personal preferences.
Prices of related goods, income, preference/taste, consumer expectations, population change
Demand Determinants
Prices of Related Goods
Substitutes: Goods that are related in such a way that an increase in the price of one leads to an increase in the demand for the other [goods that can be consumed in place of one another] (Pepsi and Coke) Compliments: Goods that are related in such a way that an increase in the price of one leads to a decrease in the demand for the other [goods that are normally consumed together] (hamburgers and french fries)
Determinants cont.
Income
Normal Good: a good for which demand increases as consumer incomes rise (milk) Inferior Good: A good for which demand decreases as consumer incomes rise (ground chuck, bus rides) As income rises consumers tend to switch from consuming these inferior goods to consuming normal goods (ex. steak, car/plane)
Determinants cont.
Preference/Taste
Likes and dislikes in consumption
Consumer Expectations
Change in future price of goods Change in future income
Population Change
As the number of consumers in a market changes the demand will change
Law of Supply
The amount producers are willing to provide at various prices.
As price increases, supply increases.
As price decreases, supply decreases.
Law of diminishing returns: Adding units of a factor of production will increase output for a time. Eventually output will decrease.
Supply Schedule & Curves
A Supply Schedule displays the quantity of a product supplied at each price Price Per Bottle Bottles Supplied .75
.50
.35
.25
200 130 75 50
Supply of shovels before a large snowstorm sold at Lowes
Price $4.00
$8.00
$12.00
$14.00
Quantity Supplied 5 10 15 20
Determinants of Supply
Technology
If more efficient technology is discovered production costs will fall So suppliers will be more willing and able to supply more of the good at each price
Price of Relevant Resources
Those resources employed in the production of a good.
Determinants con
’
t
Prices of Alternative Goods
Price of a good that uses some of the same resources as used to produce the good in question
Producer Expectations
Shift production according to future prices
Number of Producers
# of Prod. Increases # of supply
Government Restrictions
Taxes, quotas, licenses, etc.
Supply and Demand
If price falls, demand will increase and supply will decrease.
If price rises, demand will decrease and supply will increase.
Equilibrium price: Point where supply and demand meet.
Shortage and surplus: When demand is greater than supply, a shortage occurs.
When supply is greater than demand, a surplus occurs.
Prices will rise in a shortage and fall in a surplus.
Price Controls
Price Ceiling – Gov good or service ’ t set maximum price that can be charged for a Price Floor -- Gov good or service ’ t set minimum price that can be charged for a
Price Elasticity
How consumers react when prices change.
Elasticity is determined by: Existence of substitutes.
Percentage of income spent on a good or service.
Time allowed to adjust to a change.
Types
Elastic: Many competing brands.
Price increases, people choose a substitute.
Inelastic: Not much competition.
Price increases, demand does not change.
Steak: Elastic or Inelastic ?
Elastic Why? People as a whole can do without steak and will substitute chicken or other protein for expensive steak
Milk: Elastic or Inelastic ?
Inelastic Why?
The population as a whole can do without steak….but can not do as easily without milk…especially families with children
Gasoline: Elastic or Inelastic ?
What Products are Subject to Elastic Demand ?
Luxury Items – Most customers want luxuries and will consider buying them if price drops
If Price Represents a Large Portion of Family Income
e.g. Mortgage Rates drop from 6.5 to 5.5% people will “ refinance ”
Availability of Substitute Items
e.g. Steak /chicken
Durable Goods
Computers, cars, washers, dryers will be in greater demand if the price drops
What Products are Subject to
“
Inelastic Demand
”
?
Necessities (milk, gasoline)
Drugs
Legal (heart medicine antibiotics) Illegal (heroin, cocaine)
Products with no good substitute
insulin, cancer drugs, etc.
salt in Middle Ages (preservative)
Why is Elasticity of Demand Important ?
What happens if a florist increases the price of roses 400 % in October ? Will sales go up or down ?
A. Probably, down What happens if a florist increases the price of roses on February 14 th ? Will sales go down or up?
A. Probably up Why ? Frantic husbands and boyfriends will pay exorbitant prices for a dozen roses on Valentine ’ s Day.
Competition
Competition will exist if different businesses produce similar products.
Perfect Competition 1.
2.
3.
Large Market Similar Product Easy entry and exit 4.
5.
Information obtainable No control over price Market Price is equilibrium price. (decided by supply and demand)
Imperfect Competition
One group can have an impact on price.
Monopoly Oligopoly Monopolistic Competition Barriers to entry: Government regulations: Some goods and services are protected from duplication by the government.
Cost of getting started: Large amount of capital is needed to begin.
Ownership of raw materials: Companies control materials and do not sell to competitors.
Monopoly
One group controls the market.
1.
Single seller 2.
3.
No substitutes No entry 4.
Complete control over price Suppliers can raise prices without losing business.
Types of Monopoly
1.
2.
3.
4.
5.
Natural: Control of resources. Water company Geographic: Control of location Dick ’ s is the only sports store in the area Technological: Patent on technology Government: Created by the government. Illegal to enter. Post office Cartel: International form of monopoly (OPEC).
Oligopoly
1.
2.
A few businesses in competition.
Domination of a few sellers Barriers to entry 3.
4.
Identical or slightly different products Some control of price Price wars are common place.
Oligopoly Examples
Movie Studios Columbia, 20 th Century Fox, Warner Bros., Paramount, Universal, and MGM Television Disney/ABC, CBS Corp., NBC Universal, Time Warner, and News Corporation Food Processing Kraft Foods, PepsiCo, and Nestle Telecommunications AT&T, Verizon, Sprint, and T-Mobile
Monopolistic Competition
1.
2.
3.
4.
Numerous sellers Easy entry Different products Competition 5.
Some control of price Substitution and advertising are factors.
Mergers
One company joins with another.
Horizontal: Companies in the same business.
Vertical: Company joins with one it buys from.
Conglomerate: Buying of un related businesses.
Vertical or Horizontal?
Google and Bing Horizontal Paper Company and Saw Mill Vertical Tostitos and Corn Fields Vertical Harris Teeter and Ace Hardware Conglomerate Pepsi and Coke Horizontal
Government policies
Late 1800 ’ s the railroad industry was the biggest in the United States.
Theodore Roosevelt set out to stop monopolies with his businesses.
“ trust-busting ” policy, which would break up large All mergers must be approved by the Government.