Supply and Demand

1. Supply and Demand Chapter 4 and 5

2. Demand: desire to own something and the ability to pay for it • Law of Demand: price of a product is lower, demand is higher and vice versa. • If a slice of pizza cost $1 = sell 100 • If a slice of pizza cost $2 = sell 50 • If a slice of pizza cost $10 = sell 0 • Ceteris paribus: all other things held constant

3. Substitution effect (income effect) • Substitution effect: find something else to replace the product that is more reasonable. Demand drops; prices will be forced to drop. • Cost of pizza is $1 = sell 100 slices • Cost of pizza is $10 = buy a burger • Cost of pizza must drop or the seller will go out of business This works in reverse… if burger prices escalate, but pizza is $1 more people will buy pizza instead of a burger.

4. Demand Schedule: relationship between the price and demand of a product

5. Graph: Demand Curve

6. Changes in demand (no ceteris paribus) • Normal goods: do we NEED pizza. Or are there other things we need to buy more with our limited income? • Normal goods: high demand • Luxury goods: We will give these up when money is tight • Inferior goods: substitute the product for a cheaper product • Round Table versus Little Caesars • Steak versus Macaroni and Cheese

7. Population size and demographics • Baby booms = more baby food • Small town = 1 pizza joint instead of 20 • Sell to your market… how many Lamborghini’s will you sell to a poor rural farm town in Kentucky?

8. Consumer Expectations: ammunition and firearms • Why are the prices of guns and ammo super high right now? • Gun laws going into effect… • Get it now while you can = increased demand • After laws are in effect = decreased demand

9. Consumer tastes • People Change: • I don’t want pizza everyday • I don’t want to wear the same styles everyday • Advertising and technology changes and makes me want new things • We are all experienced with new products and wanting new stuff.

10. Elasticity of Demand (flexibility) • Inelastic: demand for a good no matter how much it costs (gas, basic groceries) • Elastic: demand will change based on the market price (luxury items) • Total Revenue: the amount of money a company will try to make based on how far they can stretch their prices.

11. Supply: amount of goods and services available to be acquired • Law of supply: the higher the price, the more suppliers are willing to produce to make profits • Ceteris paribus: all things being constant… • If a pizzeria can sell 100 slices of pizza for $1 they will try to sell 200 slices for $1 to make more money

12. Supply schedule: relationship between price and quantity of a product being supplied

13. Supply curveWhat they are willing to make

14. Graph: Demand Curve: What we are willing to purchase

15. Elasticity of supply • Flexibility in pricing and supply to maximize profits • What affects supply? • Time… how many slices of pizza can you eat in a week? • Market saturation: How many iPhones can you use at once? • Increase in costs of production and rising prices

16. What are costs of production? • Labor: employees and how much they make in income– how many people are needed and how many can a producer afford? • Land: costs of natural resources to produce including raw materials, packaging, • Capital: machinery, maintenance, rent

17. Costs of production • Fixed costs: prices don’t change • Variable costs: prices fluctuate • Marginal costs: how much it takes overall to make a product at different quantities • Is it worth making 100 slices of pizza? • Is it better to make 1000 slices of pizza?

18. Increasing marginal returns: hiring a person who specializes or finding better, cheaper resources may increase output which will increase profits • Decreasing marginal returns: hiring more people than necessary increases output; minimum wage increases; costs of production increases (materials too expensive, gas prices go up, etc.) • Negative marginal returns: the cost of production is higher than the profits being made during sales: • Close operations, shut down, and retire to Bahamas!

19. Besides cost of production, what else can affect supply? • Technology: no one wants outdated technology • Subsidies: governments regulate markets (like milk, eggs… farms are usually subsidized otherwise it isn’t worth being a farmer. • Taxes: (excise taxes– kinda like a sales tax) • Regulations: laws in effect that make sales difficult (background checks on gun purchases) • Saturation of markets: if there are already 20 pizzerias within a mile of Franklin HS, it is not a good idea to open another one. • Location, patriotism, transportation, etc.

20. Combining Supply and Demand Chapter 6

21. Combining Supply and Demand: How much to make? At what price?

22. Equilibrium: the point of balance:The most money for the best profit. Make 175 slices of pizza for $1.75 ea.

23. Vocabulary: • Equilibrium: the point of balance where supply meets demand in a perfect market. • Disequilibrium: When supply and demand are not equal– unbalanced • Excess demand: Demand is higher than supply • Excess supply: Supply is higher than demand • Surplus: excessive products that are not selling.

24. Changes in the market: what causes shifts in Supply and Demand? • Prices: the cost of a product to the consumer • Price changes: improved technology, more cost effective production methods • 1st CD player = $1000 • Today, $20 for a basic CD player– can you even buy one anymore? • Increase the supply because manufacturers can afford to make more. • Increased supply leads to surplus. Surplus leads to a price reduction. • Price reduction leads to a higher demand • The law will naturally find equilibrium: (law of supply and demand)

25. Government intervention on S&D Equilibrium • Price ceiling: Setting the highest price that can legally be charged for a product • Ex: milk prices • Ex: Rent control • Others? • Price floor: setting the lowest price that can legally be charged for a product. • Ex: minimum wage • Ex: milk prices • Others?

26. Vocabulary: • Supply shock: a sudden shortage of products or goods • Rationing: dividing up goods and services when a product is needed but is in shortage • Gas rationing in the 1970’s • Raise prices (demand drops… this isn’t always possible) • Food rationing during war • Black market: business is conducted without government controls (off the books) • Illegal (there I have made the statement) • Can drop prices (bootleg DVD’s) • Can raise prices (unlocked phones, Cuban cigars, illegal products) • Spillover costs: costs that are part of production not planned for (war, pollution, spills, weather)

27. Changes in Equilibrium • When supply output changes, demand will change. • When demand for product changes, supply output will change. • The market is constantly trying to find equilibrium • When prices drop, production will change affecting supply and demand curves. • When prices escalate (gas prices) production will drop affecting supply and demand curves

28. Chapter 7: Perfect Competition creates equilibrium in a market • Many buyers and sellers participate in the market • Sellers offer IDENTICAL products • Buyers and sellers are well informed about the products • Sellers are able to enter and exit the market freely

29. Competition is not perfect: • Start up costs too high for some markets • Machines • Technology • Labor costs • Products are not equal: • Samsung vs. Apple • Resources are not equally allocated

30. Monopoly • A single supplier dominates a market • Controls the market and sets whatever prices they want • Technically illegal in the United States • PG&E, water utilities, railroads, medical developments, gasoline • False monopolies: airlines, television, phone carriers, cooperation between corporations to set pricing

31. Setting up a Business: Chapter 8 • Sole proprietor: single owner • Only one person makes the rules • One person assumes all liability (responsibility) • Partnerships: owned by two or more people • A small group makes the rules • Liability is shared amongst all owners • General partnership: all partners are equal • Limited partnership: one person takes the lead with investors or silent partners

32. Corporation • Large “entity” controlled by stock holders and run by a governing board • Limited liability of each stockholder • 20% of businesses are corporations • 90% of market controlled by corporations • Private corporations • Public corporations (sell stocks, we can own shares) • Conglomerates • Franchise: individual owner follows corporate rules • Non-profit organizations (no profits but run business)

33. Monopolies and mergers • Monopolies develop when corporations merge (combine) • Vertical Merger: Two companies merge that compliment each other: • ex: AT&T merged with DirectTV and Uverse to control a large portion of the telecommunications market. • Horizontal merger: two companies make the same thing and merge together: • Ex: Chrysler and Dodge • Office Depot and Office Max • Various Airlines merge

34. Chapter 9: labor • Labor force: non-military people who are eligible for employment • 16 years or older • Work at least one hour in a week for pay • Work at least 15 hours in a week for a family business without pay • Held jobs but did not work due to illness, vacation, strikes, bad weather, etc. • Unemployment: counts people who do not meet the above criteria • Without work and looking for work • Outside labor force • Permanently Disabled • Retired • Stay at home parents (controversial) • Students

35. Shifts in labor reflect American History • Men were farmers • Technology development shifted economic markets • Wartime shifted available labor • Women entered the work force • Migration/immigration • Blue collar versus white collar • Education and emphasis on secondary education

36. Labor and Wages • Derived demand: demand is determined by the market • (how many pizza cooks depends on how many pizzerias) • Labor Supply: the availability of people in a particular market. • Wages determine willingness to work in a market • Higher wages, more likely to work in that industry • Fringe benefits: why do people become teachers?

37. Levels of Labor: generally the more skill required, the higher demand and less competition for that career. the more pay… • Unskilled labor : requires no specialized skills, training, or education • Semi-skilled labor: minimal skills, training, or education for certain types of equipment or duties • Skilled labor : requires specialized training for complicated duties or equipment • Professional labor: demands advanced skills and education- white collar laborers.

38. Wage discrimination: • Minimum wage laws: sets a minimum amount of money paid to a laborer • More danger, more pay • Unions (featherbedding: protecting unnecessary jobs) • Discrimination pay (glass ceiling) for: • Minorities • Women • Age • Where do illegal aliens fit in this?

39. Organized labor: why unions? • 1800’s: no labor standards or protection • Unions organized to help protect unskilled laborers who were forced to work in dangerous conditions. • Strikes: refuse to work until changes are made • Collective bargaining: representatives negotiate for the greater group for wages and benefits • Right-to-work laws: outlaw unions because they protect corporations and weaken unions