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The Demand and Supply Curve Economic Model

The Demand and Supply Curve Economic Model. Objectives: Understand the demand curve Understand the supply curve What happens when supply and demand meet and what causes an increase or decrease in one or the other?. Can of Coke.

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The Demand and Supply Curve Economic Model

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  1. The Demand and Supply Curve Economic Model Objectives: Understand the demand curve Understand the supply curve What happens when supply and demand meet and what causes an increase or decrease in one or the other?
  2. Can of Coke How much are you willing to pay for an ice cold can of Coca Cola, that I will allow you to drink in class? 100, 20, 13, 8, 5 , 50 centimos Let´s graph the result, and see what we have
  3. Demand for Cusquena Cusquena is intending to launch a new citrus flavoured beer onto the market. They have undertaken market research that has shown them how many units they can expect to sell at a range of different prices. The results can be seen below:
  4. The Demand Curve As the price increases (goes up) the quantity demanded decreases (goes down) = MOVEMENT ALONG THE CURVE However, some things can actually move the curve, examples: Changes in income (how much they people get paid) Changes in consumer preference Competitor prices
  5. Movement (increase or decrease) of the demand curve Practice: In which direction (right = increase or left = decrease) does the demand curve move in the following situations: You have a very successful advertisement on TV The government increases income taxes Their product is found to be harmful to your health
  6. The Supply Curve How much you would have to be paid (in soles, by other students) to be make a Mother´s Day Card that you will make yourself (to sell to other students for their moms) For each card? 250 soles, 40 soles, 20 soles, 8 soles, 4 soles, 1 sol What do we have? Go to next slide
  7. The Supply Curve As the price increases, supply increases = MOVEMENT ALONG THE CURVE However, some things can actually move the supply curve to the right (= increase)or tothe left (= decrease) Raw materials become cheaper New machinery Labor costs go up Energy costs increase
  8. PuttingtheDemand and Supply Curves Together Wedrew a demand curve Wedrew a supply curve Whenweputthemtogetherwehave a modelfor a MARKET FOR A PARTICULAR GOOD OR SERVICE, WHERE BUYERS (DEMAND) AND SELLERS (SUPPLY) MEET
  9. Demand and Supply Curves meet Thepoint of equilibrium, wherethetwo curves meet, ormarketclearingprice(point A)iswherethequantitydemandedequalsthequantitysupplied at a certainprice
  10. Now, how do thefourdifferentpossibilities look? 1. Increase in demand - DEMAND CURVE SHIFTS TO THE THE RIGHT INCREASE IN INCOME, DECREASE IN TAXES, INCREASE IN THE PRICE OF FANTA, ESPECIALLY HOT WEATHER END UP AT EQUILIBRIUM POINT B, with a higherprice and a higherquantitydemanded
  11. Decrease in Demand 2. Decrease in demand - DEMAND CURVE SHIFTS TO THE LEFT INCREASE IN TAXES, DECREASE IN INCOME, A NEW JOB THAT PAYS LESSS, DECREASE IN PRICE OF COMPETITORS PRODUCT (FANTA), COLD WEATHER ALL SUMMER END UP AT EQUILIBRIUM POINT C, with a lowerprice and lowerquantitydemanded
  12. Increase in Supply 3. Increase in supply - SUPPLY CURVE SHIFTS TO THE RIGHT RAW MATERIALS TO MAKE THE MOTHERS DAY CARD ARE CHEAPER, YOU GET SOME NEW SCISSORS OR MARKERS OR TAKE AN ART CLASS ANY OF WHICH MAKE YOU ABLE TO MAKE THE CARDS QUICKER, YOUR TEACHERS GIVE YOU EXTRA TIME TO MAKE THE CARDS IN CLASS, FOR COKE COULD BE A NEW DISCOVERY THAT MAKES THE PROCESSS TO MAKE COKE CHEAPER, OR THE TAXES THEY HAVE TO PAY TO THE GOVERNMENT DECREASE, OR THEIR WORKERS BECOME MORE EFFICIENT IN MAKING COKE END UP AT EQUILIBRIUM POINT E, with a higherprice and lowerquantitydemanded
  13. Decrease in Supply Decrease in supply – SUPPLY CURVE SHIFTS TO THE LEFT THE COST OF THE RAW MATERIALS INCREASE, YOUR SCISSORS BREAK AND YOU HAVE TO USE OLD SCISSORS OR BAD MARKERS, OR YOUR TEACHERS DONT GIVE YOU ANY TIME TO MAKE THE CARDS IN CLASS. FOR COKE, COULD BE INCREASE IN THE TAXES THEY HAVE TO PAY, OR THEIR MACHINERY BREAKS, OR THEIR EMPLOYEES SAY THEY WANT TO BE PAID MORE MONEY.. END UP AT EQUILIBRIUM POINT F, with a lowerprice and lowerquantitydemanded
  14. NextStep, Price Elasticity of Demand Measurestheresponsiveness of demandfollowing a change in price = percentagechange in quantitydemanded percentagechange in price
  15. Price Elasticity of Demand Example: % change in demandis 10, % change in priceis 25 centimos PED = 10 = .4 25 This .4 PED meansthatdemandchanges .4% forevery 1.0% change in price
  16. Thingsthat determine priceelasticity Hownecessarytheproductis Howmany similar productsthere are Thelevel of consumerloyaltytotheproduct Theprice of theproduct as a proportion of theconsumer´sincome
  17. Price Elasticity of Demand Ifitiszero– NO CHANGE IN DEMAND WITH CHANGES IN PRICE =Perfectlyinelasticdemand(in reality, no product has zeroelasticity) Ifitisbetwen 0 and 1 = CHANGE IN DEMAND IS LESS THAN THE CHANGE IN PRICE =Inelasticdemand(insulinfor a diabetic, bottledwaterafteranearthquake, electricity, butitalsocouldbesomethinglike opera tickets, whichwealthypeoplebuy) Ifitis 1 = ONE FOR ONE CHANGE =unitaryelasticity(movietheatre tickets, expensivedesert at a nicerestuarant) Ifitisgreaterthan 1 = CHANGE IN DEMAND IS MORE THAN THE CHANGE IN PRICE =Elasticdemand(economy air travel, new shoes, PepsiorFanta)
  18. Whatdoesit mean? Companies can use PEDsfor sales forecastsorpricingdecisions ButPEDs can change and they are difficulttocalculate WE WILL RETURN TO THIS TOPIC WHEN WE TALK ABOUT PRICE (4 Ps of the Marketing Mix)
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