Supply, Demand, & Price Setting

1. Supply, Demand, & Price Setting • http://www.youtube.com/watch?v=1mo_D8qRjTU Price Setting Exercise: Your parents are away for the weekend and you and a group of your friends are throwing a party with the goal of making a profit. You need to decide how much to charge for admission in order to make the most profit. Decide how much you are going to charge for admission per person and why you came to that price. Be sure to consider how many people you can actually fit in your house or apt. Also, be sure to think about how much your customers (high school students from Clairemont High) can afford to spend on a party. Also, make an argument to convince people to come to your party. Costs of production must include the following: Flyers (5 cents each) Soda (1 dollar per can) Pizza (8 dollars per pie) If you add items you must account for their costs. Each group will have access to 1 iPad to research costs. Don’t worry about trying to find the cheapest product, otherwise you won’t have time to complete the activity. All items/activities you add must be legal for persons aged 17 and under to consume or participate in.

2. Your written submission must include • The names of the people in your group • How many people you are planning on having • The costs of production • Your admission price • Your expected profit • Also, make a flyer on a PowerPoint slide convincing people to come to your party. • Email it to me mrkatzman84@gmail.com

3. Chapter 4: Demand

4. The Law of Demand • Demand is the desire to own something and the ability to pay for it. • Therefore, if a small amount of people have the ability to pay for product, there will be little demand for it. • The law of demand states that when the price of a good is lower, the consumer will buy more of it.

5. The Demand Curve • Shows the relationship between the price of a good and the quantity purchased. • Follows the law of demand; as demand increases, price decreases

6. Effects of Rising Prices: The Substitution Effect • Substitution Effect • When the price of one good rises, consumers become more likely to buy an alternative good as a substitute • For instance, If I eat chicken every Monday and Wednesday, but the price of chicken rises, I may choose to start eating turkey instead of chicken on Wednesdays.

7. Limits of the Demand Curve • The demand curve only shows changes in prices, not other conditions that may affect demand.

8. Changes in demand • Income • Consumer Expectations • Population • Consumer Tastes & Advertising

9. Changes in Demand: Income • the income effect is the change in income and how that change will impact the quantity demanded of a good or service. As income increases, so does the quantity of goods and services demanded. As income decreases, so does the quantity of demand for goods and services. • For instance, if am able to get a teaching job by next summer, I will have the income necessary be able to fly to Italy for my cousin’s wedding in July.

10. Changes in Demand: Consumer Expectations • Expectation of future price affects demand • For instance, lets say I want to buy a big TV in late October, but I know that if I wait one more month I can get a great deal starting the day after Thanksgiving. Thus, the immediate demand for a big TV goes down, since people know that they can get a better price a month later.

11. Changes in Demand: Population • Changes in the size of a population will affect the demand • Rise in population will increase a demand for houses, food, and many other goods and services • Example: At the end of WWII many soldiers came home, got married, and had families. This led to a “baby boom,” which caused a higher demand for baby clothes, baby food, and books on baby care.

12. Changes in Demand: Consumer Taste & Advertising • Trends may increase demand • Examples: • Paint jeans in the late nineties • Bell bottom jeans in the 60s • Advertising also helps increase demand • Example: godaddy.com

13. Complements, Substitutes, & Inferior Goods • Complements • Two goods that are used together • Skis and ski boots • If demand for skis goes down, so will demand for ski boots • Substitutes • Goods used in place of one another • Margarine for butter • Inferior goods • Macaroni & Cheese • LCD TV’s • Generic Cereal

14. Warm Up In your book, find the definitions for elastic demand and inelastic demand. Give two examples of each of products that are “elastic” and “inelastic”

15. Elasticity of Demand • The degree to which demand for a good or service varies with its price. Normally, sales increase with drop in prices and decrease with rise in prices. As a general rule, appliances, cars, confectionary and other non-essentials show elasticity of demand whereas most necessities (food, medicine, basic clothing) show inelasticity of demand (do not sell significantly more or less with changes in price). Also called price demand elasticity.

16. Factors Affecting Elasticity • Availability of substitutes • Lack of available substitutes means less elasticity • Ex: life-saving medicine; your demand will not decrease if the price goes up • Relative importance • If a good that you buy in large quantities increases, you may have to consume less of it. • Necessities vs. Luxuries • Food is a necessity • A fancy car is a luxury • Change over time • Products might become temporarily elastic until people accept higher prices • Ex: gasoline; people have begun spending money on cars that get better mileage per gallon and even electric cars

17. Elasticity & Revenue • Total revenue (also known as gross revenue or gross for short) is the amount of money a company receives from selling its goods • Price x Quantity sold ₌ Total Revenue • If I sell 10 t-shirts for 10 dollars each my total revenue would be $100 • If the t-shirt company increases their price to $15 dollars a shirt but sells 3 less t-shirts they would still make $5. If they less 4 less t-shirts they would lose $10. Thus, companies with elastic demand must be careful about setting prices.