How do we determine prices?
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Transcript of How do we determine prices?
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WHAT DETERMINES PRICES?
Supply and Demand
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A Competitive Market
Any arrangement that brings buyers and sellers together
Physical or virtual
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Since Economics is about Choices…
Demand Supply
We see how all buyers’ and sellers’ decisions interact in the market to create prices.
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What is DEMAND?
Individual: how one person’s decisions affect price
Market: total sum of all buyers in a market
Consumers’ willingness and ability to buy an item at a given price Wants within budget constraints Refers to a behavior
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THE LAW OF DEMAND
Shows an inverse relationship between price (P) and quantity (Q)
Price affects the quantity demanded Higher prices lower quantity
demanded Lower prices more quantity
demanded Sales!
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THE LAW OF DEMAND
Why does the curve go down?
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The Demand Law exists…
1. Income effect $ increase you feel poorer, you
buy less $ decrease you feel richer, you
buy more
2. Substitution effect Pepsi vs. Coke
3. Marginal Utility Ex. All You Can Eat Buffet
Each plate makes you less happy than the plate before
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DemandSchedule vs. Curve
Schedule shows all of the combinations of quantities demanded at different prices, ceteris paribus
Curve
Plots the relationship between price and quantity demanded
Curve
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How do you shift the Demand Curve?
Tastes or Preferences
Related Goods’ Prices
Income Population (# of
buyers) Expectations
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The 5 Determinants of Demand
Affected by trends and health considerations
Complements Hot dogs and buns If P goes up of
complement, demand decreases and vice virsa
Substitutes
Pepsi vs. Coke If P of substitute
goes up demand increases
Tastes (Preferences)
Related Prices
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The 5 Determinants of Demand
If income increases Buy more
luxury/normal goods
If income decreases Buy more
normal/inferior goods
More buyers = more demand
Less buyers = less demand
IncomePopulation (# of Buyers)
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The Five Determinants of Demand
If P is expected to go up in the future, demand increases NOW
If P is expected to go down in the future, demand decreases NOW
Expectations
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SHIFT IT…
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Shift Vs. Change in Quantity Demanded
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GROUP ACTIVITY
You are in charge of opening a firm offering a specific good or service. Decide on a product name, slogan, and then answer the three basic questions of production: what you will produce, how you will produce it, and for whom you will produce it. After, draw a potential demand curve for your expected market of the good or service. Explain how your demanders’ curves could shift in or out using the determinants of demand. Be prepared to justify your answers as expert economists.
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Supply
Producers’ willingness and ability to sell a good or service
Refers to a behavior
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THE LAW OF Supply
Shows a direct relationship between price (P) and quantity (Q)
Price affects the quantity supplied Higher prices higher quantity
supplied Lower prices less quantity
suppliedPRODUCERS LOVE HIGHER PRICES!
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THE LAW OF SUPPLY
Why does the curve go up?
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The law of Supply
Increasing Opportunity Costs Increasing production
Need more space Can’t add factories and
machines fast enough Labor is used
Crowding out results (too much congestion)
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A “profit- maximizing” producer wants to produce more at a higher price.
Law of Increasing opportunity costsSupply Schedule
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Movement along the Curve vs. ShiftChanges in the quantity supplied comes because of a price change
A shift in the Curve comes because of a change in a determinant of supply.
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How do you shift the Supply Curve?
Sellers (#) Productivity Input Costs Expectations Related Prices Cash Change
Taxes or subsidies
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The 6 Determinants of Supply
If more suppliers Shifts right
If less suppliers Shifts left
Increase supply Technology,
capital innovation Decrease supply
Natural phenomenon hinders productivity
Sellers Productivity
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The 6 Determinants of Supply
If inputs price increases Shifts left
If inputs price decreases Shifts right
If price will go up in the future, the supply NOW decreases
If price will decrease in the future, the supply NOW increases
Input Prices Expectations
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The 6 Determinants of Supply
If related price increases Shifts left
If related price decreases Shifts right
Subsidy Supply shifts right
Tax Supply shifts left
Related Prices Cash Change
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Market Equilibrium
Click icon to add pictureP= $1.00Qs = 10 million bottles
WHEN SUPPLY MEETS DEMAND
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