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The Price System:

Supply and Demand working together to set a fair price

Carrie Hindenach

on 20 February 2013

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Transcript of The Price System:

Supply and Demand working to set prices The Price System Big Ideas:
1. We communicate through PRICE
2. We are the producers and consumers
3. We have to be free.
4. We must have access to information
5. We act on incentives - that is what motivates us.
6. We must discriminate - some must be left behind Big Ideas of The Price System Changes in a Price: Causes a SLIDE along the demand curve Non-Price Market Conditions of Demand Law of Supply: Direct Relationship Supply Schedule, Curve and Law! 1. Market Competition
2. Price of Related Goods
3. Producer Price Expectations
4. Resource Costs of Production
5. Taxes or Subsidies
6. Trade Barriers
7. Technology Non Price Market Conditions of Supply Working with supply and demand factors of the market Changing price in the Market Or the Free Market
Or Capitalism
Or Free Enterprise The Basics of Demand: Consumers:
Demand goods and services
Fulfill their wants and needs by buying stuff
Act in their own self interest:
Income effect: It is limited so we try to keep it
Substitution effect: All else being the same, we go with the cheapest. Producers:
Supply goods and services
Work for Profits (want to keep costs low)
Act in their own self interest:
The Profit Motive: If I can make money....I will Definition: The amount consumers are willing and able to buy at various price in a given time period. How much would you pay for these goods?

I phone 5

One gallon of gas

Internet connection per month

Smart phone data Demand Schedule P Qs D P Qd Demand curve:

1. Always downward sloping
2. Law of demand
3. Shows a range of possibilities
4. Because of the income effect
and the substitution effect.
5. Diminishing Marginal Utility Demand curve Demand Elasticity The amount the quantity changes in relation to price, depends on the characteristics of the good.

Some goods have drastic reactions to price changes, while others don't react at all.

The questions is....what would make you buy something regardless of the price? Inelastic Goods Elastic Goods When the price changes there is a dramatic (huge) change in the quantity demanded. A very small change in price causes a HUGE change in the amount of that good sold on a given day. When the price changes there is little or no
change in the quantity demanded. A very large change in price does not really affect the amount of that good sold on a given day. P1

P2 Q1 Q2 P1 P2 Q1 Q2 Price goes up....quantity demanded goes down. Price goes down quantity demanded goes up! The LAW OF DEMAND BUT WHAT WOULD CAUSE A CREATION OF A NEW CURVE?
WHAT WOULD CAUSE CONSUMERS TO ALL OF A SUDDEN...STOP BUYING? PRICE D D1 D2 Q Q2 Q1 INCREASE DECREASE http://www.khanacademy.org/ Microeconomics Class Reading:

Demand Elasticity:
Read together and decide what we need to know about elasticity of demand.
Paraphrase together and construct workable notes on this reading. Put this economics in our own words and bring our own meaning to it.
http://tutor2u.net/economics/revision-notes/as-markets-price-elasticity-of-demand.html Utility is the satisfaction you get from a good.
Marginal means extra
Diminishing means decreasing. Who wants a candy bar? Demand Market Forces:
1. Income (normal v. inferior good).

2. Tastes and Trends

3. Market Size

4. Consumer Expectations

5. Related Goods: Substitutes and Complements Gas Prices Reading:
Read and take notes on your part individually
Rewrite, restate, relate and respond
Grab a white board and friends that read the SAME as you.
Prepare a quick presentation to the class about your section.
Take notes the other sections Demand Assignment on Edmodo.com Class Reading Assignment Old Fashion Homework:

Pencil and Paper! Do these problems and be sure that you NAME, SHIFT AND EXPLAIN Examples:



Medicine D 0 Why?

1. The g/s is considered a necessity
2. The g/s has no substitutes
3. The g/s has no real effect on income Why?
1. The g/s is not a necessity
2. There are plenty of substitutes
3. It has an effect on income. Supply: The other side of the price system Law of supply Elasticity of supply Inelasticity of supply Supply schedule Supply curve non-price conditions of supply The Profit Motive: Producers make all decisions about supply based on profits. Costs of productions and the production process.

Step 1: Read and create a vocabulary list. Make decisions about what is most important in the reading. Write the definitions in your own words.

Step 2: Watch a "How it is Made" Episode. Write down and explain when you SAW 5 of your vocabulary words 'at work'. Real World Economics of Demand Group Work:
Group of 6 Each person completes the worksheet but divide the work and discuss your answers.Each need a GRAPH, a NON-PRICE MARKET CONDITION, and an EXPLANATION! When costs increase.....profits decrease. When costs decrease.....profits increase. All decisions are made based on profits and costs. When price goes up, the quantity supplied goes up.
When price goes down, the quantity supplied goes down. P Qs 1.00
5.00 2 million units
3 million
4 million
5 million
6 million 1 5 2 6 Supply curve is upward sloping This is because of the profit motive and producers relationship to costs of production. Price Elasticity of Supply Inelastic Unit Elastic Elastic Inelastic: Price changes significantly but there is only a small change in quantity supplies No matter what to price, producers are unwilling or unable to produce more. Large change in price and a small change in Quantity Supplies P1 P2 Q1 Q2 S1 Remember: This is a slide along the supply curve. Do NOT shift the when showing elasticity. Why? How would you graph a perfectly inelastic supply curve?
Can you think of examples? Elastic: Price changes a small amount, but the amount supplied increases significantly A small change in price, has producers
instantly increase production to gain more profits Small change in price means a large change in quantity supplied. P1 P2 Qs1 Qs2 Why? http://www.tutor2u.net/economics/revision-notes/as-markets-price-elasticity-of-supply.html http://www.khanacademy.org/finance-economics/microeconomics/v/elasticity-of-supply P Decrease Increase Qs3 Qs1 Qs2 S1 S2 S3 SHORTAGE AND SURPLUS If government gets involved the market goes into disequilibrium. Price ceilings cause shortages, price floors cause surpluses. Price Equlibrium PE QE ME: Market Equilibrium is where demand and supply meet. Demand:
Market Size
Consumer Expectations
Tastes, Preferences and Trends
Price of Related Goods
Income Supply:
Market Competition
Producer Price Expectations
Taxes and/or Subsidies
Resource Costs of Production
Trade Barriers
Price of Related Goods Monopolies: Read Mergers: Vertical, horizontal and conglomerate. http://247wallst.com/2011/03/22/the-new-generation-of-american-monopolies/ A merger between firms that are involved in totally unrelated business activities. There are two types of conglomerate mergers: pure and mixed. Pure conglomerate mergers involve firms with nothing in common, while mixed conglomerate mergers involve firms that are looking for product extensions or market extensions. A merger occurring between companies in the same industry. Horizontal merger is a business consolidation that occurs between firms who operate in the same space, often as competitors offering the same good or service. Horizontal mergers are common in industries with fewer firms, as competition tends to be higher and the synergies and potential gains in market share are much greater for merging firms in such an industry. A merger between two companies producing different goods or services for one specific finished product. A vertical merger occurs when two or more firms, operating at different levels within an industry's supply chain, merge operations. Most often the logic behind the merger is to increase synergies created by merging firms that would be more efficient operating as one. http://www.whitenova.com/thinkEconomics/supply.html http://www.college-cram.com/study/economics/supply-and-demand/equilibrium-curve-shifting-the-curve/
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