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Understanding supply and demand is crucial for grasping how a market economy functions effectively. Companies produce goods or services to generate profits while consumers seek to acquire these offerings. The interplay between demand, which reflects consumers' willingness and ability to purchase at given prices, and supply, which depends on production levels, creates market equilibrium. The principles of elasticity illustrate how price changes affect demand, with necessities showing inelastic behavior and luxuries being more elastic. Observing these forces reveals insights into pricing strategies and consumer behavior.
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SUPPLY AND DEMAND HOW DOES A MARKET ECONOMY REQUIRE THESE FORCES TO WORK, AND WORK WELL?
RE-CAP • IN A MARKET ECONOMY: • COMAPNIES/BUSINESSES PRODUCE GOODS OR SERVICES • COMPANIES/BUSINESSES WANT PROFITS • CONSUMERS WANT GOODS OR SERVICES • COMPANIES/BUSINESSES COMPETE TO GIVE CONSUMERS WHAT THEY WANT • CONSUMERS WANT TO GET A “BARGAIN” • FREE MARKET ALLOWS FOR COMPETITION AND PRODUCTION OF GOODS DEMANDED BY THE CONSUMERS • REGULATIONS ARE FEW SINCE “LAISSEZ-FAIRE” IS OBSERVED
WHAT IS DEMAND? • THE DESIRE TO PURCHASE SOMETHING AT A SPECIFIED PRICE AND TIME ACCOMPANIED BY THE ABILITY AND WILLINGNESS TO PAY • DEMAND AND WANT ARE NOT THE SAME THING • YOU MAY WANT A NEW CAR BUT…. • YOU DEMAND IT ONLY WHEN YOU CAN ACTUALLY BUY IT
DEMAND • JOE HAS A CAR WHICH REQUIRES GASOLINE • GAS PRICES ARE AS FOLLOWS: PRICE PER GALLON GALLONS PER WEEK $3.00 5 $2.50 10 $2.00 15 $1.50 20 $1.00 25 $.50 30
WHAT HAPPENED? • PEOPLE BUY LESS OF SOMETHING AT HIGHER PRICES THAN THEY DO AT LOWER PRICES • THIS IS CALLED……PRICE EFFECT or LAW of DEMAND
PRICE ELASTICITY OF DEMAND • Also known as : ELASTICITY • or – ELASTICITY OF DEMAND
WHAT IS THIS? • IF WE NEED IT, WE BUY IT • IF THE PRICE IS LOW AND WE NEED IT, WE BUY LOTS OF IT • IF THE PRICE CHANGES – EVEN UP TO 200% AND WE NEED IT, WE STILL BUY IT….. • WHAT IF WE DON’T NEED IT – WE JUST WANT IT?
H2O SCENARIO AT THE MALL • IN THE MALL I’M THIRSTY – I NEED…. WATER • I’M EXPECTING TO PAY = $1.00 BUT THE WATER = $2.00 WILL I BUY THE WATER? Yes I will – WHY?
T-SHIRT SCENARIO AT THE MALL • H&M – STORE FOR FAIRLY INEXPENSIVE YET TRENDY STUFF HAS T-SHIRTS FOR SALE • I EXPECT TO PAY $10 FOR A T-SHIRT THERE • BUT THE T-SHIRT IS ACTUALLY $15 WILL I BUY THE T-SHIRT? NO I WON’T– WHY NOT?
ELASTIC vs. INELASTIC WANTS: LUXURY GOODS NEEDS: NECESSITIES • LESS LIKELY TO BUY THESE GOODS IF THE PRICE IS HIGH • BUT IF PRICE DROPS….MAYBE WE’LL BUY • WILL BUY THESE GOODS EVEN IF PRICE CHANGES – BECAUSE WE NEED THEM!
FACTORS OF ELASTICITY UNLESS THERE ARE SUBSTITUTES for particular goods or services, we identify goods as ELASTIC or INELASTIC WHEN a GOOD or SERVICE has no SUBSTITUTE – it becomes INELASTIC
ANOTHER WAY TO LOOK AT IT: • CONSIDER ELASTIC AS A CHANGE YOU ARE RESPONSIVE TO • CONSIDER INELASTIC AS A CHANGE YOU ARE IRRESPONSIVE TO
SUPPLY in all of this….. • PRICE IS CHANGED BY DEMAND – • PRICE DOES NOT CHANGE SUPPLY – SUPPLY CHANGES PRICE
BOOK SCENARIO • THERE IS AN ECONOMICS BOOK WITH ALL THE ANSWERS TO YOUR FRIDAY QUIZZES • I ONLY HAVE ONE COPY – MY SUPPLY IS LOW • HOW MUCH WOULD YOU PAY FOR THE BOOK? • MS. GOOD COMES IN WITH 100 OF THESE BOOKS – HOW MUCH WOULD YOU PAY FOR THE BOOK? • WHAT CHANGES????
WHERE SUPPLY AND DEMAND COLLIDE…. • WHEN SUPPLY AND DEMAND INTERSECT – WE HAVE MARKET EQUILIBRIUM ALSO KNOWN AS “THE IDEAL PRICE”
REAL WORLD ECO…. • OPEC – ORGANIZATION FOR PETROLEUM EXPORTING COUNTRIES RESTRICTS THE SUPPLY OF OIL TO ALLOW THE PRICE TO GO UP
