DEMAND Different people place different valuation on the same good. Meaning they will pay different prices for the same good (Love, Like, Hate relationship) In general, people want to buy more of any good at lower prices. And they will buy less at higher prices, this is called the LAW OF DEMAND. But it does not tell us how much more or less. SUPPLY Producers are driven by the profit motive. Therefore they will supply more of a good at higher prices, and less of the good at lower prices. This is called the LAW OF SUPPLY. These laws apply to normal goods, but not inferior goods. Normal goods = income rises, we want more Inferior goods = income rises, we want less Determinants of Demand 1. 2. 3. 4. 5. Tastes and Preferences Income Population Substitutes (PowerAde over Gatorade) Complements (Tires and cars) Determinants of Supply 1. 2. 3. Size of Industry Technology Cost of Inputs (steel prices for cars, rubber for tires or weather) Price of Related Outputs (price of tablets goes up **As more firms enter the industry, the market supply curve will shift out, driving down prices. 4. Changes in determinants will cause a shift in that line, which is a whole new line. The price change is always caused by a shift. Shift in Demand = Change in demand This a whole new line Movement Along Demand = Change in Quantity Demanded This is the same line Definitions Utility Marginal Utility Largest amount of money consumer will give up for one more unit of that good. Total Utility Amount of satisfaction consumer gets from buying a product. Largest sum of money a consumer is willing to spend for a bundle of goods. Diminishing Marginal Utility Utility, or satisfaction, decreases with each marginal use. Opposite can be true too. Examples? For a given change in price, there is a small change in quantity. The product is unresponsive to the price change. QD changes by a smaller percentage than price changes. P up 10%, QD down 5%. Examples Necessities - Insulin No close substitutes - beanie babies, cabbage patch dolls Small fraction of income - shoelaces, salt For a given change in price, there is a large change in quantity. The product is very responsive to price change. QD changes by a larger percentage than price changes. P up 10%, QD down 15% Examples Luxury Goods Large percent of income Many close substitutes - Beef/Chicken, Ford/Chevy, Soup brands Inelastic / Elastic usually depends on number of substitutes. 1948 – McDonald’s Hamburgers 1968 – Big Mac 1973 – Quarter Pounder 1981 – McRib 1985 – Mc BLT 1991 – McLean Deluxe 1993 – Arch Deluxe 2001 – Big N’ Tasty 2007 – Angus Third Pound 1993 – $23.5 Billion 1995 – $19.9 Billion Market Share Loss of 12% 1% = 800 Million in an 80 Billion Dollar Industry That’s a $9.6 Billion Dollar Loss in Profits 1999 – $33.6 Billion Gasoline prices Jimmy Johns Subs Titliest Golf Clubs Home prices Lawn mowers Bears season tickets Are these elastic or inelastic, explain why?