UNIT 1 ENTREPRENEURSHIP
AND THE ECONOMY
SUPPLY AND DEMAND
HOW ARE PRICES DETERMINED?
In a free market system(capitalism)
• By the marketplace
Sellers: Want the price to be
the MOST they can CHARGE.
Buyers: Want the price to be
the LEAST they can PAY.
ECONOMIC SYSTEMS
• Pure market system: prices are set in the
marketplace based on supply and demand with
little government interference.
• Command economic systems are run by a strong
centralized government that decides how
resources will be used and sets prices.
• Mixed economies combine the principles of market
and command economies. Ex: many prices are set
in the marketplace but government laws set restricts
to eliminate monopolies, price fixing, ripping off
consumers.
DEMAND
• Demand refers to the quantity of goods or
services consumers are willing and able to
buy. Therefore:
• When the prices goes UP, demand goes DOWN.
• When the price goes DOWN, demand goes UP.
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DEMAND ELASTICITY
• The demand for some products and services
is more effected by economic conditions
such as price than others.
• Elastic demand: demand IS effected by price.
• Inelastic demand: price is NOT effected by
demand. This is more likely when there is no
substitute available and means you can charge
more without affecting demand.
• The law of DIMINISHING MARGINAL UTILITY says
that price alone does not determine demand;
other factors (income, taste, etc.) also play a role.
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SUPPLY
• Supply refers to the quantity of goods or
services producers are willing and able to
provide to the marketplace. Therefore:
• When the prices goes UP, supply goes UP.
• When the price goes DOWN, supply goes DOWN.
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EQUILIBRIUM
• Equilibrium is the price point where the
demand meets supply, and consumers will
buy all of a product supplied by producers.
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SCARCITY
• Scarcity occurs when demand exceeds
supply. This plays a large role in setting prices
for some goods and services.
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QUESTIONS
• What might be considered scarce in today’s
marketplace?
• Think about it: At what price would you
demand a cell phone?
•
•
•
•
$50?
$100?
$150?
$200?
DEMAND SCHEDULE
Price
Quantity Demanded
$50.00
$100.00
$150.00
$200.00
P
r
i
c
e
200
150
100
50
Quantity
From econedlink.org
LAW OF DEMAND
Let’s take a look at the Netflix Controversy.
• What happened to the quantity demanded of
Netflix products when the company raised its prices
by up to 60 percent?
• How does this illustrate the law of demand?
From econedlink.org
LAW OF DEMAND
Rising food prices sour Utah families:
• When the price of beef increased, a consumer
responded by substituting pork because it was
relatively less expensive. Assuming that beef and
pork are substitutes, what does this say about the
relationship between the demand for a good (like
pork) and the price of a substitute (such as beef)?
From econedlink.org
LAW OF DEMAND
• Consider that beef hamburgers and hamburger
buns are complements, or goods that go together.
If the demand for beef decreases, what will
happen to the demand for hamburger buns?
• The video mentioned the price of ice cream.
Suppose that this price is expected to increase in
the future. What will happen to the demand for ice
cream in the present?
From econedlink.org
LAW OF DEMAND
The Income Effect
• Based on the lesson from the video, would frozen
vegetables be considered a normal or inferior
good? Why?
• The video reported that laptops are normal goods.
Are other electronics, like music players, cell
phones, and televisions also normal goods? Why?
From econedlink.org
LAW OF DEMAND
The Income Effect
• Demand curve shifting:
• Shifting the demand curve to the right shows an increase in
demand; the quantity demanded is higher at each price
level. In the video, an increase in income caused the
demand curve to shift to the right for normal goods.
• Shifting the demand curve to the left shows a decrease in
demand.; the quantity demanded is lower at each price
level. In the video, an increase in income caused the
demand curve to shift to the left for inferior goods.
• Consider how future expectations of income affect
demand. For example, if you expect your income
to increase in the future, how will this affect your
demand for most goods and services in the
present?
From econedlink.org
QUESTION
• Do you think your own income would affect your
decision to purchase the cheap T-shirts versus the
more expensive ones?