Supply, demand and competition
How are prices set? Seller? Buyer? Both buyer and seller set the price!
Setting an Economy’s Price System
To understand how a nation’s economy functions it is important to understand the nation’s ______ __________.
The forces that determine price are called the forces of _____________ and ___________.
The place where these two forces meet is called the ______________________.
Basic Facts
_____________ have a great influence on the price of goods and services. Why?
Market =
Voluntary exchange – Buyers and sellers work out a deal that suits _________ sides.
Demand
Demand – shows how many of a product consumers are _______________ and _______ to buy at a
___________________price during a ______________time period.
Ex. – Swimming suits have a different price and quantity demanded in summer vs. winter.
Law of Demand
Explains the _______________ people are willing to buy as ________ change.
When can demand occur?
Three factors that affect what and how much people buy are ________________________________,
______________________________, and ____________________________.
Price goes up – demand goes down
Price goes down – demand goes up
Diminishing Marginal Utility (DMU)
Utility Total satisfaction _________ with additional units purchased, but additional satisfaction _____________.
People will buy until price ______________ satisfaction.
Price decreases, people will buy _________.
Real Income Effect
Income __________ the amount of money people can spend.
People cannot keep buying the same amount if price _____________ and income stays the same (____________
____________________ ____________________)
People are forced to _____________ if price increases.
If price decreases and you buy the same amount, your real income has ___________________.
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Demand curve
Demand Curve is a ________ _________ that shows the amount of a product that will be purchased at each
________; it shows an inverse relationship and is always _____________________.
p
d
Remember!!
A change along the curve indicates a change in ________ and a change in ____________________________.
A change of the curve (right or left) indicates an across the board change in _____
As price __________________, the quantity demanded ___________________.
As price __________________, the quantity demanded ___________________.
P
Q
Price per gallon of water
Bottles per week
JO
.75
.50
.35
.25
Pat
90
130
180
290
Demand for hot chocolate in December at the skating rink
Price
$.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
Quantity Demanded
30
25
20
15
10
5
0
2
50
70
100
130
Demand Determinants
_______________________________ that will affect the amount people will buy. Includes changes in population,
_____________________, and ________________________________________.
Prices of Related Goods
What are substitutes?
Give 2 examples?
What are compliments?
Give 2 examples?
Income
Normal Good – a good for which demand _____________ as consumer incomes rise (milk)
Inferior good – a good for which demand _____________ as consumer incomes rise (ground chuck, bus rides)
As income _________ consumers tend to switch from consuming these inferior goods to consuming normal
goods.
Preference/Taste – likes and dislikes in consumption
Consumer Expectations – change in __________price of goods. Change in ___________ income.
Population change – as the number of __________________ in a market changes the ___________ will change.
Law of Supply
The amount _____________ are willing to provide at various prices.
As price _______________, supply _______________.
As price _______________, supply ________________.
_______________________________________ - Adding units of a factor of production will increase output for a
time. Eventually output will decrease.
Supply Schedule & Curves
A Supply Schedule displays the quantity of a product supplied at each price
Price per bottle
.75
.50
.35
.25
Bottles supplied
200
130
75
50
3
Supply of shovels before a large snowstorm sold at Lowes
Price
4.00
8.00
12.00
14.00
Quantity
supplied
5
10
15
20
Determinants of Supply
Technology – If more efficient technology is discovered, what happens to production costs?
Why?
Price of Relevant Resources – Those resources employed in the production of a good.
____________________________________ – Price of a good that uses some of the same resources as used to
produce the good in question.
Producer Expectations – shift production according to ___________ prices.
_______________________ - number of producers increases the number of supply
Government restrictions –
Supply and Demand
If price falls, _______________ will increase and ________________ will decrease.
If price rises, demand will ______________ and supply will ______________.
Equilibrium price –
Shortage and surplus – When demand is ______________than supply, a _____________ occurs.
What happens to prices in a shortage?
In a surplus?
Why?
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Price Controls
Price Ceiling –
Price Floor -
Price Elasticity
What is price elasticity?
How is price elasticity determined?
.
Types of Price Elasticity
Elastic Inelastic –
Steak?
Milk?
Gasoline?
What Products are Subject to Elastic Demand?
_____________________________ - Most customers want luxuries and will consider buying them if price drops.
If Price Represents a Large Portion of Family Income
e.g. – Mortgage Rates drop from 6.5% to 5.5% people will refinance.
Availability of Substitute Items - e.g. Steak/chicken
___________________________ - Computers, cars, washers, dryers will be in greater demand if the price drops.
What Products are Subject to Inelastic Demand?
Necessitites – Milk, gasoline
Drugs - ___________________ (heart medicine, antibiotics)______________________ (heroin, cocaine)
Products with _____________________________________________
Insulin, cancer drugs, etc.
Salt in Middle Ages (preservative)
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Competition
Competition will exist if different businesses produce _________ products.
What is needed for there to be perfect Competition?
1.
2.
3.
4.
5.
Market Price is __________________________________ price.
How is market price/equilibrium price determined?
Imperfect Competition
One group can have an impact on price.
Barriers to entry
_________________________________Some goods and services are protected from duplication by the
government.
__________________________________ - large amount of capital is needed to begin.
______________________________________– Companies control materials and do not sell to competitors.
Monopoly
One group controls the market.
What can sellers do in a Monopoly?
Monopoly Types
Natural Geographic Technological Government Cartel 6
Oligopoly
A few businesses in compeition
4 characteristics of an Oligopoly
What are common in Oligopolies? Why?
Oligopoly examples
Movie studios
Television
Food processing
Telecommunications
Monopolistic Competition
1.
2.
3.
4.
5.
What are key factors in a Monopolistic competition? Why?
Mergers
One company joins with another.
Horizontal Vertical Conglomerate Government Policies
What was the biggest industry in the U.S. in the late 1800s?
Who set out to stop monopolies with “trust-busting” policies to break up large businesses?
What percentage of merger’s need to be approved by the government?
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