Supply and Demand

1.2

Market EconomyHow are prices

determined in a “market economy”?

What does the term “market economy” mean?

Supply and Demand What does the word “demand” mean? A willingness to pay a price for a G/S Let’s graph an example of demand: It’s the summer, it’s hot and you’re thirsty. You come across

a lemonade stand. How many cups would you buy if the price was $1 a cup? (Let’s assume the lemonade is deliciously refreshing.) For $0.50 a cup? For $2 a cup? For $3 a cup? For $5 a cup? For $10 a cup? For $0.10 a cup?

Supply and DemandCheck for understanding:

As quantity demanded increases, how is price affected?

As price increases, how is the quantity demanded affected?

Supply and Demand What does the word “supply” mean? Amount of a G/S made available to consumers Let’s graph an example of supply:

You are running a lemonade stand. How many cups would you make if you could sell it for $1 a cup? (Let’s assume that it costs you $0.25 to make a cup.) For $0.50 a cup? For $2 a cup? For $3 a cup? For $5 a cup? For $10 a cup? For $0.10 a cup?

Supply and DemandCheck for understanding:

As quantity demanded increases, how is price affected?

As price increases, how is the quantity demanded affected?

Market Equilibrium

Market Equilibrium Therefore, how does demand affect prices?

Imagine this scenario: It is the hottest day of the year, you haven’t had anything to drink, and you spent the whole day lying by your friend’s pool. On your way home, you come across the same lemonade stand.

How would prices compare to the original situation? Why?

Market Equilibrium

Imagine this scenario: It is a brisk autumn evening, and you spent the whole day closing up your friend’s pool. Her mom baked warm cookies, and served pumpkin hot chocolate. On your way home, you come across the same lemonade stand.

How would prices compare to the original situation? Why?

Market Equilibrium Supply can change prices too.

How so?

Imagine this scenario: The mall only has one pair of the gold-plated Beats By Dre (TM) left and they are back-ordered from the warehouse (plus, your internet connection is down due to the snow).

How would prices compare to if the mall had a new shipment ready?

ScarcityUnlimited Wants vs. Limited MeansThis forces economic decisions

Price of GoodsOne of the biggest factors that influence

prices : INFLATION

What does “inflation” mean?General rise in prices

Why does inflation occur?Many causes, but when too much money,

chases too few goods.And Supply and Demand

Examples of Inflation1998

Cost of a new home: $181,900

Cost of a new car: $17,200 Cost of a first-class stamp:

$0.32 Median Household Income:

$38,568 Cost of a gallon of regular

gas: $1.06 Cost of a dozen eggs:

$1.09 Cost of a gallon of Milk:

$3.16

2014 Cost of a new home: $188,900 Cost of a new car: $32,069 Cost of a first-class stamp: $0.49 Median Household Income:

$50,230 Cost of a gallon of regular gas:

$1.93 Cost of a dozen eggs: $2.23 Cost of a gallon of Milk: $3.65

Pretend I’m giving you all a $500 gift. Make a list (including prices) of everything you would do (not just buy) with that amount.

Be sure to keep a running total, so that you don’t go over your gift amount.

Wants vs. NeedsWANTS What are “wants”?

What are some examples of “wants”?

NEEDS What are “needs”?

What are some examples of “needs”?

Now, go through your list you made from the last slide, and write a “W” for want, or a “N” for needs next to every item of your list. When finished, exchange with a neighbor and check their work.

Wants Needs

Utility an economics term used to describe

people’s tastes and preferences“how much enjoyment someone gets out

of consuming a good”

Why do some people buy 3 glasses of lemonade and others buy only 1 at a price of $1 a cup?

Diminishing Utility

Why do you buy 2 cups of lemonade at $0.50 a cup, but not 50 cups of lemonade at $0.02 a cup?

This is Diminishing Utility“utility goes down for each time”

Closing Time How much money is enough?

Using this concept, do you think that money increases happiness, or simply decreases unhappiness?