Economics

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Economics

January 30,  2012

SUPPLY AND DEMAND

We have a supply and demand system.

Demand

The amount of a good or service that a consumer is willing and able to buy at various possible prices during a given period of time.

Example

·       You dream of driving a ford mustang. Are you willing and able to buy one for $40,000. Nope! But if they sell them for $5,000 you are more likely to be able to buy one.

·       Is there a demand for swimming suites right now? No. But this summer there will be.  Demand is different at different times. The demand one day can be very different from the next.

The Law of Demand

·      As price goes up, demand goes down.

·      As price goes down, demand goes up.

·      Their relationship is an inverse (opposite).

THE NUMBER ONE THING THAT AFFECTS DEMAND… IS PRICE!

THREE THINGS THAT EFFECT DEMAND

1)          INCOME EFFECT

·      Purchasing power- the money you have to spend on goods (after) and services after taxes.

·      Income effect- as you make more money you buy more stuff, the more money you have the more products you demand. If you have less money, you buy less.

o    If the price of a required or needed product drops and you are spending less money on that product, you then have more money leftover to spend on other products, increasing the demand on those products.

§  EXAMPLE: If gas prices drop, then you will have more money to go to the movies. If gas prices go up, then you may not have enough money to go to the movie because you spent all of your money on gas!

2)    SUBSTITUTION EFFECT

·      When similar (but not identical) products can be substituted (swapped) for one another

·      When two different products satisfy the same basic need.

o   EXAMPLE:

§  Burger King vs. Wendy’s or Whopper vs. single. If Burger King has a sale on Whopper for .99 then the demand on a Wendy’s Single will go down (because it is $2. 99).  You would rather pay .99 for a burger than $2.99. 

§  Fruit Loops…a substitute is Kroger Cereal Loops Another kind of substitute is a Generic product….Fruit O’s in a bag. Generic is the least expensive.

§  Butter and Margarine

§  Sugar and Splenda, Sweet and Low

§   

Generic products

·      Lease expensive, substitute for another product.

·      Introduced in the 1970’s and hit their peak (selling the most) in 1980’s-

Diminishing Marginal Utility (satisfaction)

·      As you consume more and more of a product you get less and less satisfaction from consuming that product.

o   EXAMPLE:

§  At C. C.’s the first piece of pizza tastes really good, the fifth…not near as good.

§  All you can eat buffet, Movie theaters, Discount ice cream.

Page 93 schedule and graph.  Know the demand schedule (a list of the information) and demand curve, make sure you understand it.  This is what you will have to do on your supply and demand poster.

CHANGES IN DEMAND

1). Consumer Tastes and Preferences

·      Popular Items: Musical group with new CD

·      Seasonal Purchases: Easter, Halloween, Christmas (regardless of price, demand will increase) Valentines Day- demand increases in flowers and chocolate.

·      Public attitude toward a company or product.

EXAMPLES

Þ   Positive Effects -after the super bowl more people will download Black-eyed Pea songs because more people will be exposed to them after their halftime performance.

Þ   Negatives- people stopped buying bp gas after the oil spill. 6 years ago no-one would by Nutella because Coby Bryant was doing their advertisement. Then he was accused of rape. No one would buy peanut butter with a “rapist” picture on it.