7-1 L ECTURE LAUNCHER PAGES PAGES

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1 7-1 L ECTURE LAUNCHER Proctor & Gamble s introduced disposable diapers to the marketplace in At first parents only used Pampers for special occasions. Today, 95% of American parents use disposable diapers at a cost of about $2,100 a child. Why do you think the change took place gradually? How are the concepts of marketplace and voluntary exchange linked to the Laws of Demand? PAGES I. The Marketplace A. Consumers influence the price of goods in a market economy. B. Demand is how people decide what to buy and at what price. C. Supply is how sellers decide how much to sell and what to charge. D. A market represents actions between buyers and sellers. Describe two different types of marketplaces in which you shop. (Possible response: I buy things at the mall where the seller and the buyer meet face to face. I also order products on the Internet the buyer and seller only communicate via computer. PAGES II. Voluntary Exchange A. The seller sets the price. B. The buyer agrees to the product and price through the act of purchasing product. C. Supply and demand analysis is a model of how buyers and sellers behave in the marketplace. Suppose that the buyer does not agree to the product and price. Other than change the price, how can the seller convince the buyer to agree to the price? (The seller can change the product a little so that customer is more satisfied. The seller can market the product in such a way as to create a perceived need that the customer did not see before.) Daily Lecture Notes 40

2 7-1 PAGES III. The Law of Demand A. Demand is created only when the customer is both willing and able to buy product. B. As price goes up, quantity demanded goes down. As price goes down, quantity demanded goes up. C. Real income effect is when people are limited by their income as to what they can purchase. D. Substitution effect is when people can replace one product with another if it satisfies the same need. E. Utility is the term used to mean customer satisfaction, or the power a good or service has to satisfy a want. F. People will purchase additional items until the satisfaction from the last unit is equal to the price. G. The lessening of this satisfaction with each additional purchase is called diminishing marginal unity. What are some reasons that people substitute one product for another? What are some reasons that people continue to buy a product despite its price? (They substitute because the price of one rises and it doesn t seem worth the rise in price or the person s income decreases and they can t afford the product. They continue buying the product because their income is high enough that they can still afford it, or the product has a quality that the person is unwilling to give up regardless of the price.) end Daily Lecture Notes 41

3 7-2 L ECTURE LAUNCHER Vending machines of the future will have variable pricing. On a winter day, a soda may cost only 50 cents, but on a summer day it may cost $1.00. What other variables might increase, or decrease, the demand for soda? PAGES I. Graphing the Demand Curve A. A demand schedule is a table of prices and the quantity demanded at each price. B. Lists quantity demanded at different prices C. A demand curve graphs the quantity demanded of a good or service at each possible price. Why do you think graphing the demand curve would be useful to businesses? (By having a graph that expresses all the possible prices and quantity demanded, a business can better predict its financial future.) PAGE 180 II. Quantity Demanded vs. Demand A. A change in quantity demanded is caused by a change in the price of a good. B. If something other than price causes demand to increase or decrease, this is known as a change in demand and shifts the demand curve. Think of some factors or events other than price that can cause demand as a whole to increase or decrease? Give examples of such a factor or event. (Changes in the environment or political climate can cause demand to increase. For example, if there is a blizzard the overall demand for snow shovels will probably increase. If a large scale war suddenly ends, the demand for weapons will decrease.) Daily Lecture Notes 42

4 7-2 PAGES III. Determinants of Demand A. Population B. Income C. Tastes and preferences, including fads D. Substitutes are when a new competitor is added or an old competitor leaves the market. E. Complementary goods are products that rely upon one another, demand for one affects demand for the other. For products that fill the three basic needs (food, clothing, and shelter), which determinant(s) of demand would be the most significant and why? (Substitutes and/or income should be the most significant determinants. Income will affect how much a person can afford to spend on any one item of clothing or meal. Substitutes make it possible for the consumer to choose a different item to meet the need.) PAGES IV. The Price Elasticity of Demand A. How much consumers respond to a given change in price is elasticity. B. Elastic demand occurs when the demand for some goods is greatly affected by the price. C. Inelastic demand occurs when the demand for some goods is less affected by price. D. How many substitutes exist and how closely they provide the same quality and service affects elasticity of demand (fewer or no substitutes make demand inelastic). E. Percent of a personal budget spent on that item affects elasticity of demand (the higher the percent of budget, the more elastic the demand). F. How much time consumers have to adjust to the new price affects elasticity of demand (more time makes for greater elasticity). Daily Lecture Notes 43

5 7-2 Do you think it is in a company s best interest to drastically change the price of a popular product and give consumers months to buy the product at the new price? Why or why not? (It depends upon the type of product and whether or not the price was increased or decreased. If it is a product with elastic demand and the price is decreased then the longer time at the lower price will mean more buyers. However, if the price is increased, the longer time period will give people time to find other options substitutes, doing without, etc.) end Daily Lecture Notes 44

6 7-3 L ECTURE LAUNCHER In the early days of the telephone, human operators had to physically connect each call. The phone companies thought that they would always have enough operators to do the job. As the telephone became increasingly popular, what happened to the cost of labor for operations? About what percentage of your calls involves contact with a telephone operator? Why were telephone companies willing to supply more automated methods of connecting telephone calls? PAGES I. The Law of Supply A. Supply is the willingness and ability of producers to provide goods to the consumer. B. As prices rise, the quantity supplied generally rises. C. As prices fall, the quantity supplied falls. D. A direct relationship exists between price and quantity supplied. What would happen to the price of computer chips if a company opened anew chip manufacturing plant that produced billions of chips? (The price of chips would fall because the supply would exceed demand.) PAGES II. The Incentive of Greater Profits A. Increase in price and increase in production leads to an increase in profits. B. Higher prices encourage more competitors to join the market. C. Higher prices potential suppliers into actual suppliers, adding to the total output. Why do higher prices encourage more competitors to enter an industry? Explain your answer in terms of risk and profit. (If the prices go up, possible competitors now see that there is more money to be made than before. The gain seems more worth the risk than it did before.) Daily Lecture Notes 45

7 7-3 PAGES III. The Supply Curve A. Graphs and tables can explain the law of supply. B. A supply schedule shows the quantity supplied at each given price. C. A supply curve graphs the quantities supplied at each possible price. D. The relationship between quantity and price is direct and always moving in the same direction. Do you think graphs and tables are good visual indicators of supply? (Answers will vary. Students should discuss how by visually measuring supply in a graph, it is easier to see how the supply curve moves and effects the economy.) PAGES IV. Quantity Supplied vs. Supply A. A change in quantity supplied is caused by a change in price. B. Something other than price can cause a change in supply as a whole to increase or decrease. When something other than price causes the supply to increase, what do you think happens to price? Explain why. (The price will decrease because the supply will be too great.) PAGES V. The Determinants of Supply A. The price of inputs or the cost of production raw materials, wages, insurance, utilities, etc. can cause increase in supply. B. Competition or the number of companies in an industry can cause an increase in supply. C. An increase in taxes can cause a decrease in supply. D. An improvement in technology or the science used to develop new products or methods of production and distribution can cause an increase in supply. Daily Lecture Notes 46

8 7-3 Give specific examples of inputs (production costs) for a video store. (Cost of videos; wages for employees; insurance for building and workers; phones, electricity, heat, and air conditioning for the building; cost of candy and soda to sell) PAGE 192 VI. The Law of Diminishing Res A. Adding units to increase production increases total output for a limited time period. B. The extra output for each additional unit will eventually decrease. C. Businesses will continue to add units of a factor of production until doing so longer increases revenue What are some different ways that factors of production can be increased? Choose one of your examples to explain the law of diminishing res.(more employees can be hired, more raw materials can be purchased, more machines can be bought to make the product, more stores can be built, etc. If a company continues to build toy stores, they will increase profits. However, at some point the amount of money spent to build and maintain the new stores will not bring in enough extra profit to warrant the increased expenditure.) end Daily Lecture Notes 47

9 7-4 L ECTURE LAUNCHER Toy manufacturers rarely charge the equilibrium price for the season s hottest toy. What is the short-term result when demand exceeds supply? PAGES I. Equilibrium Price A. In the real world, demand and supply work together. B. The price at which the supply meets the demand where the two curves intersect is the equilibrium price. What is the equilibrium price and why is it important? (The price at which supply and demand meet; because it shows how the market works to establish prices.) PAGE 195 II. Shifts in Equilibrium Price A. If the demand curve shifts due to something other than price, the equilibrium price will change. B. If the supply curve shifts due to something other than price, the equilibrium price will change. Suppose that your jeans are at the equilibrium price. There is suddenly a shortage of cotton in the world market. What will happen to the demand curve, the supply curve, and the equilibrium price? (The supply curve will shift to the left, meaning that less pairs of jeans will be produced. The demand curve will remain the same. The price will go up. Then the demand will decrease because the price will have increased. Finally the equilibrium price will be higher than before.) Daily Lecture Notes 48

10 7-4 PAGES III. Prices Serve as Signals A. Rising prices signal producers to make more and consumers to purchase less. B. Falling prices signal producers to make less and consumers to purchase more. C. Shortages occur when the quantity demanded (at equilibrium price) is greater than quantity supplied. D. Surpluses occur when the quantity supplied (at equilibrium price) is greater than quantity demanded. E. Market forces can cause the prices to rise or fall to correct shortages and surpluses. Think of a situation in which it is important that the government prevent market forces from dealing with shortages and surpluses. (Possible response: In a natural disaster, such as a flood, many people need water and food. At such a time there is a shortage of clean water for drinking. If government did not intervene, market forces would cause the prices of water (needed for basic human survival) to increase to a point that many people could not afford it, and they would be ill or die.) PAGES IV. Price Controls A. Price ceilings are a maximum price set by the government to prevent prices from going above a certain level. B. Items in short supply might be rationed. C. Shortages can lead to a black market, or illegal places to purchase such products at exorbitant prices. D. Price floors are minimum prices also set by the government to prevent prices from going below a certain level. E. Price floors set minimum wage levels and support agricultural prices. Consider the examples of farmers and price floors from the text. How can these price floors actually hurt the economy? (The price floors might encourage farmers to overproduce at times when regular production would still earn them a profit. In this way the consumer does not always get the best product for the best price.) end Daily Lecture Notes 49