Price Determination
How is the price of an ipad determined? Why $499? What does Apple have to consider when setting that price? Does the buyer have a say in what the price is?
How much does it cost to produce an ipad? Cost: $262 Profit: $238 Source: The Economist
Why do gas prices constantly change?
Gas Prices? Law of Demand Law of Supply T R I B E AND T I G E R S
http://switchboard.nrdc.org/blogs/smui/assets_c/ 2012/03/gas-graph-MHred-6001.html
Putting a Market Together The interaction of buyers and sellers makes a market. Equilibrium:only one price and quantity combination is compatible with the interests of both buyers and sellers. Equilibrium is located where the demand curve and supply curve intersect. No shortage exists. No surplus exists. Qd = Qs = Qe. P P e Q e S D Q
Disequilibrium Shortage (excess demand) Surplus (excess supply) quantity demanded quantity supplied when the price is below the equilibrium, QD increases but QS decreases. when the price is above the equilibrium, QD decreases but QS increases. Price QD QS $6 0 35 $5 11 27 $4 21 21 $3 31 14 $2 41 7 $1 51 0 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 5 10 15 20 25 30 35
Price QD QS $6 0 35 $5 11 27 $4 21 21 $3 31 14 $2 41 7 $1 51 0 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 Surplus shortage 5 10 15 20 25 30 35
Market Equilibrium Surplus Quantity demanded is less than quantity supplied Q d < Q s Equilibrium Quantity demanded is equal to quantity supplied Q d = Q s Shortage Quantity demanded is greater than quantity supplied Q d > Q s
Supply and Demand are put together to determine equilibrium price and equilibrium quantity Demand Schedule P Qd $5 10 $4 20 $3 30 $2 50 $1 80 P $5 4 3 2 1 o S Equilibrium Price = $3 (Qd=Qs) 10 20 30 40 50 60 70 80 Equilibrium Quantity is 30 D Q Supply Schedule P Qs $5 50 $4 40 $3 30 $2 20 $1 10 99
Demand Schedule P Qd $5 10 P $5 4 3 What if the price S Supply Schedule P Qs $5 50 $4 20 2 increases to $4? $4 40 $3 30 $2 50 $1 80 1 o D 10 20 30 40 50 60 70 80 Q $3 30 $2 20 $1 10 100
At $4, there is disequilibrium. The quantity demanded is less than quantity supplied. Demand Schedule P Qd $5 10 $4 20 P $5 4 3 2 Surplus (Qd<Qs) S How much is the surplus at $4? Answer: 20 Supply Schedule P Qs $5 50 $4 40 $3 30 $2 50 $1 80 1 o D 10 20 30 40 50 60 70 80 Q $3 30 $2 20 $1 10 101
Demand Schedule P Qd How much is the surplus if the price is $5? P $5 S 4 Supply Schedule P Qs $5 10 $4 20 $3 30 3 2 What if the Answer: price 40 decreases to $2? $5 50 $4 40 $3 30 $2 50 1 D $2 20 $1 80 o 10 20 30 40 50 60 70 80 Q $1 10 102
At $2, there is disequilibrium. The quantity demanded is greater than quantity supplied. Demand Schedule P Qd $5 10 $4 20 $3 30 $2 50 $1 80 P $5 4 3 2 1 o Shortage (Qd>Qs) S How much is the shortage at $2? Answer: 30 D 10 20 30 40 50 60 70 80 Q Supply Schedule P Qs $5 50 $4 40 $3 30 $2 20 $1 10 103
How much is the shortage if the price is $1? P $5 S Demand Schedule P Qd $5 10 $4 20 $3 30 $2 50 $1 80 4 3 2 1 o Answer: 70 D 10 20 30 40 50 60 70 80 Q Supply Schedule P Qs $5 50 $4 40 $3 30 $2 20 $1 10 104
At $5 a piece, is the cronut too cheap?
What should Ansel Bakery do to solve this shortage problem? Prices are signals that tell a consumer or producer how to adjust. Increasing the price for the cronut would make consumers reconsider how much they want it and encourage imitation cronuts. Price changes can move the market toward equilibrium and solve shortages and surpluses.
Cronut Update 7/26/16
Resolving a Market Surplus Market surplus:the amount by which quantity supplied (QS) exceeds quantity demanded (QD) at a given price; excess supply. Price is too high. Q s > Q d, a surplus. Buyer and seller behaviors kick in. Price will fall to equilibrium price, P e. P P high P e Surplus S D Q d Q e Q s Q
Resolving a Market Shortage Market shortage:the amount by which quantity demanded (QD) exceeds quantity supplied (QS) at a given price; excess demand. P S Price is too low. Q s < Q d, a shortage. P e Buyer and seller behaviors kick in. Price will rise to equilibrium price, P e. P low Shortage Q s Q e Q d D Q
112 Shifting Supply and Demand
Supply Curve Price per Unit $50 $25 70 80 New Demand Curve Old Demand Curve Quantity
Price New Supply Old Supply $10 Demand Curve 20 80 114 Quantity
Supply and Demand Analysis Easy as 1, 2, 3 1. Before the change: Draw supply and demand Label original equilibrium price and quantity 2. The change: Did it affect supply or demand first? Which determinant caused the shift? Draw increase or decrease 3. After change: Label new equilibrium What happens to Price? (increase or decrease) What happens to Quantity? (increase or decrease) Let s Practice! 117
S&D Analysis Practice 1. Before Change (Draw equilibrium) 2. The Change (S or D, Identify Shifter) 3. After Change (Price and Quantity After) Analyze Hamburgers 1. New grilling technology cuts production time in half 2. Price of chicken sandwiches (a substitute) increases 3. Price of burgers falls from $3 to $1. 4. Price for ground beef triples 5. Human fingers found in multiple burger restaurants. 118
Demand increases If the price of good rises, what occurred in the market? Supply decreases
If the price of good falls, what occurred in the market? Demand decreases Supply increases
Double Shifts in Supply and Demand What happens to the equilibrium price and quantity of ice cream if: 1. Science proves that ice cream cures depression 2. 10 million cows die.
We can say for certain that the price increased but since the change in equilibrium quantity is dependant on how our curves are drawn, the change in equilibrium quantity is ambiguous.
Double Shifts in Supply and Demand 1. Suppose the demand curve for gasoline shifts to the right, as global demand from India and China increases. Suppose also that new discoveries of oil enable an increase in the supply of gasoline to be sold on the market. Assuming that nothing else changes, what is the effect on the equilibrium price quantity of gasoline? 2. The price of a round-trip ticket to Paris on Air France falls by more than $200 after the end of school vacation in Sept. This happens despite the fact that generally worsening weather increases the cost of operating flights to Paris, and Air France therefore reduces the number of flights at any given price.
S/D Shifts CONTINUED: What is the effect on price and quantity? 8 Demand increases Demand decreases Supply increase Supply decreases Demand decreases and supply increases Bothsupply and demand decrease Demandincreases and supply decreases Bothsupply and demand increase Effect on Price Effect on Quantity
Simultaneous Shifts in S/D 9
S/D Shifts: What is the effect on price and quantity? 0 Effect on Price Effect on Quantity Demand increases Up Up Demand decreases Down Down Supply increase Down Up Supply decreases Up Down Demand decreases and supply increases Both supply and demand decrease Demand increases and supply decreases Both supply and demand increase Down Ambiguous Up Ambiguous Ambiguous Down Ambiguous Up
Uber is a technology company that has developed a software that allows anyone to request a ride via mobile app, text message, or the web. Drivers arrive curbside in just minutes, you can track the arrival of your ride, you'll receive a text message when your driver arrives,the credit card on file is charged after your ride, and you will receive an email receipt detailing your trip. http://www.businessinsider.com/uber-new-yearseve-surge-pricing-2014-1
Dynamic Pricing prices reflect supply and demand demand < supply = low prices demand > supply = high prices (surge pricing)
http://www.businessinsider.com/uber-new-years-eve-surge-pricing-2014-1 http://www.npr.org/blogs/money/2014/01/24/265396928/when-a-65-cab-ride-costs-192
Graph supply and demand for A. Uber during regular hours/day B. Demand or Quantity Demanded during a snow storm C. Supply or Quantity Supplied during surge pricing D. After a Twitter rant What happens to the price in each scenario?
Do you agree or disagree with the following statement: Dynamic pricing benefits customers, Uber, Uber drivers and the economy. http://www.npr.org/blogs/money/2014/02/07/27306 0341/episode-516-why-paying-192-for-a-5-mile-carride-may-be-rational 22 minutes s Pricing Model
Planet Money Episode #516 Dynamic Pricing PROs CONs Do you agree or disagree with the following statement: Dynamic pricing benefits customers, Uber, Uber drivers and the economy. Explain.
UBER DEBATE Do you agree or disagree with the following statement: Dynamic pricing benefits customers, Uber, Uber drivers and the economy. Extra credit points (sum of speaking students NOT contributions) to be divided up between speaking members of the winning team. You must have completed the HW to earn the EC. Teams will be judged according to A-HA! contributions. No personal attacks (no credit for bad behavior!)