FCS 226 Chapter 2 Supply and Demand

FCS 226 Chapter 2 Supply and Demand - Supply and Demand...

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Unformatted text preview: Supply and Demand Supply The Law of Demand The How prices are determined in a market economy. Price reductions lead buyers to desire more of a good or service Price increases lead them to desire less of a good or service This is a result of two (2) effects that reinforce each other. 1. Substitution Effect 1. When the price of a good/service falls, people have an economic incentive to use more of that particular good/service because it has become less expensive relative to all the other goods and services available An Example An Concert tickets are $20 regularly and drop (on sale) to $10. Movie tickets remain at $5. Fans have an incentive to see more concerts compared to movies. This is a better buy per dollar. This encourages more concert ticket sales and therefore less movie ticket sales. 2. Income Effect 2. When price of a good/service falls, purchasing power rises and people consume more because they feel wealthier. Economists call this the income effect. Not only can they buy more of the one product (in which the price fell), but also they can purchase more of everything else An Example An $100/Week Income $21/Week spent on Soda (7 six­packs at $3.00 per) Sale! Now soda is $2.50 / six­pack 7 six­packs @ $2.50 = $17.50 on soda Now have $3.50 more, even w/same purchases Typically, consumption increases, and consumers do not save this money. Therefore, consumers either buy more soda or buy more of other products producing an increased income effect. Negative Prices Negative Theoretically, goods and services can go so low in price that eventually you would desire it. This is even if you would not normally purchase the item. For example, if prunes decreased in price, at some point you would eat them, even if it were a negative price (somebody paying you to do so). Converse Effect Converse Conversely, imagine a scenario when a price increases. We buy less of that product (soda) or buy the same amount and do not buy other normally purchased products and services. Group Behavior Group In Consumerism, we are interested in the collective behavior or group behavior of all consumers. This helps us understand the economic conditions of the moment. The Supply Relationship The In order to determine the price that buyers would have to pay to purchase various amounts of a product, we have to understand the principle of supply. The supply of a good tells us how much is offered for sale at specified prices. Generally, the supply of a good or service is the relationship between its price and the quantity offered for sale, ceteris paribus. Assumptions of Supply Theory Assumptions 1. Suppliers and Their Goals. Firms must consider what goods, how to produce the goods, and the quantity of goods produced. All with profit in mind (low cost in producing and not producing too much or too little) Firms must consider “flow” – how much to offer in the market place per time period. Firms also consider the future in their decisions. The Law of Supply The We examine the relationship between the price of a good/service and the amount offered for sale. The law of supply states that price increases lead suppliers to supply more of a good/service, whereas price reductions lead them to supply less. Factors that Shift Supply Factors When things other than price change, there results a change in supply. Factors that Result in Supply Shifts Factors Changes in Technology Changes in Input Prices Changes in Prices of Other Goods or Expected Future Prices of the Good Produced Changes in Technology Changes Previous products offered at lower prices Supply of old products builds Changes in Input Prices Changes Materials or labor required for manufacturing of goods increases or decreases China – cost of manufacturing low and therefore, supply of goods in U.S. is up Changes in Prices of Other Goods or Expected Future Prices of the Good Produced Produced Future prices affect current supply. Storage a large factor – expensive to store oil, for example, if you’re an oil well owner in Texas. ...
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