Money, Banking and the Markets

Lesson 3 Supply and Demand

Supply and Demand

Aim: Why is the law of supply and

demand such a fundamental aspect of our economy?

Do Now: Identify something, like a new

product or event ticket, that’s inhigh demand.

How Are Needs Different From Wants?

Needs

Food

Water

Shelter

The economy’sjob is to try to

respond to theseneeds and wantswith goods and

services

Supply and DemandDemand (D)

How much of something people seek– Price increases when

demand increases because suppliers will be able to raise prices knowing people will still pay

Supply (S) How much of something

is available– Price decreases when

there is more supply than people demand. Suppliers have to cut prices to get their products sold.

The Supply and Demand Balance

Supply Demand

Price

Equilibrium Price

The market price at which the supply of an item equals the quantity demanded

Supply and Demand

What Drives Demand?

Earlier, we identified products and services that are in high demand. What makes them so desirable?

1. They do something new! Examples?

iPhone in 2007 could surf the Internet, xBox gaming network let gamers team up and/or play against each other

What is behind all these examples? Technological innovation!

What Drives Demand?

In what industries is technology innovation being brought to bear?o Electronics: So many cool new gadgets!o Transportation: Self-driving vehicles and the

electric car, cashless tollso Housing: Smart thermostats, security

systems & applianceso Food? Genetically modified crops can resist

bad weather and pests, increasing yield

What Drives Demand?

Besides having something new, what else drives demand?

2. Take a quality product and make it cool! Examples?

Beats headphones and Nike sneakers How do brands become cool?

Associate them with cool people who dress cool and who live cool lifestyles through marketing and advertising

What Drives Demand?

What is a third way to drive demand?

3. Offer a better value. Examples?

Hyundai Sonata sedan as good as Camry or Accord, for less

Why is this angle to creating demand especially important in bad economic times? People need to make their money go further.

A better value is just that, a better way to pay less for the same quality.

What Drives Supply? If you anticipated demand for one your products to grow

significantly in a few months, what would begin doing today?

1. Make more in anticipation of increased demand. Examples?

It could as simple the Northface making more jackets and coats as winter approaches.

You discovered a way to make your product twice as fast and at ½ the cost. Why might you announce that you are doubling production?

2. Take advantage of manufacturing advance to dramatically lower selling price, drive competitors out

What Drives Supply? There’s something unique about the natural

world. Hint: Why would it be tough to predict the size of next year’s corn harvest?

3. We don’t know the weather and rainfall we’ll experience. For products that are grown, supply can go up or down from year to year on the basis of nature!

Supply, Demand, and the Economy

What’s the connection between supply / demand and the businesses that make up a large part of the economy? Specifically, what can we say about the futures of companies whose products are in high demand? Low demand?1. High demand = Bright future! Examples?

Apple, Google, Nike, Facebook2. Low demand = Questionable future! Examples?

Radio Shack, Barnes & Noble, Sears

Lesson Summary1. Needs and wants are part of which side

of the Supply / Demand dynamic?

2. The miracle of the free market is that the demand of consumers will eventually balance with the supply made available by companies. How is this done, and what do we call the point of balance?

3. What are three methods companies can use to create demand for their products?

Lesson Summary4. What are influences on the supply

that a company will provide?

5. Why is the law of supply and demand such a fundamental aspect of our economy?

Web Challenge #1Q: Many countries, like Cuba and Venezuela (and to some degree, China and Russia) are not capitalistic. How do they manage?

• A: The leaders of “centrally planned’ or “command economies” determine how much of various goods and services should be made and provided.

• Challenge: Research instances where leaders of these countries miscalculated, leaving their citizens short of essentials such as bread and fuel.

Web Challenge #2Q: When the supply and demand dynamic is not allowed to work, there are times when goods and services are grossly mispriced. What does this have to do with Aroldis Chapman, relief pitcher for the Cincinnati Reds?

• A: A player on the Cuban baseball team, Chapman was probably treated nicely. But that doesn’tcome close to the value he and his 100 mph fastball really have. He was only able to benefit when he defected from Cuba and had MLB teams bid for his services.

• Challenge: Research examples of the mispricing of goods and services that can occur in centrally planned economies.

Web Challenge #3Q: Calculating the correct supply is very difficult. Make too many and they’ll sit on a shelf and become obsolete. Too little and customers will yell and scream that they can’t get one, then buy a competitor’s product.

• Challenge: Researching the latest generation of Apple phones, find out how many Apple had ready on the release date as well as what factors went into choosing how many to make initially.