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| | Many of the problems in this course, and in any economics course, can be answered just by remembering and applying the above there principles about price. The equilibrium price is the result of a "tug of war" between the buyer and seller: the buyer wants to pay less (a lower price), and the seller wants to receive more (a higher price). Those opposing forces are constantly working to keep the price at equilibrium. | | Many of the problems in this course, and in any economics course, can be answered just by remembering and applying the above there principles about price. The equilibrium price is the result of a "tug of war" between the buyer and seller: the buyer wants to pay less (a lower price), and the seller wants to receive more (a higher price). Those opposing forces are constantly working to keep the price at equilibrium. |
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| − | == Revisited: Supply and Demand Curves == | + | == The Law of Supply == |
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| − | The graph of a demand curve is downward sloping because of the Law of Demand stated above. The demand curve represents the change in demand by the public based on a change in price for the good or service.
| + | When solving a problem in economics, always take care to keep the "supply" and "demand" curves separate in your mind, even though they are superimposed on each other in one graph. The "supply" curve is from the perspective of the seller, the owner, the manufacturer, the company, etc. It is on this side that the good is produced (or obtained) and then sold to the public. In some ways this side is more difficult for students to understand, because in real life students are almost always on the opposite side, the demand side, where the buyers are. |
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| − | The supply curve is completely different from the demand curve, and not as obvious. <explain further> | + | Question: what the price in a graph of the supply curve really represent? The price for a supply curve is the '''''market price for the sale of his goods or services'''''. When that market price increases, the supplier will produce more of his good (or provided more of his services). As the salaries of baseball players has increased in the major leagues, more and more people have tried to become professional baseball players. The more profitable that the sale of a good becomes, the more of that good that people want to produce (or, in the case of baseball, the more of that service that people want to provide). |
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| | + | Let's take an example. If the market price of oil is low, as in only $10 a barrel, then there is no incentive to increase the production of oil. No one is going to want to drive for new oil wells. It's not worth it. It's not profitable enough. But as the market price of oil increases to $100 a barrel, then there is much profit to made by producing more oil. Companies drill new oil wells in order to sell at the high price and make more profits. The supply of oil increases as its market price increases. |
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| | + | This is the '''''Law of Supply: as the market price for a good increases, the quantity supplied will increase.''''' That is because as the market price increases, there is an incentive to supply more of the good or service is supplied to the market. This is why the supply curve is upward sloping. |
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| | == What Happens When the Supplier Increases His Price? == | | == What Happens When the Supplier Increases His Price? == |
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| | + | Question: why doesn't a supplier constantly increase the price of his good or service to make more money? |
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| | The suppliers of goods and services would like to increase their prices without losing sales, so that they can make more money. So why don't companies constantly increase their prices so that they can make more money? For example, why doesn't Shop-Rite increase its price for milk and eggs by 10% every year? | | The suppliers of goods and services would like to increase their prices without losing sales, so that they can make more money. So why don't companies constantly increase their prices so that they can make more money? For example, why doesn't Shop-Rite increase its price for milk and eggs by 10% every year? |
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| | Imagine yourself as president of a company that makes "widgets" (a "widget" is an imaginary good), and you are having a meeting to discuss your product. Inevitably an employee suggests increasing the price on the widget so that the company will make more money. People who have never studied economics think that increasing the price will always result in increased revenue from sales, because revenue is price times quantity sold. If quantity sold is constant, then increasing the price should have the effect of increasing the revenue from sales. | | Imagine yourself as president of a company that makes "widgets" (a "widget" is an imaginary good), and you are having a meeting to discuss your product. Inevitably an employee suggests increasing the price on the widget so that the company will make more money. People who have never studied economics think that increasing the price will always result in increased revenue from sales, because revenue is price times quantity sold. If quantity sold is constant, then increasing the price should have the effect of increasing the revenue from sales. |
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| − | But suppose you have an employee who had taken this economics course in your meeting. He or she points out that an increase in price will reduce the demand, because the demand curve is usually downward sloping. You will sell fewer goods if you raise the price: your "quantity sold" will decrease if in you increase your price, and your overall revenue may decrease too. | + | But suppose you have an employee who had taken this economics course in your meeting. He or she points out that an increase in price will reduce the demand, because of the Law of Demand: demand decreases when price increases. You will sell fewer goods if you raise the price: your "quantity sold" will decrease if in you increase your price, and your overall revenue may decrease too. |
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| | As owner, you then ask, “how much fewer sales will result if I increase the price?” If sales decline by a smaller percentage than the price increased, then overall revenue (price times quantity sold) will increase. If, however, sales decline by a larger percentage than the price increased, then overall revenue will decline. | | As owner, you then ask, “how much fewer sales will result if I increase the price?” If sales decline by a smaller percentage than the price increased, then overall revenue (price times quantity sold) will increase. If, however, sales decline by a larger percentage than the price increased, then overall revenue will decline. |
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| | ==Price Elasticity of Demand== | | ==Price Elasticity of Demand== |
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| | But some goods cannot be resold. Goods that are personal to the buyer, like a tailored suit or dress, cannot be resold. Price discrimination works fine for personalized goods or exclusive markets, because there is not a resale market to destroy the discrimination. | | But some goods cannot be resold. Goods that are personal to the buyer, like a tailored suit or dress, cannot be resold. Price discrimination works fine for personalized goods or exclusive markets, because there is not a resale market to destroy the discrimination. |
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| | == Imbalance in Information == | | == Imbalance in Information == |