· Be able to create and manipulate supply and demand curves
· Measure the elasticity of items under different scenarios
· Apply this to describe the market for their own products and items within Durango
Yesterday we started our study of supply and demand. I threw you into groups and gave you some local scenarios to consider. My hope was to provide some real-world context for what can be very impersonal graphs. The scenarios had to do with burritos sold by Zia Taqueria, applications to FLC, Be Local Coupon books for Local First, and tickets for the train. This proved confusing because the scenarios I created mixed what 's happening in the overall MARKET (state, nation, world) with the decisions of INDIVIDUAL business owners. These two things ARE related. The market is made up of individual decisions. BUT the markets we're talking about are so large that one person's decisions don't have a lot of impact.
The reason for us, as prospective business owners, to care about supply and demand is that it's part of understanding the behavior of the overall market for our products: be they hiking boots, hot tubs, nutrition coaching, or drive-in movies. This helps us make decisions about how to set prices, when to spend and grow the business, or slow down and be more conservative.
The best way to learn this stuff is a bit at a time. Here are the main concepts:
Creating Supply & Demand Curves
- Supply and demand curves compare changes in prices with changes in quantity
- The numbers we use to construct these graphs come from individual buying and selling decisions of everyone added together
- When price goes UP sellers/suppliers will shift their resources to sell more to earn more money. So the supply curve slopes upWhen price goes UP buyers/demanders will shift their resources to purchase other things and demand less of a particular good. So the demand curve slopes down.
Find the Equilibrium Price & Quantity
- The point where the two curves cross shows the equilibrium price and quantity, where these totals will settle over the long term. X marks the spot on the graphs
- The price and quantity is always changing but ASSUMING NO FUNDAMENTAL CHANGES the price and quantity will come back to equilibrium.
Changes in Response to Price
- Despite the equilibrium point, sometimes market forces will push the price either up or down. This can happen over a period of weeks or months.
- These changes prompt opposite responses from suppliers (sellers) and demanders (buyers).
- With a higher price, it's worth suppliers to supply more of that product. They earn more profit
- But demanders, will demand less of that product because it costs more.
- With a lower price, suppliers will invest in producing other goods where they can make more money
- But demanders, will demand more because it seems like a deal
- These differences will produce either a SURPLUS or SHORTAGE of the product over the short-term.
Return to Equilibrium
- If there is a surplus, suppliers will try to get rid of extra product by lowering their prices. As they try to undersell each other, the price for the whole market drops back to the equilibrium price.
- If there is a shortage, demanders will be frustrated and offer to pay more to get the product. Think about what would happen if there was a shortage of Harry Potter books when each one came out. You'd have demanders (buyers) bidding up the price. This would push the price back up to equilibrium.
- This is movement ALONG the curve and typically represents a SHORT-TERM situation.
Shifting Supply and Demand Curves
- Long-term other factors besides price will affect the behavior of suppliers and demanders. These factors can be the costs of production, changing tastes or preferences, new technology, etc.
- When these NON-PRICE FACTORS change the shift the position of the curve on the graph.
- This creates a new X or a new equilibrium point
- Curves shift LEFT for a decrease and RIGHT for an increase in either supply or demand
- Business people should pay attention to how the NON-PRICE FACTORS are changing so they aren't caught by surprise when the number of customers they have changes.
Want a fun review? Check out this short video about how supply and demand works in the Indiana Jones movies.
Homework due Thursday, January 22nd
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