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Econ 101LAW OF SUPPLY AND DEMANDTap water is free in restaurants but Cokes or tea cost around $2.50.Why are soft drinks more expensive than tap water? A regular penny is worth 1 cent or $0.01A gold dollar (smaller in size that a penny) may be worth $400.00 or more depending on its condition.Why is gold more expensive than copper?These examples are explained by theLAW OF SUPPLY AND DEMAND—Prices are determined by 2 factors: SUPPLY (how much there is of what you want to buy) and DEMAND (how bad you want to buy it)Example: NIKE HAS JUST INTRODUCED A NEW LEBRON JAMES GYM SHOE THAT IS THE COOLEST SHOE IN THE HISTORY OF THE WORLD! Almost ALL guys want to own a pair of LBJ shoes!When these LBJ Nike shoes are first made available for purchase, the price tag is $500. A very few rich kids get a pair of these cool shoes—nobody else can afford them!Nike drops the price to $400. The shoes still do not sell…they are ‘overpriced’—still too expensive.Nike drops the price to $240 a pair just a few weeks before Christmas.They sell 700,000 pair. After Christmas the price comes down to $200, so they sell another 400,000 pair. $200 a pair proves to be about what normal people are willing to pay.$200 a pair is still enough for Nike to make money.$200 becomes the everyday price for the shoes.$200, the price people will pay and the price which allows Nike to make money is said to be the EQUILIBRIUM price for the shoes—it is the price that has been determined by the LAW OF SUPPLY AND DEMANDDid the government set this price? NO!Who set the price? WE DID (we are the CONSUMERS—people who buy products)How did we do that? We, the consumer, set the price when we decided to either buy or not to buy Nike’s shoes. Had consumers (that’s us) not liked the shoes—or thought $200 was too much to pay—Nike would have either stopped manufacturing the shoes OR dropped the price again. TYPICAL LAW OF SUPPLY AND DEMAND ACTIONS AND REACTIONS:Supply goes UP Cost goes ______Demand goes UP Cost goes ______Supply goes DOWN Cost goes ______Demand goes DOWN Cost goes ______ Here is an actual real-time economic question:The CORONAVIRUS is infecting more and more American citizens every day. To protect themselves, citizens want to acquire masks to try to avoid infection. How has this affected the demand for masks?How has this affected the supply of masks?How has this affected the cost of masks?How has this affected the people who make the masks? Does the Law of Supply and Demand work on things other than shoes and masks? Yes! The L of S and D works with all products…including food prices in restaurants. Let’s examine our economic system and the Law of Supply and Demand with RESTAURANTS.We will do this by asking a series of questions that will expand our understanding of the economic process.What happens if a restaurant is not making any money? 1. It will go out of business OR 2. They might advertise and/or improve the quality of their food Make no mistake about it…the restaurant will close if it fails to make money long term!What happens if a restaurant makes lots of money? Maybe the owner will open another location or expand the current location. Local examples might be Los Portales or Tulum. McDonalds, Dairy Queen, Popeyes, Olive Garden are national examples of success So, what determines if a restaurant makes money or loses money…if it succeeds or fails? WE do (the potential diners or consumers)How do WE decide which restaurants succeed or fail? The ones where enough of us spend our money succeed. Restaurants fail when consumers choose NOT to spend money there. (Maybe the ones that fail have bad food, poor service, or are too far away (bad location). But really the only factor that is important is IF MONEY IS BEING MADE. Who can open a restaurant? Anyone with enough money to buy restaurant equipment and a business license. Why can anyone open a restaurant if they have the money and a business license? Because we live under the FREE ENTERPRISE ECONOMIC SYSTEM also called the FREE MARKET ECONOMY or CAPITALISM)Who can succeed in the restaurant business? Anyone who works hard, serves good food, and charges a price people are willing to pay can make money in the restaurant business Who can fail in the restaurant business? Anyone who fails to make money. (It is sort of like ‘SURVIVAL OF THE FITTEST?) (THINK ABOUT IT…DOES THIS SEEM CRUEL TO YOU THAT RESTAURANTS CAN FAIL?)So, does this mean that people are FREE to either SUCCEED or FAIL? Yes—that is the way it is under free market economics/free enterprise/capitalism.Why do some people succeed in the restaurant business? They work hard and cook food for a price people are willing to pay. Why do some people fail in the restaurant business? Maybe they can’t cook, maybe they don’t work hard enough, and maybe they just don’t know enough about the restaurant business to succeed.BUT ULTIMATELY, SUCCESS OR FAILURE IN THE RESTAURANT BUSINESS—OR IN ANY BUSINESS—IS DECIDED BY US—THE CONSUMERS. IT IS THROUGH US THAT THE LAW OF SUPPLY AND DEMAND ALWAYS DETERMINES SUCCESS OR FAILURE. Does the Law of Supply and Demand seem harsh to you? Maybe? Just a little bit? No? Not at all?WHY DON’T WE REPEAL THE LAW OF SUPPLY AND DEMAND SO THAT EVERYBODY CAN SUCCEED? The Law of Supply and Demand is a natural law. Since it is a natural law, it cannot be repealed—sort of like you can’t repeal the Law of Gravity. This is the way the real world works in a free economy. In an economy where the government makes economic decisions (socialism), the Law of Supply and Demand is not allowed to work because the GOVERNMENT INTERFERES. Look on the bright side! A free enterprise economy regulated by the Law of Supply and Demand offers GREAT OPPORTUNITY for those who work hard and get themselves educated. Forty years ago there was not even 1 Los Portales Restaurant in Jackson…today there are 4! Did the government do that? No! Would this have happened under socialism? PROBABLY NOT!Our free government and our free market economy (capitalism) combined with GOD’S BLESSING and the hard work and intelligence of Americans have created the wealthiest nation on earth—the USA. Thanks be to God!!! Therefore, we have the best health care, the most food, the most advanced technology, the best system of transportation of any country on earth.AS LONG AS WE MAINTAIN OUR FREEDOM YOU, THE STUDENTS OF THIS CLASS, HAVE EVERY OPPORTUNITY TO SUCCEED IF YOU WORK HARD, GET YOURSELVES EDUCATED, AND SEEK GOD’S WISDOM AND PLAN FOR YOUR LIFE. What would happen if…1. How would it affect the price of a product that was so popular the manufacturer could not make it fast enough to meet the demand for that product?2. Do think the price of a brand new product wanted by almost everyone when first introduced would be relatively high or low? Why? Would the price of this product probably go up or down after it had been on the market for 2 years or more? 3. What is a ‘MONOPOLY’? How would the price of product be affected if it was made by only one manufacturer? 4. After a time several companies begin manufacturing products formerly made by only 1 company.What happens to the prices of those products?5. Referring back to questions 3 and 4 above, what factors will determine the success or failure of any of these companies?THINKING QUESTIONS:6. Why don’t we just let the government figure prices for everything and not worry about the Law of Supply and Demand?7. Why do you think the cost of a new ‘miracle drug’ is so expensive when it first comes on the market?8. CELL PHONES HAVE BEEN ON THE MARKET FOR YEARS. HOW HAS THE PRICE OF CELL PHONES CHANGED OVER TIME? WHY? ................
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