MGT 222 Wright Supply Demand

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1
Objectives
 Explain who controls a market

economy.
 List the three main market forces.
 Describe the effect of price on supply
and demand.
 List three factors that cause changes in
demand.
2
Objectives
 Describe the effect of supply and

demand on price.
 Describe three ways a business can
increase profits.
 Explain the role of the consumer in
determining which products get
produced.
3
Marketing Terms
 demand  law of supply

 supply  profit motive
 market demand  productivity
 market supply  competition
 law of demand
4
Market Forces at Work
 How do the
 right products get to the
 right places, in the
 right quantities, and at the
 right prices?
5
Market Forces at Work
 Three main market forces

 supply and demand
 profit
 competition
 They coordinate a market economy
like an “invisible hand”
 according to Scottish philosopher
Adam Smith
6
Supply and Demand
 Demand
 quantity of a
product
– a consumer is
willing and
able to buy
– at a certain
price
7
Supply and Demand
 Supply
 quantity of a product
– a supplier is
willing to provide
– at a certain
price
©2007 JupiterImages Corporation

8
Supply and Demand
 Individual demand
 quantity of a product demanded
– by an individual consumer
 Market demand
 sum of all individual demands
– for a specific product
#1 How does individual demand

differ from market demand? 9
Supply and Demand
 Individual supply
 quantity of a product supplied
– by one supplier
 Market supply
 sum of all individual suppliers’ supply
– of a specific product
#2 How does individual supply

differ from market supply? 10
Effect of Price
on Demand
 Law of demand
 when prices fall
– demand will rise
 when prices rise
– demand will fall
 The law of demand
is based on
 market demand
11
Law of Demand
Demand
will rise
When
prices fall
12
Law of Demand
 Consumers buy more (demand rises)

when price is low.
 Consumers buy less (demand falls)
when price is high.
#3 What do consumers do when there

is a sale (prices fall)?
What do consumers do when prices rise? 13
Effect of Price
on Supply
 Law of supply
 when prices are high
– supply will rise
 when prices fall
– supply will fall
 The law of supply is
based on
 market supply
14
Law of Supply
When Supply
prices will
are high rise
15
Law of Supply
 Manufacturers will supply

 more of a product when its price is high
– because they will make more profit
 Manufacturers will supply
 less of a product when the price falls
– because they will make less profit
16
Constant Environment
 The laws of supply and demand describe

 what happens to supply and demand as
– prices change in a constant environment
 A constant environment is one in which
 other factors do not change
– a stable economy, no marketing
campaigns, no changes in social trends
#4 Is the environment ever constant?

17
Changes in Demand
 Changes in demand can be caused by

changes in
 marketing campaigns
 the economic situation
 social trends
 These changes can interfere with the
laws of supply and demand
#5 Give an example of how each
of these can change demand. 18
Effect of Supply and Demand
on Price
 Price affects supply and demand

 and gives us the laws of supply and
demand
 However
 the level of supply and
 the level of demand
– interact to affect price
19
#6 What happens to the price of fruit
when the supply of fruit is high,
but the demand is low? 20
Effect of Supply and Demand
on Price
#7 What happens to the price of gas when the

supply of gas is low, but demand is high
(consumers want to drive)? 21
Effect of Demand on Supply and Price
Supply
Falls
Demand Suppliers Price
Rises can’t Rises
Consumers keep up
with the Suppliers
start buying
rapid sale of raise the
lots of
basketballs. basketballs. price of
basketballs.
Consumers
pay the
higher
price.
22
Effect of Rising Demand on
Supply and Price
 When demand is rising
 and supply falls
– marketers raise prices
 If demand is still high
 even though the price is high
– suppliers will start making more
basketballs
– and supply will rise
23
Effect of Demand on Supply and Price
Demand Price
Falls Supply Falls
Consumers Rises Suppliers
are not Soccer balls lower
buying pile up in the the price
soccer balls. suppliers’ to sell the
warehouses. soccer balls.
24
Effect of Falling Demand on
Supply and Price
 When demand is falling
 and supply rises
– marketers lower prices
 If demand is still low
 even though the price is low
– suppliers will stop making soccer balls
– and the supply will fall further
25
Effect of Supply on Price and Demand
Price Falls
Supply The suppliers Demand
Rises want to sell
Rises
their product
Strawberries before it The reduction
are in season. in price
spoils.
They lower the increases
The berries consumers’
price of
are spoiling demand for
before strawberries.
strawberries.
consumers
purchase
them.
26
Effect of Rising Supply on
Price and Demand
 For some items, like seasonal fruits
 the supply rises rapidly
– marketers lower the price to sell the
fruit faster
 In this situation, consumer demand
rises with the lowered prices
 until the fruits are out of season
– the price then rises
27
Profit
 Profit motive is the drive to earn more

profit
Costs and
Sales Expenses Profit
#8 What is profit? 28
Profit
 What is your profit if

 your store sells $100 worth of
merchandise and
– your costs are $75?
 Sales – Costs = Profit
 $100 – $75 = $____
 Your profit is $____
29
Profit
 Three main ways to increase profit

 decrease costs or expenses
 increase productivity
– the amount of product a worker
produces per hour
 increase sales
30
Profit
 To increase profit
 decrease costs
 and/or decrease expenses
 Think of your store with the $100 in sales
 Reduce your costs to $25
 What would your profit be?
 $100 – $25 = $____
31
Profit
 To increase profit, increase productivity

 if workers produce more product per hour
– you will have more products to sell
 more products to sell mean that you will
– have higher sales
 higher sales, with the same costs and
expenses
– mean higher profit
32
Profit
 To increase profit, increase sales

 Think back to the “store” example
 suppose you sold $200 worth of goods,
and your costs stayed at $25
 what would your profit be?
 $200 – $25 = $_____
 Your profit would be $_____
33
Sales – Costs = Profit
Situation Situation Situation
1 2 3
Sales $100 $100 $200
Costs $75 $25 $25
Profit $25 $75 $175
#9 What accounts for the difference

in profit in columns 2 and 3? 34
Competition
 Competition  Competition
 the contest results in
among  better products
businesses to  better quality
get customers  more services
 lower prices
#10 How does competition yield these results?

35
Role of the Consumer
 Consumers
(as a group)
 have a large
impact on a
market economy
– through the
forces of supply
and demand
36
Role of the Consumer
 If many consumers buy a product

 it will probably succeed
 If few consumers buy a product
 it will probably fail
 Few liked or bought “New Coke”
 so it failed as a product
#11 Give an example of how consumers

affect the success of a product. 37
Review
 Who controls a market economy?

 List the three main market forces.
 Describe the laws of supply and demand.
 What is a constant environment?
 What three factors can change demand?
 How is profit calculated?
 How do consumers influence a market
economy?
38
Glossary Back
 competition. Contest between two or

more businesses to get customers.
 demand. Quantity of a specific product
that a buyer is able and willing to buy at
a certain price, usually at a particular
time and place.
 law of demand. When prices fall,
demand will rise (in a constant
environment). 39
Glossary Back
 law of supply. When prices are high,

supply will rise (in a constant
environment).
 market demand. Sum of all the
individual demands for a specific
product, for a specific time period.
 market supply. Sum of all the individual
suppliers’ supply of a specific product,
for a specific time period. 40
Glossary Back
 productivity. Amount of product a

worker produces per hour
(product/hour).
 profit motive. Drive to earn more profit.
 supply. Quantity of a specific product
that a supplier is willing to supply at a
certain price.
41

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p ly

 Explain who controls a market

 Describe the effect of supply and

 demand  law of supply

 Three main market forces

©2007 JupiterImages Corporation

#1 How does individual demand

#2 How does individual supply

 Consumers buy more (demand rises)

#3 What do consumers do when there

 Manufacturers will supply

 The laws of supply and demand describe

#4 Is the environment ever constant?

 Changes in demand can be caused by

 Price affects supply and demand

#7 What happens to the price of gas when the

 Profit motive is the drive to earn more

 What is your profit if

 Three main ways to increase profit

 To increase profit, increase productivity

 To increase profit, increase sales

Costs $75 $25 $25

Profit $25 $75 $175

#9 What accounts for the difference

#10 How does competition yield these results?

 If many consumers buy a product

#11 Give an example of how consumers

 Who controls a market economy?

 competition. Contest between two or

 law of supply. When prices are high,

 productivity. Amount of product a

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