AOF Business Economics Unit 3 Lesson 9 Demand

A business is motivated by profit • Firms will grow avocados only if they can make a profit. • To make a profit, the price must exceed the cost of growing them. How much does price need to exceed cost to entice a firm to enter the market?

Breaking even isn’t enough Firms won’t grow avocados unless their return on investment (ROI) is positive. Production Cost + Opportunity Cost + How much profit = One way to assess ROI is through a yearly rate of return: To invest or not to total profits divided by total invest, that is the investments. question How much more would you have to make above total costs to launch a business?

Increased demand creates profit opportunities • The low-calorie avocado increases demand. • People will buy more of them at any price. $1. 09 0. 99 0. 89 0. 79 0. 69 D 2015 (low-cal introduced) D 2014 50 100 150 200 250 When demand increases, what signal does this send to the marketplace?

When demand changes, so do price and supply When demand goes up Price goes up Then supply goes up How might the production from these new firms impact avocado prices?

Low-calorie avocados increase demand Firms respond only to the increase in price that leads to an increase in profit. $1. 09 S 0. 99 0. 89 0. 79 0. 69 D 2015 (low-cal arrive) D 2014 50 100 150 200 250 How might this impact revenue and profit next year?

Supply and demand continually adjust • Profits provide an incentive for firms to start producing avocadoes, which increases supply. • Increased supply means prices will fall. $1. 09 0. 99 0. 89 0. 79 0. 69 S 2014, 2015 S increase D 2015 (low-cals appear) D 2014 50 100 150 200 250

The competitive market is self-balancing • Firms devote resources to products and services that are in demand. • Pressure from competitors forces firms to be efficient.