Supply & Demand: Introduction and Demand Section 2: Module 5 Supply & Demand: Introduction and Demand

Main Ideas What a competitive market is and how it is described by the supply and demand model. What the demand curve is. The difference between movements along a demand curve and changes in demand. The factors that shift a demand curve.

Key Economic Concept The key concept and graph in this module is the downward sloping demand curve for good X. A movement along a demand curve shows how a change in the price of good X causes an opposite change in quantity of good X demanded (a to b). A shift outward (b to c), or inward, in the entire demand curve is caused by an external factor (not the price of good

Key Economic Concept Lemonade Stand Economics

Key Economic Concept Change in DEMAND—a change at ALL price levels Change in QUANTITY demanded

Presentation Overview I. Supply and Demand: A Model of a Competitive Market II. The Demand Curve A. The demand Schedule and the Demand Curve B. Understanding Shifts of the Demand Curve 1. Changes in the Prices of Related Goods or Services 2. Changes in Income 3. Changes in Tastes 4. Changes in Expectations 5. Changes in the Number of Consumers

I. Supply and Demand: A Model of a Competitive Market A market is an institution or mechanism which brings together buyers (demanders) and sellers (suppliers) of particular goods and services. 1. A market may be local, national, or international in scope. 2. Some markets are highly personal with face-to-face exchanges and flexible prices (a garage sale or estate auction) while others are impersonal and remote (global market for oil or coffee beans). 3. This chapter concerns competitive markets with a large number of independent buyers and sellers. 4. Each of these buyers and sellers are so small that they cannot affect the price of the product. POINT OF EMPHASIS: The assumption of competitive markets just simplifies the analysis. Much information can be gained by looking at demand and supply in a competitive market, and in later chapters of a microeconomics textbook, you will study markets that are not competitive.

Food Trading Activity Use your “notes” app to keep track of each round. Rate your level of satisfaction (utility) from each food received. Complete the questions online… Duffka.com>C219>Assignments>Intro Trade Activity Open the Main Ideas Link after you have submitted the information and read it!

II. The Demand Curve A. Demand Schedule and Curve Demand is a schedule that shows how much of a product consumers are willing and able to buy at each of a series of possible prices during a specified time period. 1. Example of demand schedule for cans of soda from a vending machine is: 2. Schedule shows how much buyers are willing and able to buy at five possible prices. 3. The market price depends on demand and supply. 4. To be meaningful the demand schedule must have a period of time associated with it. (Per week) The demand schedule shows that when the price is high, the quantity of sodas demanded is low. This relationship is known as the Law of Demand.

II. The Demand Curve Law of demand is a fundamental characteristic of demand behavior. 1. Other things being equal, as the price increases, the corresponding quantity demanded falls. 2. Restated, there is an inverse relationship between price and quantity demanded. 3. Note the “other things being equal” assumption which refers to a handful of other factors that affect our demand for a good. These will be covered shortly.

II. The Demand Curve Law of demand is a fundamental characteristic of demand behavior. 1. Other things being equal, as the price increases, the corresponding quantity demanded falls. 2. Restated, there is an inverse relationship between price and quantity demanded. 3. Note the “other things being equal” assumption which refers to a handful of other factors that affect our demand for a good. These will be covered shortly. Plot the following points. Price on the vertical axis and quantity on the horizontal.

II. The Demand Curve The demand curve illustrates the inverse relationship between price and quantity demanded. The downward slope indicates lower quantity (horizontal axis) at higher price (vertical axis), higher quantity at lower price. When the price falls from $3 per can to $2 per can. Quantity demanded increases from 150 cans per week to 200 cans per week. This is a movement down the demand curve, holding all other things constant.

II. The Demand Curve

B. Shifts of Demand There are several “shifters” of demand or the “other things,” besides price, which affect demand. Changes in a shifter cause changes in demand. If demand has increased, it has shifted to the right. At any price, consumers wish to buy more. If demand has decreased, it has shifted to the left. At any price, consumers wish to buy less.

II. Shifts of Demand 1. Prices of related goods i. Substitute goods (those that can be used in place of each other): Price of substitute and demand for the other good are directly related. If the price of Nike shoes rises, the demand for New Balance shoes should shift to the right. ii. Complementary goods (those that are used together like tennis balls and rackets): When goods are complementary, there is an inverse relationship between the price of one and the demand for the other. If the price of tennis rackets rises, demand for tennis balls will shift to the left.

II. Shifts of Demand 2. Income i. Normal goods More income leads to an increase in demand; less leads to decrease in demand for most goods and services. Steak is a normal good. So are textbooks, running shoes, and iPods. ii. Inferior goods For a few goods, more income leads to a decrease in demand. Chicken is an inferior good because of the price. City bus tickets are. So are second-hand clothing and store-brand food items.

II. Shifts of Demand 3. Tastes A favorable change in tastes leads to an increase in demand; an unfavorable change to a decrease. Example Demand for a sport team’s apparel increases when the team is winning.

II. Shifts of Demand 4. Expectations Consumers have expectations about future prices, product availability, and income, and these expectations can shift demand. Example If I expect the price of gas to decrease next week, my demand for gas will decrease this week. I will wait for the price to fall. Example If I take a new job and expect my salary to rise next month, I may increase my demand for a new suit today.

II. Shifts of Demand 5. Number of buyers—the more buyers lead to an increase in demand; fewer buyers lead to decrease. Example Demand for prescription drugs has increased, as the population has grown older. Example Demand for infant formula would decrease if families had fewer babies.

II. Shifts of Demand-Review 1. Prices of related goods i. Substitute goods (those that can be used in place of each other): Price of substitute and demand for the other good are directly related. ii. Complementary goods: When goods are complementary, there is an inverse relationship between the price of one and the demand for the other. 2. Income i. Normal goods More income leads to an increase in demand; less leads to decrease in demand for most goods and Services. ii. Inferior goods For a few goods, more income leads to a decrease in demand. 3. Tastes A favorable change in tastes leads to an increase in demand; an unfavorable change to a decrease. 4. Expectations Consumers have expectations about future prices, product availability, and income, and these expectations can shift demand. 5. Number of buyers The more buyers lead to an increase in demand; fewer buyers lead to decrease.

II. Shifts of Demand-Review Effective advertisements SHIFT demand to the right for products—meaning that people are willing to buy more at EVERY price.

II. Shifts of Demand-Review The forces of demand are all the factors that shift the curve Related Goods Tastes Number of Buyers Income Expectations

Change in Demand vs. Change in Quantity Demanded

Individual Demand & MARKET Demand

APE U2 L1 A9 Figure 9.2 Demand for Greebes PRICE PER GREEBE D QUANTITY Part A: Figure 9.1 Demand for Greebes P Qty Demanded ($/Greebe) (millions) .10 350 .15 300 .20 250 .25 200 .30 150 .35 100 .40 50 Figure 9.2 Demand for Greebes .55 .50 .45 .40 .35 .30 .25 .20 .15 .10 .05 PRICE PER GREEBE D 0 50 100 150 200 250 300 350 400 QUANTITY The data for D curve D indicate that at a P of .30, buyers would be willing to buy _______ million. Other things constant, if the P increased to .40, buyers would be willing to buy _____ million. Such a change would be a decrease in (demand/quantity demanded). Other things constant, if the P of Greebes decreased to .20 buyers would be willing to buy _______ million. Such a change would be called an increase in (demand/quantity demanded). 150 50 250

APE U2 L1 A9 Figure 9.3 Demand for Greebes PRICE PER GREEBE D D1 Part A: Figure 9.3 New Demand for Greebes …dramatic change in income tax rates affects disposable income of Greebe buyers. P Qty Demanded ($/Greebe) (millions) .05 300 .10 250 .15 200 .20 150 .25 100 .30 50 .55 .50 .45 .40 .35 .30 .25 .20 .15 .10 .05 PRICE PER GREEBE D D1 0 50 100 150 200 250 300 350 400 QUANTITY Comparing the new D1 curve with D, we can say that the change in D has resulted in a shift of the entire D curve to the (left/right). Such a shift indicates that at each of the possible P’s shown, buyers are now willing to buy a (smaller/larger) quantity; & at each of the possible qty’s shown, buyers are willing to offer a (higher/lower) maximum price. The cause of this D curve shift was a(n) (increase/decrease) in tax rates that (increased/decreased) the disposable income of Greebe buyers.

APE U2 L1 A9 Figure 9.4 Demand for Greebes PRICE PER GREEBE D2 D D1 Part A: Figure 9.4 New Demand for Greebes …dramatic change in peoples taste and preferences for Greebes. P Qty Demanded ($/Greebe) (millions) .20 350 .25 300 .30 250 .35 200 .40 150 .45 100 .50 50 .55 .50 .45 .40 .35 .30 .25 .20 .15 .10 .05 PRICE PER GREEBE D2 D D1 0 50 100 150 200 250 300 350 400 QUANTITY Comparing the new D2 curve with D, we can say that the change in D has resulted in a shift of the entire D curve to the (left/right). Such a shift indicates that at each of the possible P’s shown, buyers are now willing to buy a (smaller/larger) quantity; & at each of the possible qty’s shown, buyers are willing to offer a (higher/lower) maximum price. The cause of this D curve shift was a(n) (increase/decrease) in people’s tastes and preferences for Greebes.

APE U2 L1 A9 Part B: Multiple Choice 1. Other things constant, which of the following would NOT cause a change in the demand for mopeds? B. A decrease in the price of mopeds 2. “Rising oil prices have caused a sharp decrease in the demand for oil.” Speaking precisely, choose the statement that best describes this quote: C. The quote is incorrect: An increase in P causes a decrease in QUANTITY demanded, not a decrease in demand. 3. “As the P of cars has inched upward, customers have found foreign cars to be a better bargain. So domestic cars sales down and foreign up.” Which of the following best describes this statement? C. A movement along the demand curve for domestic autos, and a shift in the D curve for foreign autos.

APE U2 L1 A9 4. “Economic markets are like a see-saw. If D rises, the P rises; If P rises then D will fall. If D falls, P will fall; if P falls, D will rise and so on forever.” What’s the problem? They are confusing a change in D (curve shift) with a change in quantity demanded (a movement along the curve). Part of the 2nd sentence, --”if P rises, then D will fall”—is wrong. The quantity demanded will fall and; and since this is not a change in demand the rest of the statement does not follow.

APE U2 L1 A9 *CONSUMER SURPLUS: The value received from the purchase of a good in excess of the price paid—OR—the difference between what a consumer is willing to pay and the actual price paid for it. $7.5 million (50mX$.10 + 50mX$.05) Figure 9.5 Consumer Surplus .55 .50 .45 .40 .35 .30 .25 .20 .15 .10 .05 $.10 $.05 PRICE PER GREEBE D 0 50 100 150 200 250 300 350 400 QUANTITY 50 50

APE U2 L1 A9 *CONSUMER SURPLUS: The value received from the purchase of a good in excess of the price paid—OR—the difference between what a consumer is willing to pay and the actual price paid for it. If the P increases the shaded area DECREASES. If P consumers pay decreases, the shaded area INCREAESES. 7. If the P drops to .20 CS will INCREASE 8. At $.20 calculate CS for: $.40 $10m $.35 $7.5m C.$.30 $5m D.$.25 $2.5m Total Surplus $25m 9. Will there be any CS at .20, .15 or .10? NO. They are willing to pay equal or less than the market P. Figure 9.5 Consumer Surplus .55 .50 .45 .40 .35 .30 .25 .20 .15 .10 .05 PRICE PER GREEBE D 0 50 100 150 200 250 300 350 400 QUANTITY

APE U2 L1 A10 A B C Beef Consumption in May Price Quantity HEADLINE D Shift Y/N Inc/Dec Curve L/R Curve 1. Price of Beef to Rise in June Y INCREASE RIGHT C 2. Millions of Immigrant Swell Population 3. Pork Prices Drop DECREASE LEFT A 4. Surgeon Gen. Warns About Beef 5. Beef Prices Fall; Consumers Buy More NO -- 6. Real Income for US Drops for 3rd Month 7. Charcoal Shortage Threat to Cookouts 8. Nationwide Fad: The Disco-Burger

APE U2 L1 A10 X Reason Headline Number 1 2 3 4 5 6 7 8 Change in expectations X Change in tastes Change in number of consumers Change in income Change in price of substitute good Change in P of complementary good

Decrease in Demand or Quantity Demanded?

Main Ideas What a competitive market is and how it is described by the supply and demand model. What the demand curve is. The difference between movements along a demand curve and changes in demand. The factors that shift a demand curve.

Mod 5 Practice Quiz- Question # 1 1. Which of the following would increase demand for a normal good? A decrease in a. price. b. income. c. the price of a substitute. d. consumer taste for a good. e. the price of a complement.

Mod 5 Practice Quiz- Question # 2. A decrease in the price of butter would most likely decrease the demand for a. margarine. b. bagels. c. jelly. d. syrup.

Mod 5 Practice Quiz- Question # 3. If an increase in income leads to a decrease in demand, the good is a. a complement. b. a substitute. c. inferior. d. abnormal. e. normal.

Mod 5 Practice Quiz- Question # 4. Which of the following will occur if consumers expect the price of a good to fall in the coming months? a. The quantity demanded will rise today. b. The quantity demanded will remain the same today. c. Demand will increase today. d. Demand will decrease today. e. No change will occur today.

Mod 5 Practice Quiz- Question # 5. Which of the following will increase the demand for disposable diapers? a. a new “baby boom” b. concern over the environmental effect of landfills c. a decrease in the price of cloth diapers d. a move toward earlier potty training of children e. a decrease in the price of disposable diapers

Creating a Demand Curve Groups of 3 or 4 students. Each team will survey the quantity demanded for a specific product. Each team only one product to survey. Some possibilities: A private parking space on campus A new Dell laptop computer A three-ring notebook Visits to a tanning salon Downloadable songs on iTunes A new Xbox game system 1. Teams brainstorm five possible prices for their product, from high to low. 2. Teams agree on how all members will conduct the survey. For example, youcan ask: “If the price is __ , how many will you buy (in a week, a month or a year)?” or, “If the price is__ , will you buy it?” (A “yes” is counted as 1, and a “no” is counted as 0.) 3. Each team member interviews two students in the class regarding their demand for the team’s product. 4. Students return to the team and add the quantity demanded at each price for all team member surveys. 5. Teams draw the demand curve for their product and post it on the board.