Unit 2: Demand, Supply, and Consumer Choice Copyright ACDC Leadership 2015

How much is the shortage if the price is $1? Supply Schedule Demand Schedule S $5 4 3 2 1 P Qd $5 10 $4 20 $3 30 $2 50 $1 80 P Qs $5 50 $4 40 $3 30 $2 20 $1 10 Answer: 70 D 10 20 30 40 50 60 70 80 Q 3

The FREE MARKET system automatically pushes the price toward equilibrium. Supply Schedule Demand Schedule S $5 4 3 2 1 When there is a surplus, producers lower prices P Qd $5 10 $4 20 $3 30 $2 50 $1 80 P Qs $5 50 $4 40 $3 30 $2 20 $1 10 When there is a shortage, producers raise prices D 10 20 30 40 50 60 70 80 Q 4

Review Explain the Law of Demand Explain the Law of Supply Identify the 5 shifters of demand Identify the 6 shifters of supply Define Subsidy Explain why price DOESN’T shift the curve Define Equilibrium Define Shortage Define Surplus Identify 10 stores in the mall Copyright ACDC Leadership 2015

Shifting Supply and Demand Copyright ACDC Leadership 2015

Yoo-hoo! Big summer blowout! What would happen to the price and quantity of sunblock if summer suddenly became winter?

Supply and Demand Analysis Easy as 1, 2, 3 Before the change: Draw supply and demand Label original equilibrium price and quantity The change: Did it affect supply or demand first? Which determinant caused the shift? Draw increase or decrease After change: Label new equilibrium? What happens to Price? (increase or decrease) What happens to Quantity? (increase or decrease) Let’s Practice! Copyright ACDC Leadership 2015

S&D Analysis Practice Analyze Hamburgers Before Change (Draw equilibrium) The Change (S or D, Identify Shifter) After Change (Price and Quantity After) Analyze Hamburgers New grilling technology cuts production time in half Price of chicken sandwiches (a substitute) increases Price of hamburgers falls from $3 to $1. Price for ground beef triples Human fingers found in multiple burger restaurants 1. Supply Increases 2. Demand Increases 3. No Shift. Shortage 4. Supply Decreases 5. Demand Decreases Copyright ACDC Leadership 2015

Qe Q1 New grilling technology cuts production time in half Price S S1 Pe P decrease Q increase P1 D Qe Q1 Quantity 10 Copyright ACDC Leadership 2015

Qe Q1 2. Price of chicken sandwiches (a substitute) increases Price S P increase Q increase P1 Pe D1 D Qe Q1 Quantity Copyright ACDC Leadership 2015

Qs Qe Qd 3. Price of hamburgers falls from $3 to $1. Price S Shortage Qd increase Qs decrease Pe P1 D Qs Qe Qd Quantity Copyright ACDC Leadership 2015

Q1 Qe 4. Price for ground beef triples Price S1 S P1 Pe D Quantity P increase Q decrease D Q1 Qe Quantity Copyright ACDC Leadership 2015

Q1 Qe 5. Human fingers found in multiple burger restaurants Price S Pe P decrease Q decrease Pe P1 D1 D Q1 Qe Quantity Copyright ACDC Leadership 2015

Episode 3: Indiana Jones Econmovies Episode 3: Indiana Jones

Double Shifts Double Shift Rule: Suppose the demand for milk increased at the same time as production technology improved. Use S&D Analysis to show what will happen to PRICE and QUANTITY. Double Shift Rule: If TWO curves shift at the same time, EITHER price or quantity will be indeterminate (ambiguous). Copyright ACDC Leadership 2015

Qe Q1 Demand increases AND supply increases Price S S1 P1 Pe D1 D P indeterminate Q increase Qe Q1 Quantity

Trick: Draw it out separately and combine the results P indeterminate Q increase

What if supply increases and demand falls? P decrease Q indeterminate Copyright ACDC Leadership 2015

What if supply decreases and demand falls? P indeterminate Q decrease

Supply and Demand Review Define the Law of Demand Define the Law of Supply What is the difference between a change in demand and a change in quantity demanded? What happens if price is above equilibrium? What happens if price is below equilibrium? Identify the rule for double shifts in S&D Define consumer surplus Name 10 musical instruments

2008 Audit Exam 21. C Producers will produce more corn and supply will increase

4.D