Unit 2: Supply, Demand, and Consumer Choice Can they see me?

Demand

Why does the Law of Demand occur? What is Demand? Demand is the different quantities of goods that consumers are willing and able to buy at different prices. What is the Law of Demand? INVERSE relationship between price and quantity demanded Why does the Law of Demand occur? The Substitution effect The Income effect The Law of Diminishing Marginal Utility

What Causes a Shift in Demand? 5 Determinates of Demand (SHIFTERS) : Tastes and Preferences Number of Consumers Price of Related Goods Income Future Expectations Changes in PRICE don’t shift the curve.

Prices of Related Goods Substitutes P _____Demand for Other _____ Compliments

Income _____Demand _____ Normal Income _____Demand _____ Inferior

Other things equal, if the price of a key resource used to produce product X falls, the: A) supply curve of X will shift to the right. B) demand curve of X will shift to the right. C) supply curve of X will shift to the left. D) demand curve of X will shift to the right. E)both the supply and demand of X will increase If Z is an inferior good, a decrease in income will shift the: A) supply curve for Z to the left. B) supply curve for Z to the right. C) demand curve for Z to the left. D) demand curve for Z to the right E) there is no shift since this only changes price

Supply

Supply Shifters Prices/Availability of inputs (resources) What is supply? Supply is the different quantities of a good that sellers are willing and able to sell (produce) at different prices. What is the Law of Supply? There is a DIRECT (or positive) relationship between price and quantity supplied. Shifters Prices/Availability of inputs (resources) Number of Sellers Technology Government Action: Taxes & Subsidies Opportunity Cost of Alternative Production Expectations of Future Profit

Price Controls

Draw an effective Price Floor and Price Ceiling What are the results? Price of Corn P S $5 4 3 2 1 D 7 o 2 4 6 8 10 12 14 16 Q Quantity of Corn

Surplus Shortage P S Floor Ceiling D o Q 7 Price of Corn $5 4 3 2 1 2 4 6 8 10 12 14 16 Q Quantity of Corn

At price $20, there would be a surplus of… A) 100 B) 150 C) 200 D) 50 E) 0 What would be the effect of a price floor at $60 A) It would be ineffective E) A shortage of 100 B) A shortage of 50 D) A surplus of 100 C) Quantity demanded would increase

Excise Taxes Taxes on producers

Practice FRQ #1

Double Shifts Demand for sports cars fell at the same time as production technology improved. What happens to P and Q? If TWO curves shift at the same time, EITHER price or quantity will be indeterminate.

Which of the following statements is correct? A) If demand increases and supply decreases, equilibrium price will fall. B) If the demand and the supply both fall at the same time, quantity will be indeterminate C) If demand decreases and supply increases, equilibrium price will rise. D) If supply increases and demand decreases, equilibrium price will fall. E) If supply falls and demand remains constant, equilibrium price will fall.

How does the S&D graph show consumer and producer’s surplus? $10 8 7 6 5 4 3 2 Consumer’s Surplus = Buyers Maximum - Price Producer’s Surplus = Price- Sellers Minimum S D 6 7 8 9 10 11 12 13 Q

Practice FRQ #2

Elasticity

Inelastic Demand INelastic = Insensitive to a change in price. If price increases, quantity demanded will fall a little If price decreases, quantity demanded increases a little. In other words, people will continue to buy it. 20% 5% General Characteristics of INelastic Goods: Few Substitutes Necessities Small portion of income Required now, rather than later

Elastic Demand Elastic = Sensitive to a change in price. If price increases, quantity demanded will fall a lot If price decreases, quantity demanded increases a lot. In other words, the amount people buy is sensitive to price. General Characteristics of Elastic Goods: Many Substitutes Luxuries Large portion of income Plenty of time to decide

Perfectly and Unit Elastic Perfectly INELASTIC Unit Elastic (45 degrees)

Total Revenue Test Use elasticity to show how changes in price will affect total revenue (TR). Elastic Demand- Price _____ causes TR to _____ Inelastic Demand Unit Elastic- Price _____causes TR to ______

Practice FRQ #3

Consumer Choice

To maximize utility, how should the $10 income be allocated? UTILITY MAXIMIZING COMBINATION Product A: Price = $1 Product B: Price = $2 $ 10 income Marginal utility per dollar (MU/price) Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility, utils Unit of product First 10 -- 24 -- To maximize utility, how should the $10 income be allocated?

marginal utilities per dollar UTILITY MAXIMIZING COMBINATION Product A: Price = $1 Product B: Price = $2 $ 10 income Marginal utility per dollar (MU/price) Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility, utils Unit of product First 10 10 24 12 Examine the marginal utilities per dollar

First 10 10 24 12 Second 8 8 20 10 Third 7 7 18 9 Fourth 6 6 16 8 UTILITY MAXIMIZING COMBINATION Product A: Price = $1 Product B: Price = $2 $ 10 income Marginal utility per dollar (MU/price) Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility, utils Unit of product First 10 10 24 12 Second 8 8 20 10 Third 7 7 18 9 Fourth 6 6 16 8 Fifth 5 5 12 6 Sixth 4 4 6 3 Seventh 3 3 4 2

First 10 10 24 12 Second 8 8 20 10 Third 7 7 18 9 Fourth 6 6 16 8 UTILITY MAXIMIZING COMBINATION Product A: Price = $1 Product B: Price = $2 $ 10 income Marginal utility per dollar (MU/price) Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility, utils Unit of product First 10 10 24 12 Second 8 8 20 10 Third 7 7 18 9 Fourth 6 6 16 8 Fifth 5 5 12 6 Sixth 4 4 6 3 Seventh 3 3 4 2

First 10 10 24 12 Second 8 8 20 10 Third 7 7 18 9 Fourth 6 6 16 8 UTILITY MAXIMIZING COMBINATION Product A: Price = $1 Product B: Price = $2 $ 10 income Marginal utility per dollar (MU/price) Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility, utils Unit of product First 10 10 24 12 Second 8 8 20 10 Third 7 7 18 9 Fourth 6 6 16 8 Fifth 5 5 12 6 Sixth 4 4 6 3 Seventh 3 3 4 2

First 10 10 24 12 Second 8 8 20 10 Third 7 7 18 9 Fourth 6 6 16 8 UTILITY MAXIMIZING COMBINATION Product A: Price = $1 Product B: Price = $2 $ 10 income Marginal utility per dollar (MU/price) Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility, utils Unit of product First 10 10 24 12 Second 8 8 20 10 Third 7 7 18 9 Fourth 6 6 16 8 Fifth 5 5 12 6 Sixth 4 4 6 3 Seventh 3 3 4 2

First 10 10 24 12 Second 8 8 20 10 Third 7 7 18 9 Fourth 6 6 16 8 UTILITY MAXIMIZING COMBINATION Product A: Price = $1 Product B: Price = $2 $ 10 income Marginal utility per dollar (MU/price) Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility, utils Unit of product First 10 10 24 12 Second 8 8 20 10 Third 7 7 18 9 Fourth 6 6 16 8 Fifth 5 5 12 6 Sixth 4 4 6 3 Seventh 3 3 4 2

First 10 10 24 12 Second 8 8 20 10 Third 7 7 18 9 Fourth 6 6 16 8 UTILITY MAXIMIZING COMBINATION Product A: Price = $1 Product B: Price = $2 $ 10 income Marginal utility per dollar (MU/price) Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility, utils Unit of product First 10 10 24 12 Second 8 8 20 10 Third 7 7 18 9 Fourth 6 6 16 8 Fifth 5 5 12 6 Sixth 4 4 6 3 Seventh 3 3 4 2

First 10 10 24 12 Second 8 8 20 10 Third 7 7 18 9 Fourth 6 6 16 8 UTILITY MAXIMIZING COMBINATION Product A: Price = $1 Product B: Price = $2 $ 10 income Marginal utility per dollar (MU/price) Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility, utils Unit of product First 10 10 24 12 Second 8 8 20 10 Third 7 7 18 9 Fourth 6 6 16 8 Fifth 5 5 12 6 Sixth 4 4 6 3 Seventh 3 3 4 2

combination is 2 of Product A UTILITY MAXIMIZING COMBINATION Product A: Price = $1 Product B: Price = $2 $ 10 income Marginal utility per dollar (MU/price) Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility, utils Unit of product First 10 10 24 12 Second 8 8 20 10 Third 7 7 18 9 Fourth 6 6 16 8 Fifth 5 5 12 6 Sixth 4 4 6 3 Seventh 3 3 4 2 Utility maximizing combination is 2 of Product A and 4 of product B

Utility Maximizing Rule UTILITY MAXIMIZING COMBINATION Product A: Price = $1 Product B: Price = $2 $ 10 income Marginal utility per dollar (MU/price) Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility, utils Unit of product First 10 10 24 12 Utility Maximizing Rule The consumer’s money should be spent so that the marginal utility per dollar of each goods equal each other. MUx = MUy Px Py

Practice FRQ #4

UNIT 1 KEY CONCEPT Absolute and Comparative Advantage

Output: Other goes Over Output Questions: OOO= Output: Other goes Over

Input: Other goes Under Input Questions: IOU= Input: Other goes Under