Unit 2 Supply and Demand Chapter 3 Supply and Demand

I. Competitive Market a)Many buyers and sellers b)Supply and Demand model explains how a competitive market works c)Five key elements: 1.Demand Curve 2.Supply Curve 3.Demand and supply curve shifts 4.Market equilibrium 5.Changes in market equilibrium

I. Demand a)Different quantities of goods that consumers are willing and able to buy at different prices. b)Ex. Bill gates is able to purchase a Ferrari, but if he isn’t willing he has NO demand for on. c)Law of Demand: 1.Inverse relationship between price and quantity demanded.

LAW OF DEMAND As Price Falls… …Quantity Demanded Rises As Price Rises… …Quantity Demanded Falls Price Quantity Demanded 4

II. Demand Schedule a)Shows how much of a good or service consumers will want to buy at different prices Price of coffee beans (per pound) Quantity of coffee beans demanded (billions of pounds) $2.00 Demand Schedule for Coffee Beans

GRAPHING DEMAND Q o $ Price of Cereal Quantity of Cereal Demand Schedule Draw this large in your notes 6 Price Quantity Demanded $510 $420 $330 $250 $180

GRAPHING DEMAND Q o $ Price of Cereal Quantity of Cereal Demand Schedule Price Quantity Demanded $510 $420 $330 $250 $180 Demand

Pay More, Pump Less…  Because of high taxes, gasoline and diesel fuel are more than twice as expensive in most European countries as in the United States.  According to the law of demand, Europeans should buy less gasoline than Americans, and they do: Europeans consume less than half as much fuel as Americans, mainly because they drive smaller cars with better mileage $ Price of gasoline (per gallon) 0 Italy France Canada United States Japan Germany Spain United Kingdom Consumption of gasoline (gallons per day per capita)

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III. Shifting Demand a)At the same prices, more or less people are willing and able to purchase that good. b)Demand now changes. c)We don’t move along the curve….we shift it.

IV. Shifters of Demand a)Changes in the prices of related Goods. 1.Substitutes: Two goods that are easily interchanged for each other if the price changes. (ie. Apples get expensive, people buy more oranges. 2.Complements: Two goods that need each other. (ie. Paint gets expensive so people buy fewer paint brushes.

IV. Shifters of Demand b)Changes in tastes c)Changes in expectations d)Number of consumers e)Changes in income 1.Normal goods: rise in income makes you want to buy more of something. 2.Inferior goods: rise in income makes you buy less of something.

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Change in Demand Q o $ Price of Cereal Quantity of Cereal Demand Schedule Price Quantity Demanded $510 $420 $330 $250 $180 Demand

Change in Demand Q o $ Price of Cereal Quantity of Cereal Demand Schedule Price Quantity Demanded $510 $420 $330 $250 $180 Demand

Change in Demand Q o $ Price of Cereal Quantity of Cereal Demand Schedule Price Quantity Demanded $51030 $42040 $33050 $25070 $ Demand

Change in Demand Q o $ Price of Cereal Quantity of Cereal Demand Schedule Price Quantity Demanded $51030 $42040 $33050 $25070 $ Demand D1D1 Increase in Demand Prices didn’t change but people want MORE cereal

Change in Demand Q o $ Price of Cereal Quantity of Cereal Demand Schedule Price Quantity Demanded $510 $420 $330 $250 $180 Demand

Change in Demand Q o $ Price of Cereal Quantity of Cereal Demand Schedule Price Quantity Demanded $510 $420 $330 $250 $180 Demand

Change in Demand Q o $ Price of Cereal Quantity of Cereal Demand Schedule Price Quantity Demanded $5100 $4205 $33020 $25030 $ Demand

Change in Demand Q o $ Price of Cereal Quantity of Cereal Demand Schedule Price Quantity Demanded $5100 $4205 $33020 $25030 $ DemandD2D2 Decrease in Demand Prices didn’t change but people want LESS cereal

Practice First, identify the determinant (shifter) then decide if demand will increase or decrease 25 Shifter Increase or Decrease Left or Right

Practice Hamburgers (a normal good) 1.Population boom 2.Incomes fall due to recession 3.Price for Carne Asada burritos falls to $1 4.Price increases to $5 for hamburgers 5.New health craze- “No ground beef” 6.Hamburger restaurants announce that they will significantly increase prices NEXT month 7.Government heavily taxes shake and fries causes their prices to quadruple. 8.Restaurants lower price of burgers to $.50 First identify the determinant (Shifter). Then decide if demand will increase or decrease 26

V. Supply a)The different quantities of a good that sellers are willing and able to sell at different prices. b)Law of Supply 1.Direct relationship between price and quantity. 2.As price increases, producers make more. 3.As price falls, producers make less

Example of Supply You own an lawn mower and you are willing to mow lawns. How many lawns will you mow at these prices? Price per lawn mowed Quantity Supplied Supply Schedule 28 $1 $5 $20 $50 $100 $1000

GRAPHING SUPPLY Q o $ Price of Cereal Quantity of Cereal Supply Schedule Draw this large in your notes 29 Price Quantity Supplied $550 $440 $330 $220 $110

GRAPHING SUPPLY Q o $ Price of Cereal Quantity of Cereal Supply Schedule Price Quantity Supplied $550 $440 $330 $220 $110 Supply

VI. Supply Shifters a)Changes in input prices. b)Government Action: Taxes and Subsidies c)Changes in prices of related goods and services. d)Changes in technology e)Changes in expectations f)Changes in the number of producers

Change in Supply Q o $ Price of Cereal Quantity of Cereal Supply Schedule Price Quantity Supplied $550 $440 $330 $220 $110 Supply

Change in Supply Q o $ Price of Cereal Quantity of Cereal Supply Schedule Price Quantity Supplied $550 $440 $330 $220 $110 Supply

Change in Supply Q o $ Price of Cereal Quantity of Cereal Supply Schedule Price Quantity Supplied $55070 $44060 $33050 $22040 $ Supply

Change in Supply Q o $ Price of Cereal Quantity of Cereal Supply Schedule Supply S2S2 Price Quantity Supplied $55070 $44060 $33050 $22040 $ Increase in Supply Prices didn’t change but there is MORE cereal produced

Supply Practice First, identify the determinant (shifter) then decide if supply will increase or decrease 36 Shifter Increase or Decrease Left or Right

Supply Practice Hamburgers 1.Mad cow disease kills 20% of cows 2.Price of hamburgers increase 30% 3.Government taxes burger producers 4.Restaurants can produce burgers and/or tacos. A demand increase causes the price for tacos to increase 500% 5.New bun baking technology cuts production time in half 6.Minimum wage increases to $20 1.Which determinant (SHIFTER)? 2.Increase or decrease? 3.Which direction will curve shift? 37

VII. Supply, Demand and Equilibrium a)Equilibrium: when quantity demanded of a good equals the quantity supplied (competitive market). b)Known as equilibrium price 1.Every buyer finds a seller 2.Every good is sold

Q o $ P Demand Schedule PQd $510 $420 $330 $250 $180 D S Supply Schedule PQs $550 $440 $330 $220 $110 Supply and Demand are put together to determine equilibrium price and equilibrium quantity

Q o $ P Demand Schedule PQd $510 $420 $330 $250 $180 Supply Schedule PQs $550 $440 $330 $220 $110 Supply and Demand are put together to determine equilibrium price and equilibrium quantity Equilibrium Price = $3 (Qd=Qs) Equilibrium Quantity is 30 D S

Q o $ P Demand Schedule PQd $510 $420 $330 $250 $180 Supply Schedule PQs $550 $440 $330 $220 $110 D S At $4, there is disequilibrium. The quantity demanded is less than quantity supplied. Surplus (Qd<Qs) How much is the surplus at $4?

Q o $ P Demand Schedule PQd $510 $420 $330 $250 $180 Supply Schedule PQs $550 $440 $330 $220 $110 D S At $2, there is disequilibrium. The quantity demanded is greater than quantity supplied. Shortage (Qd>Qs) How much is the shortage at $2? Answer: 30

Q o $ P Demand Schedule PQd $510 $420 $330 $250 $180 Supply Schedule PQs $550 $440 $330 $220 $110 D S When there is a surplus, producers lower prices The FREE MARKET system automatically pushes the price toward equilibrium. When there is a shortage, producers raise prices

VIII. Drawing shifting curves 1.Before the change: a)Draw supply and demand b)Label equilibrium price and quantity 2.The change: a)Did supply or demand change first? b)Which determinant caused the shift? c)Draw the increase or decrease. 3.After the change: a)Label new equilibrium b)Explain what happens to price c)Explain what happens to quantity

Simultaneous Shifts of Supply and Demand We can make the following predictions about the outcome when the supply and demand curves shift simultaneously: Simultaneous Shifts of Supply and Demand Supply IncreasesSupply Decreases Demand Increases Price: ambiguous Quantity: up Price: up Quantity: ambiguous Demand Decreases Price: down Quantity: ambiguous Price: ambiguous Quantity: down

S&D Analysis Practice Analyze Hamburgers 1.Price of sushi (a substitute) increases 2.New grilling technology cuts production time in half 3.Price of burgers falls from $3 to $1. 4.Price for ground beef triples 5.Human fingers found in multiple burger restaurants. 1.Before Change (Draw equilibrium) 2.The Change (S or D, Identify Shifter) 3.After Change (Price and Quantity After) 46

Use a S&D to explain this double shift 47

 The ease of transmitting photos over the Internet and the relatively low cost of international travel  beautiful young women from all over the world, eagerly trying to make it as models = influx of aspiring models from around the world  In addition the tastes of many of those who hire models have changed  they prefer celebrities  What happened to the equilibrium price of a young (not a celebrity) fashion model? Use your supply and demand curves to determine the salaries of “America’s Next Best Models”… Your Turn on the Runway: An Exercise of Supply, Demand and Supermodels