2. Chapters 4 and 5 “Demand, Supply, and Market Equilibrium”

3. Introduction to Demand In the United States, the forces of supply and demand work together to set prices. Demand is the desire, willingness, and ability to buy a good or service. – Demand refers to individual consumers or the total demand of all consumers in the market (market demand). Based on that definition, what is in high demand by students your age?

4. Introduction to Demand A demand schedule is a table that lists the various quantities of a product or service that someone is willing to buy over a range of possible prices. Price per Ice Cream Scoop($) Quantity Demanded of Ice Cream Scoop per day $8100 $7200 $6300 $5400 $4?????

5. Introduction to Demand A demand schedule can be shown as points on a graph. ▫The graph lists prices on the vertical axis and quantities demanded on the horizontal axis. ▫Each point on the graph shows how many units of the product or service an individual will buy at a particular price. ▫The demand curve is the line that connects these points.

6. What do you notice about the demand curve? How would you describe the slope of the demand curve? Do you think that price and quantity demanded tend to have this relationship?

7. Introduction to Demand The demand curve slopes downward. ▫This shows that people are normally willing to buy less of a product at a high price and more at a low price. ▫According to the law of demand, quantity demanded and price move in opposite directions.

8. Law of Demand = Inverse Relationship Demand is an inverse relationship: Low Price = High Demand High Price = Low Demand

9. Introduction to Demand We buy products for their utility- the pleasure, usefulness, or satisfaction they give us. What is your utility for the following products? (Measure your utility by the maximum amount you would be willing to pay for this product) White boards

15. What is Quantity? refers to the entire relationship between prices and the quantity of this product or service that people want at each of these prices. should be thought of as "the demand curve."

16. What is Quantity Demanded? The amount of goods which would be demanded at a particular price. If non-price factors that could influence demand are removed, then the higher the price of a good the lower the quantity of that good will be demanded.amountgoodspricefactorsdemandlower

17. Change in Price is a Change in Quantity Demanded

18. Changes in Demand Change in the quantity demanded due to a price change occurs ALONG the demand curve An increase in the Price of Ice Cream from $3 to $4 will lead to a decrease in the Quantity Demanded of scoops from 6 to 4.

19. Changes in Demand Demand Curves can also shift in response to the following factors: – Buyers (# of): changes in the number of consumers – Income: changes in consumers’ income – Tastes: changes in preference or popularity of product/ service – Expectations: changes in what consumers expect to happen in the future – Related goods: compliments and substitutes BITER: factors that shift the demand curve

20. Changes in Demand Changes in any of the factors other than price causes the demand curve to shift either: Decrease in Demand shifts to the Left (Less demanded at each price) OR Increase in Demand shifts to the Right (More demanded at each price)

21. Non price determinant can shift the demand curve. BITER

22. D1 D1 D1 D1 D2 D2 D2 D2 P QD 1 QD 2 More demand for both normal & inferior goods New Cars Used Cars

23. P More income results in more demand for new cars; less demand for used cars. New Cars Used Cars Less income results in more demand for used cars; less demand for new cars.

24. D3D3D3D3

25. D1D1D1D1 P Dark Chocolate: Half A Bar Per Week May Keep Heart Attack Risk At Bay.

26. D1 D1 D1 D1 P QD 1 iPad 16 GB $499

27. D1 D1 D1 D1 P QD 1

28. D1 D1 D1 D1 P

29. D1 D1 D1 D1 D2D2D2D2 P

30. Milk Cereal Pop Tarts D1D1D1D1 P P2P2 D1D1D1D1D P QD 2

31. Changes in Demand Prices of related goods affect on demand – Substitute goods  a substitute is a product that can be used in the place of another. The price of the substitute good and demand for the other good are directly related For example, Coke PricePepsi Demand – Complementary goods  a compliment is a good that goes well with another good. When goods are complements, there is an inverse relationship between the price of one and the demand for the other For example, Computers Software

32. Q: What causes a shift in Demand? A: Non-price determinants Price Quantity Demanded Decrease in demand (left) Increase in demand (Right)

33. 1. The income of the Pago-Pagans declines after a typhoon hits the island. The people on this island make boomerangs. Quantity Price D D1D1

34. 2. Pago-Pagan is named one of the most beautiful islands in the world and tourism to the island doubles. Quantity Price D D1D1

35. 3. The price of Frisbees decreases. (Frisbees are a substitute good for boomerangs) What happens to the sale of boomerangs? Quantity Price D D1D1

36. 4. The price of boomerang t-shirts decreases, which I assume all of you know are a complementary good. Quantity Price D D1D1

37. 5. The Boomerang Manufactures decide to add a money back guarantee on their product, which increases the popularity for them. Quantity Price D D1D1

38. 6. Many Pago-pagans begin to believe that they may lose their jobs in the near future. (Think expectations!) Quantity Price D D1D1

39. 7. Come up with your own story about boomerangs and the Pago-Pagans. Write down the story, draw the change in demand based on the story, and explain why demand changed. Quantity Price D

40. Review: How do the following newspaper headlines cause a change in the demand for BEEF? Use a non price determinant (BITER) to help you answer each questions. “The Price of Beef Set To Rise In June” Will the demand for beef increase or decrease? Why?

41. “Millions of Aliens Swell US Population” Will the demand of beef increase or decrease? Why? “Pork Prices Drop” Will the demand of beef increase or decrease? Why? “Charcoal shortage threatens Memorial Day Cookouts” Will the demand of beef increase or decrease? Why?

42. “Minimum Wage Set To Increase To $8.00 Per Hour.” Will the demand of beef increase or decrease? Why? “Beef is Proven To Cause Alzheimer’s Disease” Will the demand of beef increase or decrease? Why?

43. Demand Video

44. Worksheets

45. Elasticity of Demand The degree to which changes in price cause changes in demand or If we change the price, will demand change a lot or a little?

46. Elastic Demand If Demand for a good is very sensitive to changes in price, the demand is ELASTIC Or If prices changes a little bit, demand will change a lot!

47. Example of Elastic Demand Price of pizza goes up even a little bit, demand goes down a lot.

48. Elastic Demand for Pizza Curve is FLAT

49. Inelastic Demand Demand for a good that consumers will continue to buy despite a price increase is INELASTIC OR Even if price changes a lot, demand changes very little

50. Example of Inelastic Demand The price of soap goes up a lot, the demand stays almost the same.

51. Inelastic Demand for Soap Curve is STEEP

52. Factors Affecting Elasticity Several different factors can affect the elasticity of demand for a certain good. 1. Availability of Substitutes If there are few substitutes for a good, the demand will not likely decrease as price increases (inelastic), the opposite (lots of substitutes) is also usually true (elastic) Ex. Gasoline has no substitutes- inelastic McDonalds has many (Burger King, etc)- elastic

53. Factors Affecting Elasticity (Cont.) 2. Relative Importance Another factor determining elasticity of demand is how much of your budget you spend on the good. Ex. Mortgage payment must be paid (inelastic) Entertainment (movies, etc.) are elastic

54. Factors Affecting Elasticity (Cont.) 3. Necessities vs. Luxuries Whether a person considers a good to be a necessity or luxury has a great impact on the good’s elasticity of demand for that person. Ex. Food (inelastic) Jewelry (elastic)

55. Factors Affecting Elasticity (Cont.) 4. Change over Time Demand sometimes becomes more elastic over time because people can eventually find substitutes. Ex.Blockbuster used to be the only place to rent videos (inelastic) Netflix, Video on Demand, Pay Per View, are substitutes for Blockbuster (elastic)

56. Elastic or Inelastic demand?

57. New Car…..you have a used car that works from 1985.

58. Gas to heat your home in the middle of winter

59. Vacation to Italy

60. Which of the following will cause an “Increase in Demand” for digital cameras? A. Decrease in price of the cameras B. Increase in Incomes C. Decrease in Incomes D. Increase in Price of the Cameras

61. Which of the following will cause an “increase in Quantity Demanded” for digital cameras? A. Increase in price of cameras B. Decrease in price of cameras C. Increase in Incomes D. Decrease in price of camcorders

62. Which of the following will cause a “decrease in demand” for scanners? A. Increase in price of scanners B. Decrease in price of scanners C. Decrease in number of consumers

63. Which of the following will cause a “decrease in Quantity Demanded” for scanners? A. Decrease in price of scanners B. Increase in price of scanners C. Decrease in number of consumers

64. Which of the following will not cause the demand for Snickers to change (shift)? A. A change in price of Snickers. B. A change in price of Hershey Bars C. An increase in consumer incomes D. A decrease in consumer incomes

65. W hich of the following will not shift the demand curve for beef? A. A widely publicized study which indicates beef increases one’s cholesterol B. A reduction in the price of beef C. An effective advertising campaign by pork producers D. A change in the incomes of beef consumers

66. “When the price of product falls, the purchasing power of our money income rises and thus permits us to purchase more of the product” 1. An inferior good 2. The income effect 3. The substitution effect 4. The law of supply

67. If the price of Coke increases, the demand curve for Pepsi will? A. Shift to the right B. Decrease C. Shift to the left D. Remain unchanged

68. An decrease in demand means that 1. given supply, the price of the product can be expected to decline 2. the demand curve has shifted to the left 3. Price has declined a consumers therefore want to purchase more of the product 4. The demand curve has shifted to the right.

69. An increase in Quantity Demanded means that… 1. Given supply, the price of the product can be expected to decline 2. Price has declined and consumers therefore want to purchase more of the product 3. The demand curve has shifted to the right

70. Partner up…Develop review anchor charts on Demand Picture for each letter of BITER All vocabulary including quantity demanded and demand curve and provide explanation of how it impacts demand. BITER…what does each letter mean? Explain and graph/explain/show examples for each letter. Graphs showing an increase in demand and a decrease in demand. Graph showing an increase and decrease in quantity demanded Inelastic and Elastic Demand graphs and examples

71. Smart Start What is the economic definition for the word supply?

72. Introduction to Supply Supply refers to the various quantities of a good or service that producers are willing to sell at all possible market prices. Supply can refer to the output of one producer or to the total output of all producers in the market (market supply).

73. Based on…. Voluntary decisions made by producers

74. Introduction to Supply A supply schedule is a table that shows the quantities producers are willing to supply at various prices Price per Widget ($)Quantity Supplied of Widget per day $510 $48 $36 $24 $12

75. Vocabulary Quantity supplied- amount that producers bring to market at any given price Change in quantity supplied- change in the amount offered for sale in response to a change in price. Example on page 114

76. Introduction to Supply A supply schedule can be shown as points on a graph. ▫The graph lists prices on the vertical axis and quantities supplied on the horizontal axis. ▫Each point on the graph shows how many units of the product or service a producer (or group of producers) would willing sell at a particular price. ▫The supply curve is the line that connects these points.

77. What do you notice about the supply curve? How would you describe the slope of the supply curve? Do you think that price and quantity supplied tend to have this relationship?

78. Introduction to Supply As the price for a good rises, the quantity supplied rises and the quantity demanded falls. As the price falls, the quantity supplied falls and the quantity demanded rises. The law of supply holds that producers will normally offer more for sale at higher prices and less at lower prices.

79. Introduction to Supply The reason the supply curve slopes upward is due to costs and profit. Producers purchase resources and use them to produce output. ▫Producers will incur costs as they bid resources away from their alternative uses.

80. Introduction to Supply Businesses provide goods and services hoping to make a profit. ▫Profit is the money a business has left over after it covers its costs. ▫Businesses try to sell at prices high enough to cover their costs with some profit left over. ▫The higher the price for a good, the more profit a business will make after paying the cost for resources.

81. Changes in Supply If the price of Widgets fell to $2, then the Quantity Supplied would fall to 4 Widgets. Change in the quantity supplied due to a price change occurs ALONG the supply curve

82. Seven Supply Shifters… RATNEST 1.R esource Costs….wages and raw materials; if resource costs decrease, then supply will increase. If resource costs increase, then supply will decrease. 2. A lternative Output Price Change; Supply might increase because there is a decrease in the cost of inputs, such as labor and packaging. 3.T echnology Improvements; because cows produce more milk not as many cows are needed. 4.N umber of suppliers 5.E xpectations about the future price of a product. Producers think the price of their product will go up, they may withhold some of it. 6.S ubsidies from government. Free money will encourage suppliers to produce more. 7.T axes placed on businesses by the government or other countries. It is a burden and can decrease production which will decrease supply.

84. Wages Raw Materials Intel Pentium Chip S S S P

85. P1 QS1 “Substitutes in production” I only have 200 acres S S1S1S1S1 P S2S2S2S2 QS1 QS1 S1S1S1S1 P S2S2S2S2 S Producers want to produce more of the good where price is increasing, or at least, where the price is not going down. P2 QS2 QS2

86. S Because cows produce more milk, farmers don’t have to have as many cows. [ saves $ ] S P Supply curve “udderly” moves “udderly” to the right. Less skin abrasions so happier cows produce more milk. Mooooove over and give me that waterbed. Waterbedsforcows.com

87. S1S1 P Q $50 QS 1 Because of the XFL’s cheerleaders many called this league, not the XFL, but the Supply of FB games each week 8 new teams

88. P

90. [ Inverse ] P S1S1S1S1 I’m losing profits.”

91. Changes in Supply Changes in any of the factors other than price causes the supply curve to shift either: Decrease in Supply shifts to the Left (Less supplied at each price) OR Increase in Supply shifts to the Right (More supplied at each price)

92. Changes in Supply Several factors will change the demand for the good (shift the entire demand curve) As an example, suppose that there is an improvement in the technology used to produce widgets.

93. Changes in Supply Supply can also decrease due to factors other than a change in price. As an example, suppose that a large number of Widget producers go out of business, decreasing the number of suppliers.

94. Cost to ProduceAmount of SupplySupply Curve Shifts Cost of Resources Falls Cost of Resources Rises Productivity Decreases Productivity Increases New Technology Higher Taxes Lower Taxes Government Pays Subsidy

95. Supply Practice

96. 1. The government of Pago-Paga adds a subsidy to boomerang production. Quantity Price S S1S1

97. 2. Boomerang producers also produce Frisbees. The price of Frisbees goes up. Quantity Price S S1S1

98. 3. The government of Pago-Paga adds a new tax to boomerang production. Quantity Price S S1S1

99. 4. Boomerang producers expect an increase in the popularity of boomerangs worldwide. Quantity Price S S1S1

100. 5. The price of plastic, a major input in boomerang production, increases. Quantity Price S S1S1

101. 6. Pago-Pagan workers are introduced to coffee as Pago- Paga become integrated into the world market and their productivity increases drastically. Quantity Price S S1S1

102. Practice “Supply Quiz” “decrease in supply” 1. Which would cause a “decrease in supply” for MP3 Players? a. decrease in the price of MP3s b. increase in the price of MP3s c. decrease in MP3 resource cost d. producer expectations of a price increase “decrease in QS” 2. Which would cause a “decrease in QS” for MP3s? a. decrease in the price of MP3s b. increase in the price of MP3s c. decrease in MP3 resource cost d. producer expectations of a price increase “increase in supply” 3. Which would cause an “increase in supply” for MP3 Players? a. decrease in the price of MP3 Players b. increase in the price of MP3s c. decrease in MP3 resource cost d. producer expectations of a price increase “increase in QS” 4. Which would cause an “increase in QS” for MP3s? a. decrease in price of MP3s b. increase in price of MP3s c. decrease in MP3 resource cost d. producer expectations of a price increase 5. An increase in the price of asparagus will (increase/decrease) alternative output the supply of the alternative output peas. “computer chips” 6. A 50% decrease in the price of “computer chips” will “computers”. (increase/decrease) the (supply/QS) for “computers”. “increase in supply” 7. Which would cause an “increase in supply” for MP3 Players? a. increase in wages for MP3 Player workers. b. subsidies($100 per computer) are given to MP3 Player companies. c. subsidies for MP3 Player makers being taken away.

103. Apple’s iPod Video ___7. Increase in the price of Apple’s iPod Video on the Microsoft’s Zune market for Microsoft’s Zune. tealemon ___8. Increase in the price of tea on the market for lemon. taxesSUVs ___9. Increase in business taxes on the market for SUVs. Consumers expect cell phones ___10. Consumers expect a shortage of cell phones. “”[] or “ “ BITER ”[ D ] or “ RATNEST” incomecamcorders ___1. Increase in income on the market for camcorders. # of consumers ___2. Increase in # of consumers on market for computers. Producer expectations ___3. Producer expectations about a price increase. Consumer expectations ___4. Consumer expectations about a price increase. producers ___5. Increase in # of producers on market for digital cameras. resource cost ___6. Increase in resource cost on the market for bagels. A A D A C D A B D A

104. C A C A C B D B d. increase in price of computers c. decrease in # of consumers

105. “ Increase in D ” “Decrease in D ” “Increase in S ” “Decrease in S ” computers software. ___1. Increase in price of computers on market for software. auto worker wagesautos ___2. Decrease in auto worker wages on the market for autos. PepsiCoke ___3. Decrease in the price Pepsi on the market for Coke. D ecrease in the price of computer chips on the computer market ___4. D ecrease in the price of computer chips on the computer market. fertilizerwheat ___5. Increase in price of fertilizer on the market for wheat. subsidies AIDS research ___6. D ecrease in government subsidies on market for AIDS research. incomesused clothing ___7. Increase in incomes on market for used clothing. new professional soccer ___8. A new professional soccer league is formed soccer games upon the market for soccer games. Producer expectations ___9. Producer expectations that the price of orange juice will increase 30% in 3 weeks? Consumer expectations ___10. Consumer expectations that the price of orange juice will increase 30% in 3 weeks? computersmonitors ___11. Decrease in price of computers upon market for monitors? B C C D D C D A B B D 1 D 2 (A) (B) (C) (D) D1D1D1D1 D2D2D2D2 S S S1S1S1S1 S1S1S1S1 S2S2S2S2 S2S2S2S2 DD BITER RATNEST P P PP A

106. B D C B D A C A d. increase in price of Sevens c. increase in # of consumers 7 Revised of the Iphone for the Iphone

107. Supply Elasticity Measure of the way in which quantity supplied responds to a change in price. An elastic good is a good that is not needed. Price is too high, people will not buy the good…..large supply and low demand.

108. Supply Inelasticity A good that is always needed. Supply does not change based on price. Gasoline, soap, milk

109. Your turn to teach….. Chapter 5….Section 1, 2, 3 Chapter 6…..Section 1, 2, 3 You need the following: Title Facts from the subheadings/Big Ideas of each Section Vocabulary and definition Summary of the key points of the Section A large picture/mural to describe and highlight the points covered.

110. Non Price Determinants Supply Explain in your own words, what each letter means for the supply non price determinants… Write down if each determinant has a direct or inverse relationship on price and supply? R A T N E S T

111. Supply and Demand are based on the theory of production. Factor of production are: ▫Land ▫Captial ▫Labor ▫Entrepreneurship

112. Factors of Production Captial, Labor, Land, and Entrepreneurship are related to the amount of goods and service that are produced.

113. Short Run Short Run: Short production period. The time is so short that only one variable input changes. Variable input: Type of input that can be changed, such as labor, supply of materials, and amount of money that can be spent on new machinery.

114. Long Run Long run is a production period that is long enough to adjust the amounts of all its resources, including capital goods.

115. Law of Variable Proportions The Law of Variable Proportions states that in the short run, the amount of a product that is produced will change if one kind of input changes while the other kinds of input stay the same. For example: A farmer will use this law to find out how crop production will be affected if different amounts of fertilizer are added, but the farm machinery and the size of the field stay the same.

116. Law of Variable Proportions How could a factory manager use the Law of Variable Proportions?

117. Production Function Production Function is the relationship between changes in output and changes in a single input. Will production at a factory change if you add another worker? Example: Worker A produces 7 units of output, Worker A and B produce 20 units. All other input including raw materials stay the same.

118. Production Function The more workers that are added, production rises. However, after even more workers are added, production does not rise as fast. If too many workers are added, production can even go down. Why would the production go down eventually?

119. Production Function The two most important measures of output are total product and marginal product. Total product is the total amount of a product that is produced by a business. Marginal product is the extra output produced when one input, such as one more worker or one new machine is added.

120. Production Function Based on this example: Worker A produces 7 units of output, Worker A and B produce 20 units. All other input including raw materials stay the same. What would the marginal output be because a second worker was added?

121. Three Stages of Production Read pages 125 Create a Chart in your notebook with three columns. Write a description of each and what variables need to be present for each to happen. Increasing Returns Diminishing Returns Negative Returns

122. Stage One: Increasing Returns Workers hired cannot work efficiently because there are too many resources per worker. As the number of workers increases, they make better use of their machinery and resources. This results in increasing returns

123. Stage Two: Diminishing Returns Total production keeps growing but by smaller and smaller amounts. Any additional workers hired may stock shelves, package parts, and do other jobs that leave the machine operators free to do their jobs. The rate of increase in total production is now starting to slow down. Each additional worker, then, is making a diminishing but still positive contribution to total output.

124. # of Workers Total Product Marginal Product Stages of Production 000Stage 1 177 22013 33818 46224 59028 611020Stage 2 712919 81389 91446 101484 11145-3Stage 3

126. Stage Three: Negative Returns Negative Returns: Firm has hired too many workers and they are starting to get in each other’s way. Marginal product becomes negative and total plant output decreases. The firm should hire at least six but no more than ten workers.

128. Supply and Demand at Work Markets bring buyers and sellers together. The forces of supply and demand work together in markets to establish prices. In our economy, prices form the basis of economic decisions.

129. Supply and Demand at Work Supply and Demand Schedule can be combined into one chart. Price per Widget ($) Quantity Demanded of Widget per day Quantity Supplied of Widget per day $5210 $448 $366 $284 $1102

130. Supply and Demand at Work

131. A surplus is the amount by which the quantity supplied is higher than the quantity demanded. – A surplus signals that the price is too high. – At that price, consumers will not buy all of the product that suppliers are willing to supply. – In a competitive market, a surplus will not last. Sellers will lower their price to sell their goods.

132. Supply and Demand at Work Suppose that the price in the Widget market is $4. At $4, Quantity demanded will be 4 Widgets At $4, Quantity supplied will be 8 Widgets. At $4, there will be a surplus of 4 Widgets. Surplus

133. Supply and Demand at Work A shortage is the amount by which the quantity demanded is higher than the quantity supplied ▫A shortage signals that the price is too low. ▫At that price, suppliers will not supply all of the product that consumers are willing to buy. ▫In a competitive market, a shortage will not last. Sellers will raise their price.

134. Supply and Demand at Work Suppose that the price in the Widget market is $2. At $2, Quantity supplied will be 4 Widgets At $2, Quantity demanded will be 8 Widgets. At $2, there will be a shortage of 4 Widgets. Shortage

135. Supply and Demand at Work When operating without restriction, our market economy eliminates shortages and surpluses. – Over time, a surplus forces the price down and a shortage forces the price up until supply and demand are balanced. – The point where they achieve balance is the equilibrium price. At this price, neither a surplus nor a shortage exists. Once the market price reaches equilibrium, it tends to stay there until either supply or demand changes. – When that happens, a temporary surplus or shortage occurs until the price adjusts to reach a new equilibrium price.

136. Supply and Demand at Work Suppose that the price in the Widget market is $3. At $3, Quantity supplied will be 6 Widgets At $3, Quantity demanded will be 6 Widgets. At $3, there will be neither a surplus or a shortage.

137. Supply and Demand Practice Answers

138. Surplus

139. Shortage

140. 6 Market Equilibrium