1. SUPPLY AND DEMAND:
HOW MARKETS WORK

2. MARKETS AND COMPETITION
A market is a group of buyers and sellers of a particular good or service. 4

3. MARKETS AND COMPETITION
Buyers determine demand.
Sellers determine supply. 4

4. DEMAND
Quantity demanded : the amount of a good that buyers are willing and able to purchase.
Law of Demand
The quantity demanded of a good falls when the price of the good rises. $
# Demanded 8

5. Ben’s Demand Schedule 17

6. Ben’s Demand Curve Price of Ice-Cream Cone $3.00 2.50 1. A decrease
in price
...
2.00
1.50
1.00
0.50 1 2 3 4 5 6 7 8 9 10 11 12
Quantity of 2.
...
increases quantity
of cones demanded.
Ice-Cream Cones

7. Change in Quantity Demanded
Movement along the demand curve.
Caused by a change in the price of the product. 19

8. Change in Quantity Demanded
Price of Ice-Cream Cones
A tax that raises the price of ice-cream cones results in a movement along the demand curve. B
$2.00 A
1.00 D 4 8
Quantity of Ice-Cream Cones

9. Changes in
Demand!!!
(Demand Shifters)

10. What is a change in demand?
Any change that alters the quantity demanded at every price.
A shift in the demand curve, either to the left or right. 19

11. Shifts in the Demand Curve
Price of
Ice-Cream
Cone
Increase
in demand
Decrease
in demand D 1 D D 2
Quantity of
Ice-Cream Cones

12. Demand Shifters: T - I - R - E - S - Income of Consumers
Tastes & Preferences of Consumers
Income of Consumers
Related Goods: Substitutes & Complements
Expectations of Future Price Changes
Size of population/Market
I -
R -
E -
S -

13. Tastes & Preferences of Consumers
As people’s tastes change in favor of a good, or an effective advertising campaign has been waged, demand increases (shifts to the right).
As people’s tastes change against a good, or a good loses popularity, demand decreases (shifts to the left). P Q D D1 P Q D1 D

14. Example: When Michael Jordan began endorsing the products, demand for Nike & Gatorade increased.

15. Income of Consumers
As income increases, consumer demand for goods and services increases (shifts to the right).
As income decreases, consumer demand for goods and services decreases (shifts to the left).

16. Example: When Billy got laid off from his job, his demand for gourmet steak dinners decreased.

17. Related Goods: Substitutes
Substitute goods can be easily used in place of one another.
If two goods are SUBSTITUTES, when the price of Good A increases, demand for Good B increases (shifts to the right).
If two goods are SUBSTITUTES, when the price of Good A decreases, demand for Good B decreases (shifts to the left).

18. Example: Demand for Starbucks changes when Caribou alters its prices

19. Related Goods: Complements
Complementary goods are used WITH each other.
If two goods are COMPLEMENTS, when the price of Good A increases, demand for Good B decreases (shifts to the left).
If two goods are COMPLEMENTS, when the price of Good A decreases, demand for Good B increases (shifts to the right).

20. Example: Demand for ketchup changes when hamburger prices fluctuate

21. Substitute OR Complementary?
Cars and Tires
Corn and Beans
DVD Players and DVD’s
Natural Gas and Electricity
Cereal and Milk
Toast and Jam
Sweatshirts and Sweaters

22. Expectations of Future Price Changes
If consumers expect the price of a good to rise in the future, immediate demand increases (shifts to the right).
If consumers expect the price of a good to decrease in the future, immediate demand decreases (shifts to the left).

23. Example: Demand for gas changes throughout the week

24. Size of Population/Market
As the number of consumers in a given market increases, demand increases (shifts to the right).
As the number of consumers in a given market decreases, demand decreases (shifts to the left).

25. Example: Demand for girl scout patches increases when more girls join girl scouts

26. Variables That Influence Buyers

28. Shifts in Demand
A well known athlete who endorses a line of button down shirts is discovered to have been unfaithful to his wife.
Demand Shift:
Left

29. Shifts in Demand
The number of Netflix rentals if movie tickets prices increase to $12.00 per person.
Demand Shift:
Right

30. “Analyzing Demand Headlines” Activity Instructions
May work with your partner.
In this activity, you will work with your partner to analyze a series of newspaper headlines. Based on information in each headline, you will investigate what happens to the demand curve for a related product.

31. Work with your group to analyze headlines that will likely affect demand by following these steps:
Carefully read one of the demand headlines. Determine whether the information will
Shift the entire curve to the left or to the right, or
Not shift the demand curve, but change the quantity demanded along the original curve.

32. Summarize the headline in the corresponding row.
On your worksheet…
Summarize the headline in the corresponding row.
Draw what will likely happen to the demand curve.
Explain what happened to the demand curve & why.
Cite & underline the shifter (TIRES), or explain why the curve did not shift, and whether quantity demanded increased or decreased.
Wages Decline for U.S. Workers
-Demand decreased (shifted left)
-Income of consumers decreased D2

33. Summarize the headline in the corresponding row.
Have your work checked by the teacher. Then repeat the process with a new headline until A-H are completed.
Summarize the headline in the corresponding row.
Draw what will likely happen to the demand curve.
Explain what happened to the demand curve & why.

34. Elasticity OF
DEMAND

35. WHAT WILL CONSUMERS DO WHEN PRICES CHANGE
WHAT WILL CONSUMERS DO WHEN PRICES CHANGE??? How much more will consumers buy if the price falls? How much less will consumers buy if the price rises?

36. ELASTICITY OF DEMAND: Measurement of consumers’ sensitivity to price.
Buyers are responsive to price changes.
INELASTIC:
Buyers are not responsive to price changes.

37. Determinants of Demand Elasticity:
Availability of substitutes
Price relative to income
Necessities vs. Luxuries
Time needed to adjust to a price change

38. Elastic or Inelastic? Sugar New furniture New car Gasoline Food
Encyclopedia
2% Milk
Sailboat
Socks
Aspirin
Diet Coke
Gold Jewelry
Insulin

39. SUPPLY
Quantity supplied is the amount of a good that sellers are willing and able to sell.
Law of Supply
The quantity supplied of a good rises when the price of the good rises. $ #
supplied 25

40. Jerry’s Supply Schedule
Price of Ice cream cone
Qty. of Cones supplied 29

41. Jerry’s Supply Curve Price of Ice-Cream Cone $3.00 2.50 1. An increase
in price
...
2.00
1.50
1.00
0.50 1 2 3 4 5 6 7 8 9 10 11 12
Quantity of
Ice-Cream Cones 2.
...
increases quantity of cones.

42. Change in Quantity Supplied
Movement along the supply curve.
Caused by a change in the price of the product. 30

43. Change in Quantity Supplied
Price S C
$3.00
A rise in the price of ice cream cones results in a movement along the supply curve. A
1.00
Quantity of Ice-Cream Cones 1 5 30

44. Changes in
Supply!
(Supply Shifters)

45. What is a change in supply?
Any change that alters the quantity supplied at every price.
A shift in the supply curve, either to the left or right. 19

46. Shifts in the Supply Curve
Price of S2
Ice-Cream S
Cone S 1
Decrease
in supply
Increase
in supply
Quantity of
Ice-Cream Cones

47. Supply Shifters: T- I- G- E- R- S- Technology
International Events/Disasters
Government Intervention
Expectations for Future Price Changes
Resource Costs
Number of Sellers in the Market I- G- E- R- S-

48. Technological Advancements
As technology advances, production becomes more efficient and supply increases (shifts to the right). P Q S S1

49. International Events/Disasters
When international events (such as wars & revolutions) or natural disasters occur, supply decreases (shifts to the left). P Q S1 S

50. Government Intervention
(Taxes, Fees, Regulations, Subsidies)
When a tax, fee, or regulation is imposed on the production of a good or service, supply decreases (shifts to the left).
When a subsidy is granted for producers of a good or service, supply increases (shifts to the right). P Q S1 S P Q S S1

51. Example: If the import tax on Toyota Corollas increases, the profit per unit decreases, and American manufacturers will not be able to afford to offer as many for sale. P Q S1 S

52. Example: When the government decided to subsidize dairy farming, dairy farmers’ profits increased, therefore increasing supply of dairy cattle. P Q S S1

53. Expectations of Future Price Changes
If producers expect the price of a good to rise in the future, immediate supply decreases (shifts to the left).
If producers expect the price of a good to decrease in the future, immediate supply increases (shifts to the right). P Q S1 S P Q S S1

54. Example: If Farmer Joe hears that the price of corn is going to increase next month, he’s going to wait to sell his corn (therefore decreasing the immediate supply of corn).

55. Resource Costs
As the factors of production (land, labor, and capital) become more expensive for the producer to purchase, supply decreases (shifts to the left).
As the factors of production (land, labor, and capital) become less expensive for the producer to purchase, supply increases (shifts to the right). P Q S1 S P Q S S1

56. Example: Don’s landlord increases his rent, which increases Don’s costs of production. Since it’s more expensive to make a donut, the profit per unit earned decreases and supply of Don’s Donuts falls.

57. Number of Sellers in the Market
When additional firms (businesses) enter a market, supply of the product increases (shifts to the right).
When firms (businesses) exit a market (go out of business or for some other reason cease production), supply of the product decreases (shifts to the left). P Q S S1 P Q S1 S

58. Example: If the Bartow City Council passed a law banning pizza from being sold within city limits, pizza producers would have to close/move, decreasing the supply of pizza in Bartow.

59. Variables That Influence Sellers

61. Shifts in Supply
Due to recent high fuel prices, United Airlines has reduced the number of flights to the Caribbean for the upcoming spring break.
Supply Shift:
Left

62. Shifts in Supply
A water bottle company hears a forecast for a hurricane in the Polk county area early next week.
Supply Shift:
Right

63. Shifts in Supply
The state of Florida announces higher taxes on gasoline to cover road repairs.
Supply Shift:
Left

64. “Analyzing Supply Headlines” Activity Instructions
May work with your partner.
In this activity, you will work with your partner to analyze a series of newspaper headlines. Based on information in each headline, you will investigate what happens to the demand curve for a related product.

65. Work with your group to analyze headlines that will likely affect supply by following these steps:
Carefully read one of the demand headlines. Determine whether the information will
Shift the entire curve to the left or to the right, or
Not shift the supply curve, but change the quantity supply along the original curve.

66. Summarize the headline in the corresponding row.
On your worksheet…
Summarize the headline in the corresponding row.
Draw what will likely happen to the supply curve.
Explain what happened to the supply curve & why.
Cite & underline the shifter (TIGERS), or explain why the curve did not shift, and whether quantity supplied increased or decreased.
Wages Decline for U.S. Workers
-Demand decreased (shifted left)
-Income of consumers decreased D2

67. Summarize the headline in the corresponding row.
Have your work checked by the teacher. Then repeat the process with a new headline until I-P are completed.
Summarize the headline in the corresponding row.
Draw what will likely happen to the demand curve.
Explain what happened to the supply curve & why.

68. Elasticity OF
SUPPLY

69. WHAT WILL PRODUCERS DO WHEN PRICES CHANGE
WHAT WILL PRODUCERS DO WHEN PRICES CHANGE??? How much less will producers make if the price falls? How much more will producers make if the price rises?

70. ELASTICITY OF SUPPLY: Measurement of producers’ sensitivity to price.
Producers are responsive to price changes.
INELASTIC:
Producers are not responsive to price changes.

71. Determinants of Supply Elasticity:
Availability of inputs
Mobility of inputs
Storage capacity
Time needed to adjust to a price change

72. Elastic or Inelastic?
Bananas
Yogurt
Antiques
Medical Care

73. Putting it all together: EQUILIBRIUM
How Demand & Supply Interact to Determine Prices of Goods & Services

74. SUPPLY AND DEMAND TOGETHER
Equilibrium
Qs= Qd
Law of Supply and Demand:
The price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance. 36

75. SUPPLY AND DEMAND TOGETHER
Demand Schedule
Supply Schedule
At $2.00, the quantity demanded is equal to the quantity supplied! 36

76. The Equilibrium of Supply and Demand
Price of
Ice-Cream
Cone
Supply
Demand
Equilibrium
Equilibrium price
$2.00
Equilibrium
quantity 1 2 3 4 5 6 7 8 9 10 11 12 13
Quantity of Ice-Cream Cones

77. What happens when demand or supply shifts?

78. If Demand Increases…
P Q P2 D2 Q2

79. If Demand Decreases…
P Q P2 D2 Q2

80. If Supply Increases… S2
P Q P2 Q2

81. If Supply Decreases… S2
P Q P2 Q2

82. Four Steps to Analyzing Changes in Equilibrium
Does the event shift the supply (TIGERS) or demand curve (TIRES)?
Will the curve shift right ( ) or left ( )?
Draw & label the new curve on your graph
Locate the new equilibrium (price and quanity) 45

83. Airline Tickets 600 500 400 300 200 100 Price $QD QS
200 24 1
300 16 10
400
500 4 22
600 25
Airline Tickets
600
500
400
300
200
100 S
Price $
350 D 13
Quantity #

84. Let’s Practice… 45

85. Nation’s largest spaghetti producer cuts pasta prices
Spaghetti Sauce
P Q P2 D2 Q2

86. Subzero temperatures destroy much of Florida’s citrus crop
Orange Juice S2
P Q P2 Q2

87. Farmer invents new picking machine – Harvests apples in half the time
Red Delicious Apples S2
P Q P2 Q2

88. Colorado ski resorts announce 50% increase in lift ticket prices
Hotel Colorado Ski Resorts
P Q P2 D2 Q2

89. Price Controls

90. Why would the government step in to control the prices of goods and services? Would economists think that controlling prices is good idea?

91. PRICE CEILING: (Creates a Shortage)
A MAXIMUM price set by the government that consumers are required to pay for a good or service.
Prevents prices from getting too high, enabling consumers to buy essential goods or services they wouldn’t be able to afford at the equilibrium price
Example: Rent control

92. PRICE CEILING
Price Ceiling Qs Qd
SHORTAGE

93. If the price is too low (Qd > Qs)…
Price of
Ice-Cream
The Price Will Rise!
Cone
Supply
Demand
$2.00
$1.00
Quantity
Quantity
Demanded
Supplied 1 2 3 4 5 6 7 8 9 10 11 12 13
SHORTAGE
Quantity of Ice-Cream Cones

94. PRICE FLOOR: (Creates a Surplus)
A MINIMUM price set by the government that consumers are required to pay for a good or service.
Pushes price up, ensuring that producers receive a benefit for providing a good or service
Example: Minimum wage

95. PRICE FLOOR
Price Floor Qd Qs
Surplus

96. If the price is too high (Qs > Qd)…
Price of
Ice-Cream
The Price Will Drop!
Cone
Supply
Demand
$3.00
$2.00
Quantity
Quantity
Supplied
Demanded 1 2 3 4 5 6 7 8 9 10 11 12 13
Surplus
Quantity of Ice-Cream Cones

97. Shortage and Surplus of Apples
Indicate whether there is a shortage (quantity demanded > quantity supplied) or a surplus (quantity supplied > quantity demanded). Indicate the amount of the shortage or surplus.
Price per bushel
Quantity demanded (D)
Quantity Supplied (S)
Surplus or Shortage
Amount
$40 20 60
$32 30 50
$24 40
$16 $8
Surplus 40
Surplus 20
Equilibrium
Shortage 20
Shortage 40