Unit 2: Demand, Supply, and Consumer Choice

Unit 2: Demand, Supply, and Consumer Choice

Demand

DEMAND DEFINED What is Demand? What is the Law of Demand?
Demand is the different quantities of goods that consumers are willing and able to buy at different prices. (Ex: You are able to purchase diapers, but if you aren’t willing to buy then there is NO demand) What is the Law of Demand? There is an INVERSE relationship between price and quantity demanded

Example of Demand I am willing to sell several A’s in AP Economics. How much will you pay? Price Quantity Demanded Demand Schedule

Why does the Law of Demand occur?
1. The Substitution Effect If the price goes up for a product, consumers buy less of that product and more of another substitute product (and vice versa) 2. The Income Effect If the price goes down for a product, the purchasing power increases for consumers -allowing them to purchase more.

Why does the Law of Demand occur?
3. Law of Diminishing Marginal Utility Utility = Satisfaction We buy goods because we get utility from them The law of diminishing marginal utility states that as you consume anything, the additional satisfaction that you will receive will eventually start to decrease In other words, the more you buy of ANY GOOD the less satisfaction you get from each new unit consumed. Discussion Questions: What does this have to do with the Law of Demand? How does this effect the pricing of businesses?

Can you see the Law of Diminishing Marginal Utility in Disneyland’s pricing strategy?

2010 Question 36 D

Graphing Demand

Let’s draw a new demand curve for bread…
The Demand Curve A demand curve is a graphical representation of a demand schedule. The demand curve is downward sloping showing the inverse relationship between price (on the y-axis) and quantity demanded (on the x-axis) When reading a demand curve, assume all outside factors, such as income, are held constant. (This is called ceteris paribus) Let’s draw a new demand curve for bread…

GRAPHING DEMAND Draw this large in your notes Demand Schedule
Price of Bread Draw this large in your notes $5 4 3 2 1 Price Quantity Demanded $5 10 $4 20 $3 30 $2 50 $1 80 Q Quantity of Bread

Where do you get the Market Demand?
Marco Jennifer Other Individuals Market Price Q Demd $5 1 $4 2 $3 3 $2 5 $1 7 Price Q Demd $5 $4 1 $3 2 $2 3 $1 5 Price Q Demd $5 9 $4 17 $3 25 $2 42 $1 68 Price Q Demd $5 10 $4 20 $3 30 $2 50 $1 80 P P P P $3 $3 $3 $3 D D D D Q Q Q Q 3 2 25 30

Demand Review What are the two key aspects of the definition of demand? What is the Law of Demand? Give an example of the substitution effect Give an example of the income effect Give an example of the law of diminishing marginal utility How do you determine the MARKET demand for a particular good? Name 10 fast food places

Shifts in Demand Ceteris paribus-“all other things held constant.” When the ceteris paribus assumption is dropped, movement no longer occurs along the demand curve. Rather, the entire demand curve shifts. A shift means that at the same prices, more people are willing and able to purchase that good. This is a change in demand, not a change in quantity demanded PRICE DOESN’T SHIFT THE CURVE

Change in Demand What if bread makes you stronger? Demand Schedule
Price of Bread What if bread makes you stronger? $5 4 3 2 1 Price Quantity Demanded $5 10 $4 20 $3 30 $2 50 $1 80 Demand Q Quantity of bread 17

Change in Demand What if bread makes you stronger? Demand Schedule
Price of Bread What if bread makes you stronger? $5 4 3 2 1 Price Quantity Demanded $5 10 $4 20 $3 30 $2 50 $1 80 Demand Q Quantity of Bread 18

Change in Demand Demand Schedule Price of Bread $5 30 $4 40 $3 50 $2
1 Price Quantity Demanded $5 30 $4 40 $3 50 $2 70 $1 Demand Q Quantity of Bread

Prices didn’t change but people want MORE bread
Change in Demand Demand Schedule Price of Bread Increase in Demand Prices didn’t change but people want MORE bread $5 4 3 2 1 Price Quantity Demanded $5 30 $4 40 $3 50 $2 70 $1 D1 Demand Q Quantity of Bread

causes you to have body odor?
Change in Demand Demand Schedule Price of Bread What if bread causes you to have body odor? $5 4 3 2 1 Price Quantity Demanded $5 10 $4 20 $3 30 $2 50 $1 80 Demand Q Quantity of Bread

Change in Demand Demand Schedule Price of Bread $5 $4 5 $3 20 $2 30 $1
Quantity Demanded $5 $4 5 $3 20 $2 30 $1 80 60 Demand Q Quantity of Bread 23

Prices didn’t change but people want LESS bread
Change in Demand Demand Schedule Price of Bread $5 4 3 2 1 Decrease in Demand Prices didn’t change but people want LESS bread Price Quantity Demanded $5 $4 5 $3 20 $2 30 $1 80 60 D2 Demand Q Quantity of Bread

the price significantly increases? The demand stays the same
Change in Demand Demand Schedule Price of Bread What happens to the demand for bread if the price significantly increases? $5 4 3 2 1 Price Quantity Demanded $5 10 $4 20 $3 30 $2 50 $1 80 NOTHING! The demand stays the same Demand Q Quantity of Bread 25

Price doesn’t shift the curve!

significantly decreases? The demand stays the same
Change in Demand Demand Schedule Price of Bread What happens to the demand for bread if the price significantly decreases? $5 4 3 2 1 Price Quantity Demanded $5 10 $4 20 $3 30 $2 50 $1 80 NOTHING! The demand stays the same Demand Q Quantity of Bread

What is the law of demand? Explain in your own words. On a notecard
Do Now What is the law of demand? Explain in your own words. On a notecard

Changes in demand

Change in Qd vs. Change in Demand
There are two ways to increase quantity from 10 to 20 Price of Bread P A to B is a change in quantity demand (due to a change in price) A to C is a change in demand (shift in the curve) A C $3 $2 B D2 D1 Q Bread Quantity of Bread

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

Taste and preferences What it is consumers want to consume.
Advertisements, celebrity endorsements, safety concerns

Number of consumers Increases or decreases in population

Prices of Related Goods
The demand curve for one good can be affected by a change in the price of ANOTHER related good. Substitutes are goods used in place of one another. Ex: If price of Pepsi falls, demand for coke will… If the price of one increases, the demand for the other will increase (or vice versa) 2. Complements are two goods that are bought and used together. Ex: If price of hot dogs falls, demand for hot dog buns will... If the price of one increase, the demand for the other will fall. (or vice versa)

Substitutes or Complements?

Substitutes 36 36

Substitutes 37 37

Substitutes 38 38

Substitutes 39 39

Substitutes 40 40

Substitutes 41 41

Substitutes 42 42

Substitutes 43 43

Complements 44 44

Income The incomes of consumer change the demand, but how depends on the type of good. Normal Goods Ex: Luxury cars, Sea Food, jewelry, homes As income increases, demand increases As income falls, demand falls 2. Inferior Goods Ex: Top Ramen, used cars, used clothes As income increases, demand falls As income falls, demand increases Spam-Inferior Yachts- Normal Off Brand Cereal-Inferior McDonald’s-Inferior Toilet Paper- Probably no connection to income (The point-some products are very reliant on income and others are not)

Inferior Goods 46 46

Future expectations one's expectations for the future
if you expect the price of gasoline to go up tomorrow, you may fill up your car with gas now. So your demand for gas today increased because of what you expect to happen tomorrow.

if you hear that Apple will soon introduce a new iPod that has more memory and longer battery life, you (and other consumers) may decide to wait to buy an iPod until the new product comes out. When people decide to wait, they are decreasing the current demand for iPods because of what they expect to happen in the future.

Practice Identify the determinant (shifter) then decide if demand will increase or decrease Shifter Increase or Decrease Left or Right 1 2 3 4 5 6 7 8

Hamburgers (a normal good)
Practice Identify the determinant (shifter) then decide if demand will increase or decrease Hamburgers (a normal good) Population boom Incomes fall due to recession Price of tacos, a substitute, decreases Price increases to $5 for hamburgers New health craze- “No ground beef” Hamburger restaurants announce that they will significantly increase prices NEXT month Price of fries, a complement, increases Restaurants lower price of burgers to $.50 Number of consumers, increase. Income, decrease. Price of Related Goods (Substitute), decrease. Price doesn’t shift curve, no change. Tastes and preferences, decrease. Expectations, increase. Price of Related Goods (Complements), decrease. 50

Practice Identify the determinant (shifter) then decide if demand will increase or decrease Shifter Increase or Decrease Left or Right 1 Number of consumers Increase right 2 Income Decrease left 3 Price of related goods 4 Price No change 5 Tastes and preferences 6 Expectations 7 8 Number of consumers, increase. Income, decrease. Price of Related Goods (Substitute), decrease. Price doesn’t shift curve, no change. Tastes and preferences, decrease. Expectations, increase. Price of Related Goods (Complements), decrease.

Exit Ticket Complete the back of the shifting of demand worksheet

Do now Imagine the following. The society of Baghina is capable of producing 8 loaves of bread and harvesting 4 avocados in a day’s work. The society of Xpatria can also produce 8 loaves of bread, but it can harvest 10 avocados. Here is a table of their production Does Bagina have a comparative advantage over Xpatria? Does Xparia have an absolute advantage over Bagina Does opportunity cost play a role? Explain your answers. Bread Avocados Baghina 8 4 Xpatria 10

Supply

Supply Defined EXAMPLE: Mowing Lawns 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. As price increases, the quantity producers make increases As price falls, the quantity producers make falls. Why? Because, at higher prices profit seeking firms have an incentive to produce more. EXAMPLE: Mowing Lawns

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 $1 $5 $20 $50 $100 $1000

GRAPHING SUPPLY What if there are new and more productive
machines to make bread? Supply Schedule Price of Bread Supply $5 4 3 2 1 Price Quantity Supplied $5 50 $4 40 $3 30 $2 20 $1 10 Q Quantity of Bread

Change in Supply Supply Schedule Price of Bread Supply $5 50 $4 40 $3
2 1 Price Quantity Supplied $5 50 $4 40 $3 30 $2 20 $1 10 Q Quantity of Bread

Change in Supply Supply Schedule Price of Bread Supply $5 70 $4 60 $3
2 1 Price Quantity Supplied $5 70 $4 60 $3 50 $2 40 $1 10 30 Q Quantity of Bread

Prices didn’t change but there is MORE bread produced
Change in Supply Supply Schedule Price of Bread Supply S2 $5 4 3 2 1 Price Quantity Supplied $5 70 $4 60 $3 50 $2 40 $1 10 30 Increase in Supply Prices didn’t change but there is MORE bread produced Q Quantity of Bread

Change in Supply What if the price for wheat increases drastically?
Supply Schedule Price of Bread What if the price for wheat increases drastically? Supply $5 4 3 2 1 Price Quantity Supplied $5 50 $4 40 $3 30 $2 20 $1 10 Q Quantity of Bread

Prices didn’t change but there is LESS bread produced
Change in Supply Supply Schedule Price of Bread Supply S2 $5 4 3 2 1 Price Quantity Supplied $5 30 $4 20 $3 10 $2 1 $1 10 0 Decrease in Supply Prices didn’t change but there is LESS bread produced Q Quantity of Bread

Change in Supply What if there is a decrease in the number
Supply Schedule Price of Bread What if there is a decrease in the number of bread producers? Supply $5 4 3 2 1 Price Quantity Supplied $5 50 $4 40 $3 30 $2 20 $1 10 Q Quantity of Bread

Prices didn’t change but there is LESS bread produced
Change in Supply Supply Schedule Price of Bread Supply S2 $5 4 3 2 1 Price Quantity Supplied $5 30 $4 20 $3 10 $2 1 $1 10 0 Decrease in Supply Prices didn’t change but there is LESS bread produced Q Quantity of Bread

Change in Qs vs. Change in Supply
There are two ways to decrease quantity from 20 to 10 Price of Bread P A to B is a change in quantity supplied (due to a change in price) A to C is a change in supply (shift in the curve) S2 S1 C A $3 $2 B Q Bread Quantity of Bread

5 Shifters (Determinants) of Supply
Prices/Availability of inputs (resources) Number of Sellers Technology Government Action: Taxes & Subsidies 5. Expectations of Future Profit Changes in PRICE don’t shift the curve. It only causes movement along the curve.

Supply Practice Identify the determinant (shifter) then decide if supply will increase or decrease Shifter Increase or Decrease Left or Right 1 2 3 4 5 6 68

Supply Practice Analyze Hamburgers Strange virus kills 20% of cows
Which determinant (SHIFTER)? Increase or decrease? Which direction will curve shift? Analyze Hamburgers Strange virus kills 20% of cows Price of hamburgers increase 30% Government taxes burger producers New bun baking technology cuts production time in half The government subsidizes dairy farmers Minimum wage increases to $20 Decrease in availability of resources, decrease. Price doesn’t shift curve, no shift. Government action, decrease. Technology, increase. Government action, increase Price of resources, decrease.

Supply Practice Identify the determinant (shifter) then decide if supply will increase or decrease Shifter Increase or Decrease Left or Right 1 Resources Decrease left 2 Price none 3 Government action 4 Technology Increase right 5 6 Price of resources Decrease in availability of resources, decrease. Price doesn’t shift curve, no shift. Government action, decrease. Technology, increase. Government action, increase Price of resources, decrease. 70

Exit Ticket Shifting Supply

Do now At farmers’ market in the country of Ms. Lane, there is a supply and demand schedule for zucchini as shown in the table below. Graph the supply and demand curves. Now what would happen to the supply curve if the amount of zucchini produced dropped due to a zucchini mold? Show the change on the graph. What would happen to demand, show it on the graph as well. Price Demand Supply $5 200 800 $4 300 700 $3 400 600 $2 500 $1

s1 5 4 3 2 1 s D D1

Putting Supply and Demand Together!!!

Equilibrium Price and quantity at which consumers are able and willing to buy the same amount at which producers are willing and able to sell. Qe Pe

Equilibrium Price = $3 (Qd=Qs)
Supply and Demand are put together to determine equilibrium price and equilibrium quantity P 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 Equilibrium Price = $3 (Qd=Qs) D Q

What if the price increases to $4?
Supply and Demand are put together to determine equilibrium price and equilibrium quantity P What if the price increases to $4? 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 D Q 77

How much is the surplus at $4?
At $4, there is disequilibrium. The quantity demanded is less than quantity supplied. P Supply Schedule Demand Schedule S $5 4 3 2 1 Surplus (Qd<Qs) P Qd $5 10 $4 20 $3 30 $2 50 $1 80 P Qs $5 50 $4 40 $3 30 $2 20 $1 10 How much is the surplus at $4? Answer: 20 D Q 78

How much is the surplus if the price is $5?
What if the price decreases to $2? P Supply Schedule Demand Schedule surplus 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: 40 D Q

How much is the shortage at $2?
At $2, there is disequilibrium. The quantity demanded is greater than quantity supplied. P 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 How much is the shortage at $2? Answer: 30 Shortage (Qd>Qs) D Q 80

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 Q 81

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 Q

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

2008 Audit Exam 32. A

Practice Questions 1. Which of the following will cause the quantity supplied for bread to decrease? Decrease in the price of a key resource A decrease in the number of bread producers A decrease in the price of bread An increase in the price of bread A subsidy for bread producers Answer C. A change in price is rice is the only thing that changes quantity supplied

Practice Questions 1. Which of the following will cause the demand for milk to decrease? Increase in the price of a substitute A decrease in income assuming that milk is a normal good A decrease in the price of milk An increase in the price of milk A decrease in the price of a complementary good Answer B

Practice Questions 2. Which of the following will cause the quantity demanded of milk to decrease? Increase in the price of a substitute A decrease in income assuming that milk is a normal good A decrease in the price of milk An increase in the price of milk A decrease in the price of a complementary good Answer D

Consumer Choice

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!

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 1. Supply Increases 2. Demand Increases 3. No Shift. Shortage 4. Supply Decreases 5. Demand Decreases

Qe Q1 New grilling technology cuts production time in half Price S S1
Pe P decrease Q increase P1 D Qe Q1 Quantity 91

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 1. Supply Increases 2. Demand Increases 3. No Shift. Shortage 4. Supply Decreases 5. Demand Decreases

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

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. 1. Supply Increases 2. Demand Increases 3. No Shift. Shortage 4. Supply Decreases 5. Demand Decreases

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

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 1. Supply Increases 2. Demand Increases 3. No Shift. Shortage 4. Supply Decreases 5. Demand Decreases

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

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

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

Exit ticket Complete 1-3 on the shifting supply and demand worksheet.

Supply and Demand Practice Worksheet

Do Now What would happen to the equilibrium price and quantity in the market for Avocados if the US government institutes a 20% tax on all goods from Mexico? Demonstrate on a graph.

Do now decrease in supply Price increase Quantity decrease

Homework Review increase in demand Price decrease Quantity increase

Homework Review

Double Shifts Double Shift Rule:
Suppose the demand for bread 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).

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

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

Voluntary exchange

Example of Voluntary Exchange
Ex: You want to buy a truck so you go to the local dealership. You are willing to spend up to $20,000 for a new 4x4. The seller is willing to sell this truck for no less than $15,000. After some negotiation you buy the truck for $18,000. Analysis: Buyer’ Maximum- Sellers Minimum- Price- Consumer’s Surplus- Producer’s Surplus- $20,000 $15,000 $18,000 $2,000 $3,000

Voluntary Exchange Terms
Consumer Surplus is the difference between what you are willing to pay and what you actually pay. CS = Buyer’s Maximum – Price Producer’s Surplus is the difference between the price the seller received and how much they were willing to sell it for. PS = Price – Seller’s Minimum

Consumer and Producer’s Surplus
Consumer Surplus: the area below demand and above price $10 8 6 $5 4 2 1 S Producer surplus: The area above supply below price CS PS D 10 Q

Consumer and Producer’s Surplus Area of a triangle is 1/2bh:
Calculate the area of: Consumer Surplus Producer Surplus Total Surplus P $10 8 6 $5 4 2 1 S Area of a triangle is 1/2bh: CS= $25 PS= $20 Total= $45 CS PS D 10 Q

Review $16 14 12 11 10 P Calculate the area of: Consumer Surplus
Producer Surplus Total Surplus $16 14 12 11 10 S CS CS= $20 PS= $5 Total= $25 PS D 10 Q

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 Define producer surplus Name 10 musical instruments

5. 2008 Audit Exam 21. C Producers will produce more corn and supply will increase

6. 4.D

worksheet

Exit ticket Supply an example of supply or demand shifting in the real world. Explain the impact on Qe and Pe, along with a graph of the circumstances. Shade consumer and producer surplus after the shift.

Do now Draw and label a supply and demand graph for surfboards below. Identify equilibrium price and quantity. In 2005, the worlds largest producer of surfboard foam stopped production. Demonstrate on the graph the effect of this change. Now assume that surfing becomes widely popular. Demonstrate on the graph the effect of this change. Compared to the original equilibrium identify the effect of parts (A) and (B) together have on Equilibrium price Equilibrium quantity

Voluntary Exchange Activity
In the free-market, buyers and sellers voluntarily come together to seek mutual benefits. CLICK ON THE LINK ABOVE AND WATCH THIS VIDEO! 133

Price controls

Price Ceiling To be “binding”, a price ceiling must
Maximum legal price a seller can charge for a product. Goal: Make affordable by keeping price from reaching Eq. To be “binding”, a price ceiling must be below equilibrium $8 6 4 2 1 Price Gasoline S Does this policy help consumers? Result: BLACK MARKETS Price Ceiling Shortage (Qd>Qs) D Q 135

To have an effect, a price floor must be above equilibrium
Minimum legal price a seller can sell a product. Goal: Keep price high by keeping price from falling to Eq. To have an effect, a price floor must be above equilibrium P Corn S $ 4 3 2 1 Surplus (Qd<Qs) Price Floor Does this policy help corn producers? D Q 136

Practice Questions 1. Which of the following will occur if a legal price floor is placed on a good below its free market equilibrium? Surpluses will develop Shortages will develop Underground markets will develop The equilibrium price and quantity will remain the same The quantity sold will increase 2. Which of the following statements about price control is true? A. A price ceiling causes a shortage if the ceiling price is above the equilibrium price B. A price floor causes a surplus if the price floor is below the equilibrium price C. Price ceilings and price floors result in a misallocation of resources D. Price floors above equilibrium cause a shortage Answers: D C

Are Price Controls Good or Bad?
To be “efficient” a market must maximize consumers and producers surplus P S CS Pc PS D Qe Q

Are Price Controls Good or Bad? DEAD WEIGHT LOSS The Lost CS and PS.
To be “efficient” a market must maximize consumers and producers surplus P S DEAD WEIGHT LOSS The Lost CS and PS. INEFFICIENT! CS Pc Price CEILING PS D Qceiling Qe Q

To be “efficient” a market must maximize consumers and producers surplus P S CS Pc PS D Qe Q

To be “efficient” a market must maximize consumers and producers surplus P S CS Price FLOOR DEAD WEIGHT LOSS INEFFICIENT! Not Maximizing CS and PS Pc PS D Qfloor Qe Q

2010 Question 3 D

2010 Question 4 D

2012 Question 17 B

Exit ticket Based on what you know of consumer and producer surplus, if the government places a required price of a good above equilibrium, will the market be efficient? explain

2.5 Do now Frq # 3 econ binder

Elasticity shows how sensitive quantity is to a change in price.

Consumers will buy more when prices go down and less when prices go up
THE LAW OF DEMAND SAYS... Consumers will buy more when prices go down and less when prices go up HOW MUCH MORE OR LESS? DOES IT MATTER?

Price Elasticity of Demand (PED)
Measurement of consumers responsiveness to a change in price. What will happen if price increases? How much will it effect Quantity Demanded? Who cares? Used by firms to help determine prices and sales Used by the government to decide how to tax

Inelastic Demand

Inelastic Demand INelastic Demand= Quantity is 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% A INELASTIC demand curve is steep! (looks like an “I”) Examples: Gasoline Milk Diapers Chewing Gum Medical Care Toilet paper

General Characteristics of INelastic Goods:
Inelastic Demand General Characteristics of INelastic Goods: Few Substitutes Necessities Elasticity coefficient less than 1 20% 5%

Elastic Demand

Elastic Demand An ELASTIC demand curve is flat!
Elastic Demand = Quantity is 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. An ELASTIC demand curve is flat! Examples: Soda Boats Beef Real Estate Pizza Gold

General Characteristics of Elastic Goods:
Elastic Demand General Characteristics of Elastic Goods: Many Substitutes Luxuries Elasticity coefficient greater than 1

Elasticity Visualized
Perfectly Inelastic Elasticity Coefficient 0 Inelastic Elasticity Coefficient <1 Unit Elastic Elasticity Coefficient1 Elastic Elasticity Coefficient >1 Perfectly Elastic Elasticity Coefficient ∞

Elastic or Inelastic? What about the demand for insulin for diabetics?
Beef- Gasoline- Real Estate- Medical Care- Electricity- Gold- Elastic- 1.27 INelastic - .20 Elastic- 1.60 INelastic - .31 INelastic - .13 Elastic - 2.6 What if % change in quantity demanded equals % change in price? Perfectly INELASTIC (Coefficient = 0) Unit Elastic (Coefficient =1)

Total Revenue (P x Q) Relatively Inelastic Relatively Elastic S1 S1 S S D D Quantity for each will decrease TR for inelastic good will increase. TR for elastic good will decrease. What happens to quantity for each when price increases? What happens to total revenue for each when price increases?

Total Revenue Test Uses elasticity to show how changes in price will affect total revenue (TR). Ex: If the demand for gas is inelastic, what will happen to total revenue for gas stations if price increases? Inelastic Demand- Price increase causes TR to increase Price decrease causes TR to decrease Elastic Demand- Price increase causes TR to decrease Price decrease causes TR to increase Unit Elastic- Price changes and TR remains unchanged

Is the range between A and B, elastic, inelastic, or unit elastic?
10 x 100 =$1000 Total Revenue 5 x 225 =$1125 Total Revenue A Price decreased and TR increased, so… Demand is ELASTIC 50% B 125%

Exit ticket Danny dimes Donahue is a neighborhoods 9 year old entrepreneur. His most recent venture is selling homemade brownies that he bakes himself. At a price of $1.50 each, he sells 100. at a price of $1.00 each he sells 300. is demand elastic or inelastic over this price range? if demand had the same elasticity for a price decline form $ to $.50 as it does from 1.50 to 1, would cutting the price to .50 increase or decrease Danny’s total revenue?

Price Elasticity of Supply
Elasticity of supply shows how sensitive producers are to a change in price. Elasticity of supply is based on time limitations. Producers need time to produce more. INelastic = Insensitive to a change in price (Steep curve) Most goods have INelastic supply in the short-run Elastic = Sensitive to a change in price (Flat curve) Most goods have elastic supply in the long-run Perfectly Inelastic Supply= Q doesn’t change Set quantity supplied (Vertical line)

Cross-Price Elasticity of Demand
Cross-Price elasticity of demand shows how sensitive a product is to a change in price of another good It shows if two goods are substitutes or complements % change in quantity of product “b” % change in price of product “a” P increases 20% Q increases 40% Q decreases 40% If coefficient is positive (shows direct relationship) then the goods are substitutes If coefficient is negative (shows inverse relationship) then the goods are complements

Income-Elasticity of Demand
Income elasticity of demand shows how sensitive a product is to a change in INCOME It shows if goods are normal or inferior % change in quantity % change in income Income increases 20%, and quantity decreases 15% then the good is a… INFERIOR GOOD If coefficient is positive (shows direct relationship) then the good is normal If coefficient is negative (shows inverse relationship) then the good is inferior Ex: If income falls 10% and quantity falls 20%…

2008 Audit Question 34

Practice Questions 1. If the cross price elasticity coefficient of goods A and B is -5 and the income elasticity of good A is 2, which of the following is true? A decrease in the price of good A will decrease the demand for good B An increase in income will decrease the demand for good A Goods A and B are substitutes Good B is an inferior good An increase in the price of A will decrease the demand for good B Answer E

Practice Questions 1. Which of the following must be true for original Michelangelo sculptures? The demand is relatively elastic The supply is perfectly elastic The demand is perfectly inelastic The supply is perfectly inelastic The demand is perfectly elastic Answer D- The quantity is set. It doesn’t matter if price increases or decreases, the quantity will be the same.

2010 Question 6 B

Exit ticket (Monday)

Do now Tuesday 2.6

Limits on Trade World Price- Countries can buy products at their own domestic price or they can buy the products at a cheaper world price Tariff- Tax on imports that increases the world price Quota- a limit on number of imports. Purpose of tariffs and quotas: To protect domestic producers from a cheaper world price. To prevent domestic unemployment

International Trade and Quotas
P Rice $100 50 Pw20 S domestic This graphs show the domestic supply and demand for rice. The letters represent area. A B E D C D 50 100 120 Q

International Trade and Quotas
Identify the following: CS with no trade PS with no trade Amount we import at world price (PW) PS if we trade at world price (PW) CS if we trade at world price (PW) If government tariff leads to a world price of PT, how much is imported and what is the CS and PS? 1.H 2.TLI 3.Q5-Q1 4. T 5.HIJKLMNRS 6. Import Q4 – Q2, PS is T, CS is HIJK This graphs show the domestic supply and demand for grain. The letters represent area.

1.H 2.TLI 3.HIJKLMNRS 4.T 5.Q5-Q1 6. CS gets smaller and PS gets bigger

Excise Tax = A per unit tax on producers
Excise Taxes Excise Tax = A per unit tax on producers For every unit made, the producer must pay $ NOT a Lump Sum (one time only)Tax The goal is for them to make less of the goods that the government deems dangerous or unwanted. Ex: Cigarettes “sin tax” Alcohol “sin tax” Environmentally Unsafe Products Etc.

Government sets a $2 per unit tax on Cigarettes
Excise Taxes Supply Schedule Government sets a $2 per unit tax on Cigarettes P P Qs $5 140 $4 120 $3 100 $2 80 $1 60 S $5 4 3 2 1 D Q 180

Government sets a $2 per unit tax on Cigarettes
Excise Taxes Supply Schedule Government sets a $2 per unit tax on Cigarettes P P Qs $5 $7 140 $4 $6 120 $3 $5 100 $2 $4 80 $1 $3 60 S $5 4 3 2 1 D Q 181

Tax is the vertical distance between supply curves
Excise Taxes STAX Supply Schedule P P Qs $5 $7 140 $4 $6 120 $3 $5 100 $2 $4 80 $1 $3 60 S $5 4 3 2 1 Tax is the vertical distance between supply curves D Q 182

Identify the following:
Excise Taxes STAX Identify the following: Price before tax Price consumers pay after tax Price producers get after tax Total tax revenue for the government before tax Total tax revenue for the government after tax P S $5 4 3 2 1 1.$3 2.$4 3.$2 4.$0 5.$160 D Q 183

Tax Practice CS Before Tax PS Before Tax CS After Tax PS After Tax
Tax Revenue for Government Deadweight Loss assuming society wants Q2 produced Amount of tax revenue producers pay 1.ABCD 2.HFEG 3.A 4.G 5.BCHF 6.DE 7.HF

Excise Tax P $14 12 11 8 S D 10 12 Q

Excise Tax 12 P Stax S $14 11 Pc 8 Pp D 10 12 Q Calculate Tax Per Unit
Total Tax Revenue Amount of Tax paid by consumers Amount of Tax paid by producers Total Expenditures Total Revenue for firms B/W the two points is demand inelastic, elastic, or unit elastic? P Stax $14 12 11 8 S Pc Pp D 10 12 Q

Excise Tax P Stax $8 S $6 $5 $4 $2 D 6 Q 9 Calculate CS Before Tax
PS Before Tax Total Surplus Before Tax CS After Tax PS After Tax Tax Revenue to the Government Dead Weight Loss After Tax B/W the two points is demand inelastic, elastic, or unit elastic? P Stax $8 $6 $5 $4 $2 S D 6 9 Q

Price went up and TR went down
Excise Tax Answers $13.5 $27 $6 $12 $3 Relatively elastic Total Revenue Test $5x9=$45 $6X6=$36 Price went up and TR went down P Stax $8 $6 $5 $4 $2 S D 6 9 Q

Tuesday exit ticket

Wendsday do now

Tax Incidence Who ends up paying for an excise tax?
191

Tax Incidence (Who pays?)
ST S ST S ST S ST S ST S D D D D D Perfectly Inelastic Relatively Inelastic Unit Elastic Relatively Elastic Perfectly Elastic Tax burden paid entirely by consumers Tax burden mostly on consumers Tax burden shared by consumers and producers Tax burden mostly on producers Tax burden paid entirely by producers

2012 Question 18 D 193

2012 Question 19 D 194

Excise Tax Calculate CS Before Tax Total Expenditures Before Tax
Tax Per Unit Total Tax Revenue that goes to Government Amount of Tax paid by consumers Amount of Tax paid by producers Total Expenditures after tax Total Revenue for firms after tax CS After Tax DWL

EXCISE TAX ON MILK $2 TAX on Producers 5 P $10 8 6 4 2 S D 8 10 Q
Demand- Inelastic Supply- Unitary $10 8 6 5 4 2 S $2 TAX on Producers D 8 10 Q 197

EXCISE TAX ON MILK $2 TAX on Producers 5 P S1 $10 8 7 6 4 2 S D 9 10 Q
$6.50 =Pconsumers Amount Consumers Pay $2 TAX on Producers $4.50 = Pproducers Amount Producers Pay D 9 10 Q Quantity Doesn’t Fall VERY Much!!! 198

EXCISE TAX ON BEEF $2 TAX on Producers 5 P $10 8 6 4 2 S D 8 10 Q
Demand- Elastic Supply- Unitary $10 8 6 5 4 2 S $2 TAX on Producers D 8 10 Q 199

EXCISE TAX ON BEEF $2 TAX on Producers 5 P S1 $10 8 S 6 4 2 Pc Pp D 10
DWL? Pp D 7 10 Q Quantity Falls A lot!!! 200

EXCISE TAX 5 P S1 $10 8 7 6 4 2 S D 20 30 Q Pconsumers = $7
CS After Pconsumers = $7 Tax per Unit? Total Tax Revenue? Tax paid by consumers? Tax paid by producers? Total spending? Revenue for businesses? Pproducers = $4 D 20 30 Q 201

EXCISE TAX 5 P S1 $10 8 7 6 4 2 S D 20 30 Q Pconsumers = $7
CS After Pconsumers = $7 Tax per Unit = $3 Total Tax Revenue = $60 Tax Paid by Consumers = $40 Tax Paid by Producers = $20 Total Spending = $140 Revenue for Businesses=$80 Pproducers = $4 D 20 30 Q 202

2008 Audit Exam 18.B

Exit ticket Wednesday

2.7 Do now Thursday

Calculate Marginal Utility
# of Slices of Pizza Total Utility (in utils) Marginal Utility/Benefit 1 8 2 14 3 19 4 23 5 25 6 26 7 24 How many pizzas would you buy if the price per slice was $2?

# of Slices of Pizza Total Utility (in dollars) Marginal Utility/Benefit 1 8 2 14 6 3 19 5 4 23 25 26 7 24 -2 Marginal Cost $2 How many pizzas would you buy if the price per slice was $2?

# of Slices of Pizza Total Utility (in dollars) Marginal Utility/Benefit 1 8 2 14 6 3 19 5 4 23 25 26 7 24 -2 Marginal Cost 2 You will continue to consume until Marginal Benefit = Marginal Cost How many pizzas would you buy if the price per slice was $2?

Utility Maximizing Rule You use this rule subconsciously every day!
The consumer’s money should be spent so that the marginal utility per dollar of each goods equal each other. MUx = MUy Px Py 3 apples and 2 oranges You use this rule subconsciously every day!

Marginal Utility Per Dollar
CONSUMER BEHAVIOR You plan to take a vacation and want to maximize your utility. Based on the info below, which should you choose? Destination Marginal Utility (In Utils) Price Tahiti 3000 $3,000 Chicago 1000 $500 Marginal Utility Per Dollar 1 Util 2 Utils

Marginal Utility Per Dollar
CONSUMER BEHAVIOR You plan to take a vacation and want to maximize your utility. Based on the info below, which should you choose? Destination Marginal Utility (In Utils) Price Tahiti 3000 $3,000 Chicago 1000 $500 Marginal Utility Per Dollar 1 Util 2 Utils Calculating Marginal Utility Per Dollar allows you to compare products with different prices.

Utility Maximization $10 $5
# Times Going Marginal Utility (Movies) MU/P (Price =$10) Marginal Utility (Go Carts) (Price =$5) 1st 30 10 2nd 20 5 3rd 2 4th 1 If you only have $40, what combination of movies and go carts maximizes your utility?

# Times Going Marginal Utility (Movies) MU/P (Price =$10) Marginal Utility (Go Carts) (Price =$5) 1st 30 3 10 $2 2nd 20 5 $1 3rd 2 $.40 4th $.50 1 $.20 If you only have $40, what combination of movies and go carts maximizes your utility?

# Times Going Marginal Utility (Movies) MU/P (Price =$10) Marginal Utility (Go Carts) (Price =$5) 1st 30 3 10 2 2nd 20 $2 5 $1 3rd $.40 4th $.50 1 $.20 If you only have $40, what combination of movies and go carts maximizes your utility?

# Times Going Marginal Utility (Movies) MU/P (Price =$10) Marginal Utility (Go Carts) (Price =$5) 1st 30 3 10 2 2nd 20 5 1 3rd .40 4th .50 .20 If you only have $40, what combination of movies and go carts maximizes your utility? 3 Movies and 2 Go Carts

# Times Going Marginal Utility (Movies) MU/P (Price =$10) Marginal Utility (Go Carts) (Price =$5) 1st 30 3 10 2 2nd 20 5 1 3rd .40 4th .50 .20 1.Total Utility is 75 2. 68 1. How much is the total utility from 3 movies and 2 go carts? 2. Total utility from 2 movies and 4 go carts?

# Times Going Marginal Utility (Movies) MU/P (Price =$10) Marginal Utility (Go Carts) (Price =$5) 1st 30 3 10 2 2nd 20 5 1 3rd .40 4th .50 .20 1. If you only have $25 what combination will maximize your utility?

2008 Audit Exam 5.E

Utility Maximizing Rule
The utility maximizing rule assumes that you always consume where MU/P for each product is equal 221

Thursday exit ticket

Unit 2: Demand, Supply, and Consumer Choice

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Unit 2: Demand, Supply, and Consumer Choice

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