1. Warm-up
Get out paper for notes, we’ll start learning about supply and demand today!

2. Reading Check chapter 4-6
Get out a sheet of paper, something to write with, and your homework.

3. Supply and Demand
Unit 4 part 2

4. Demand
Demand is the desire to own something and the ability to pay for it. Law of demand says that when a good’s price is lower, consumers will buy more of it; higher, less.
Demand Curve is the graphic representation of a demand schedule. Vertical axis (prices) and horizontal (quantities demanded at those prices).
Discuss why this is always going to be a downward sloping line. Why quantity and price are related.
How does the substitution effect and the income effect influence decisions?
As the price rises for a good, buyers will substitute another good in its place, thereby decreasing demand for the first good. If price of good lowers, people will buy more of that, substituting it for other goods and raising demand.
Income effect means when income lowers, you will buy less of a good. If the price goes up, you may still buy the good but in lower amounts, decreasing demand and leading to the law of demand.
What is the difference between a demand schedule and a market demand schedule?
To demand a good you must be willing and able to buy it. If you can’t afford an item, you are not demanding it. A demand schedule shows what the quantity someone “demands” of a good at different prices. A market demand schedule is the total of all demand schedules on the market, showing quantities demanded at each price by all consumers on the market. Only difference is market schedule lists larger quantities demanded.
What causes a shift in the demand curve?
The demand curve shifts when the other variables are not constant -- income, consumer expectations, population, consumer tastes and advertising.

5. Demand Schedule
Have a student make a graph of this demand schedule

6. Types of Goods
Normal good is a good consumers demand more of when their incomes increase. These are most items we purchase.
Inferior good is a good that, when an increase in income happens, the demand for these goods falls. Used cars, mac & cheese, etc.
Have students provide examples of these

7. Types of Goods
Complement: a good that is usually bought in conjunction with another good.
Substitute: a good that is bought instead of another similar good

8. Supply
Supply is the amount of a good available, and the relationship between price and quantity supplied. The law of supply is the idea that the higher the price, the larger the quantity produced.
Supply curve is the graph of a supply schedule. Vertical axis is the price, and horizontal is quantity of good SUPPLIED.
Discuss what would cause the supply curve to shift left and right. Why they can charge more when they are producing more goods.
What would happen if the govt put a subsidy (ex. corn)? Shift right b/c they can produce more and charge less
What about a tax (ex. cigarettes)? Shift left because people have to pay more so they’ll demand less.

9. Supply Schedule
Have a student construct a supply curve from the schedule
How does a firm choose to set output?
A firm chooses output by maximizing total revenue and minimizing total cost, so look for the biggest gap between the two. The ideal level of output is where marginal revenue (price) is equal to marginal cost. More than that (or less) and you’d generate less profit.
How does a firm decide to shut down an unprofitable business? An unprofitable business will stay afloat only as long as the market price of the good is high enough to cover all the costs of production. If total revenue from the good and services the factor produces is greater than the cost of keeping it open.
How does the future expectation of prices impact supply? Supply will either spike if prices are predicted to go down, or scarcity will increase if future prices look like they will increase.

10. Things that affect supply:
Fixed cost / variable cost / total cost
Fixed costs do not change no matter how many goods are produced( (rent, repairs, taxes).
Variable costs rise and fall based on quantity produced (labor, raw materials).
Total cost is a combination of these two costs.
Marginal cost: The additional cost of producing one more unit of a good
Governments can also regulate an industry. How would that affect the curve? Shift it left because the businesses have more costs, which makes producing a good more expensive.

11. Things that affect supply:
Subsidy: a government payment that supports a business or market
Excise tax: governments can reduce the supply of some good by placing an excise tax -- the tax on the production or sale of a good -- on them. (Cigarettes, alcohol)

13. Changes in supply and demand
Price ceiling is a government-imposed maximum price that can be legally charged for a good
Price floor minimum price set by the government for a good or service
Surplus happens when quantity supplied exceeds quantity demanded at a given price
Shortage is when there is more demand for an item than supply of that item
Draw on the graph how a price ceiling and floor can create shortages and surpluses.

14. Let’s label this all together!

15. Other supply terms:
Supply shock is when a sudden shortage of a good, like gasoline, because suppliers can no longer meet the needs of consumers.
Rationing is dividing up goods / services using criteria other than price.
Spillover costs are production costs not paid by seller but by buyer or third party, such as in the case of pollution from a factory.