1. Unit 1: Demand, Supply, and Consumer Choice

2. 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.

3. 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)

4. Substitutes or Complements?

5. Substitutes 5 5

8. Substitutes 8 8

9. Substitutes 9 9

10. Substitutes 10 10

11. Substitutes 11 11

12. Substitutes 12 12

13. Substitutes 13 13

14. Complements 14 14

15. 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)

16. Inferior Goods 16 16

17. Supply

18. 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

19. 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 19

20. GRAPHING SUPPLY Draw this large in your notes Supply Schedule
Price of Milk
Draw this large in your notes $5 4 3 2 1
Price
Quantity
Supplied $5 50 $4 40 $3 30 $2 20 $1 10 Q
Quantity of Milk 20

21. GRAPHING SUPPLY Supply Schedule Price of Milk Supply $5 50 $4 40 $3 302 1
Price
Quantity
Supplied $5 50 $4 40 $3 30 $2 20 $1 10 Q
Quantity of Milk

22. GRAPHING SUPPLY What if there are new and more productive
Supply Schedule
What if there are new
and more productive
milking machines?
Price of Milk
Supply $5 4 3 2 1
Price
Quantity
Supplied $5 50 $4 40 $3 30 $2 20 $1 10 Q
Quantity of Milk 22

23. Change in Supply Supply Schedule Price of Milk Supply $5 50 $4 40 $32 1
Price
Quantity
Supplied $5 50 $4 40 $3 30 $2 20 $1 10 Q
Quantity of Milk 23

24. Change in Supply Supply Schedule Price of Milk Supply $5 50 $4 40 $32 1
Price
Quantity
Supplied $5 50 $4 40 $3 30 $2 20 $1 10 Q
Quantity of Milk 24

25. Change in Supply Supply Schedule Price of Milk Supply $5 70 $4 60 $32 1
Price
Quantity
Supplied $5 70 $4 60 $3 50 $2 40 $1
10 30 Q
Quantity of Milk 25

26. Prices didn’t change but there is MORE milk produced
Change in Supply
Supply Schedule
Price of Milk
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 milk produced Q
Quantity of Milk

27. Change in Supply What if the price for dairy cows increases
Supply Schedule
What if the price for
dairy cows increases
drastically?
Price of Milk
Supply $5 4 3 2 1
Price
Quantity
Supplied $5 50 $4 40 $3 30 $2 20 $1 10 Q
Quantity of Milk 27

28. Change in Supply Supply Schedule Price of Milk Supply $5 50 $4 40 $32 1
Price
Quantity
Supplied $5 50 $4 40 $3 30 $2 20 $1 10 Q
Quantity of Milk 28

29. Change in Supply Supply Schedule Price of Milk Supply $5 50 $4 40 $32 1
Price
Quantity
Supplied $5 50 $4 40 $3 30 $2 20 $1 10 Q
Quantity of Milk 29

30. Change in Supply Supply Schedule Price of Milk Supply $5 30 $4 20 $31
Price
Quantity
Supplied $5 30 $4 20 $3 10 $2 1 $1
10 0 Q
Quantity of Milk 30

31. Prices didn’t change but there is LESS milk produced
Change in Supply
Supply Schedule
Price of Milk
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 milk produced Q
Quantity of Milk 31

32. Change in Supply What if there is a increase in the number
Supply Schedule
What if there is a
increase in the number
of milk producers?
Price of Milk
Supply $5 4 3 2 1
Price
Quantity
Supplied $5 50 $4 40 $3 30 $2 20 $1 10 Q
Quantity of Milk 32

33. 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.

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

35. 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 35 35

36. 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
New bun baking technology cuts burger production time in half
Government subsidizes dairy farmers
Minimum wage increases to $20
Price of hamburger buns increases 30%
Price of hamburgers increase 30%
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.

37. Putting Supply and Demand Together!!!

38. Supply and Demand are put together to determine equilibrium price and equilibrium quantity
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

39. Equilibrium Price = $3 (Qd=Qs) Equilibrium Quantity is 30
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
Equilibrium Quantity is 30 39

40. What if the price increases to $4?
Supply and Demand are put together to determine equilibrium price and equilibrium quantity
What if the price
increases to $4? 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 D Q 40

41. 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 41

42. How much is the surplus if the price is $5?
What if the price
decreases to $2? 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
Answer: 40 D Q 42

43. 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 43

44. 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 44

45. 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 45

46. 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

47. 2008 Audit Exam
32. A