1. Unit 2: Supply, Demand, and Consumer Choice
Do you see the cow?

2. 1. The relationship between quantity supplied and price is _____ and the relationship between quantity demanded and price is _____.
A) direct, inverse
B) inverse, direct
C) inverse, inverse
D) direct, direct
E) strong, weak
2. An increase in the price of a product will reduce the quantity demanded for that product because:
A) supply curves are upward sloping.
B) the higher price means purchasing power has risen.
C) consumers will substitute other products for the one whose price has risen.
D) consumers get increasing marginal utility for each new unit of a good they consume

3. 1. The relationship between quantity supplied and price is _____ and the relationship between quantity demanded and price is _____.
A) direct, inverse
B) inverse, direct
C) inverse, inverse
D) direct, direct
E) strong, weak
2. An increase in the price of a product will reduce the quantity demanded for that product because:
A) supply curves are upward sloping.
B) the higher price means purchasing power has risen.
C) consumers will substitute other products for the one whose price has risen.
D) consumers get increasing marginal utility for each new unit of a good they consume

4. A) a change in the price of a close substitute
3. Which of the following will NOT cause the demand for video games to change?
A) a change in the price of a close substitute
B) a change in consumer incomes
C) a change in the price of video games
D) a change in consumer tastes
E) a change in consumer preferences
4. An economist for a bicycle company predicts that a rise in consumer incomes will increase the demand for bicycles. This prediction assumes that:
A) there are many substitutes for bicycles.
B) there are many complementary goods for bicycles.
C) there are few goods that are substitutes for bicycles.
D) bicycles are normal goods.
E)bicycles are an inferior good

5. A) a change in the price of a close substitute
3. Which of the following will NOT cause the demand for video games to change?
A) a change in the price of a close substitute
B) a change in consumer incomes
C) a change in the price of video games
D) a change in consumer tastes
E) a change in consumer preferences
4. An economist for a bicycle company predicts that a rise in consumer incomes will increase the demand for bicycles. This prediction assumes that:
A) there are many substitutes for bicycles.
B) there are many complementary goods for bicycles.
C) there are few goods that are substitutes for bicycles.
D) bicycles are normal goods.
E)bicycles are an inferior good

6. 6. A leftward shift of a supply curve might be caused by:
5. Which of the following statements is correct?
A) A decline in the price of X will increase the demand for substitute product Y.
B) A decrease in income will decrease the demand for an inferior good.
C) An increase in income will decrease the demand for a normal good.
D) increase in the price of X will decrease the demand for complementary product Y.
6. A leftward shift of a supply curve might be caused by:
A) an improvement in the relevant technique of production.
B) a decline in the prices of needed inputs (resources).
C) an increase in consumer incomes.
D) some firms leaving a market.

7. 6. A leftward shift of a supply curve might be caused by:
5. Which of the following statements is correct?
A) A decline in the price of X will increase the demand for substitute product Y.
B) A decrease in income will decrease the demand for an inferior good.
C) An increase in income will decrease the demand for a normal good.
D) increase in the price of X will decrease the demand for complementary product Y.
6. A leftward shift of a supply curve might be caused by:
A) an improvement in the relevant technique of production.
B) a decline in the prices of needed inputs (resources).
C) an increase in consumer incomes.
D) some firms leaving a market.

8. Putting Supply and Demand Together!!!

9. 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 o Q 9

10. 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 o Q
Equilibrium Quantity is 30 10

11. 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 o Q 11

12. 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 o Q 12

13. 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 o Q 13

14. 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 o Q 14

15. 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 o Q 15

16. Surplus and Shortage Defined
What is a surplus?
A surplus is the amount by which the quantity supplied of a product exceeds the quantity demanded at a specific price.
A surplus may only occur above the equilibrium price.
What is a shortage?
A shortage is the amount by which the quantity demanded of a product exceeds the quantity supplied at a specific price.
A shortage may only occur below the equilibrium price.

17. 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 o Q 17

18. Shifting Supply and Demand

19. 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!

20. 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
Price of chicken sandwiches (a substitute) increases
Price of burgers 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

21. Double Shifts
Suppose the demand for sports cars fell at the same time as production technology improved.
Use S&D Analysis to show what will happen to PRICE and QUANTITY.
If TWO curves shift at the same time, EITHER price or quantity will be indeterminate.

22. Use a S&D to explain this double shift22

23. Voluntary Exchange
In the free-market, buyers and sellers voluntarily come together to seek mutual benefits.

24. Voluntary Exchange
In the free-market, buyers and sellers voluntarily come together to seek mutual benefits.

25. Voluntary Exchange
In the free-market, buyers and sellers voluntarily come together to seek mutual benefits.

26. Voluntary Exchange
In the free-market, buyers and sellers voluntarily come together to seek mutual benefits.

27. 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

28. 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

29. Pearl Exchange Activity29

30. Voluntary Exchange Activity30

31. Consumer and Producer’s Surplus
Calculate the area of:
Consumer Surplus
Producer Surplus
Total Surplus P
$10 8 6 $5 4 2 1 S CS
CS= $25
PS= $20
Total= $45 PS D 10 Q