1. Introduction to Supply and Demand

2. Demand Demand: a schedule showing the quantities of a good or service consumers are willing and able to purchase at various prices during a time period and ceterus paribus Price Quantity demanded

3. Demand continued Demand curve—a graphic representation of the schedule, (all graphs must always be labeled) prices on right axis, quantity on horizontal axis The graph represents the Law of Demand: quantity demanded of a product is negatively related to its price as the curve slopes downward because Income effect-when prices are lower, consumers purchase larger quantities Substitute effect-as price goes up, consumers will find substitutes, thus demand goes down

4. Utility The demand curve represents the economic idea of utility Marginal utility: the extra usefulness a person gets from using one more unit of a product We buy something because it gives us satisfaction, but as we use it the extra satisfaction we get from using additional quantities decreases, which is the law of diminishing marginal utility Why do you only buy one drink at Sonic (another question— why does Sonic encourage you to buy the larger size)

5. Determinants of Demand The Curve assumes constants and a change on the curve is a change in the quantity demanded, but changes in demand will shift the curve right or left P references- “how well you like one product compared to another” E xpectation-of prices rising in the future the curve shifts to right, if prices are lowered curve shifts to left N umber of consumers in market-more consumers in the market causes curve to shift right, less consumers, left T astes-same as preferences I ncome-a change in income will cause one curve to shift one direction, and another curve to shift in another P rice of related goods-substitute goods: products used in place of other products; complimentary goods: products purchased along with other goods O pportunity Costs

6. Examples (foreign beef market) outbreak of mad cow disease causes a ban on imported beef; (local beef market) same scenario (Coke and Pepsi) Pepsi raises prices (gas) OPEC increase oil production (Ford) government forces auto makers to meet new emissions standards (Burger King burgers) Burger King lowers the price of fries (Nike shoes) begin advertising campaign aimed toward women (Levi’s jeans) Levi’s raises prices 20% (Orange juice) Hurricanes in Florida destroy orange crops

7. Supply A schedule showing the quantity of goods and services producers are willing and able to supply Quantity Supplied Price

8. Supply Continued Supply curve—a graphic representation of the schedule, (all graphs must always be labeled) prices on right axis, quantity on horizontal axis The graph represents the Law of Supply: quantity supplied of a product is positively related to its price as the curve slopes upward because it allows producers to recover their costs

9. Determinants of Supply T echnology-influences the types of machines we use, so a technological advance changes the curve because it uses fewer resources S ellers-number of producers in the market, more producers the greater supply so curve shifts to the right T axes and subsidies-taxes are costs to businesses and reduce supply, subsidies are income and allow producers to increase supply O ther goods made from resources- R esource Prices-because the curve assumes prices of resources remains unchanged, an increase in resource prices allow the curve to shift left or vice-versa E xpectations of supplies in the future

10. Determining Supply Measures of Cost Fixed costs or overhead: costs incurred even if output is zero Variable cost: costs that change such as labor Total cost Marginal cost: the extra cost incurred when a business produces one additional unit 24 hour gas station Internet shopping

11. Determining Supply Total revenue—units sold times price More important is marginal revenue—extra revenue made with the production and sale of one additional unit of output

12. Price determination Crossing the two curves will create an Equilibrium price and Equilibrium Quantity Surplus: a situation in which quantity supplied is greater than quantity demanded Shortage: a situation in which quantity demanded is greater than quantity supplied

13. Analyze changes in Equilibrium: 1. Decide whether the event shifts the supply curve or demand curve (or both) 2. Decide which direction the curve shifts 3. Use the supply and demand diagram to see how the shift changes the equilibrium