1. Chapter 5SectionMain Menu Activating Strategy, 9.10

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5. Chapter 5SectionMain Menu The law of demand states that consumers buy more of a good when its price decreases and less when its price increases. What Is the Law of Demand? The law of demand is the result of two separate behavior patterns that overlap, the substitution effect and the income effect. These two effects describe different ways that a consumer can change his or her spending patterns for other goods.

6. Chapter 5SectionMain Menu Market Demand Curve 3.00 2.50 2.00 1.50 1.00.50 0 050100150 200250 300 350 Slices of pizza per day Price per slice (in dollars) Demand The Demand Curve A demand curve is a graphical representation of a demand schedule. When reading a demand curve, assume all outside factors, such as income, are held constant.

7. Chapter 5SectionMain Menu The Substitution Effect and Income Effect The Substitution Effect The substitution effect occurs when consumers react to an increase in a good’s price by consuming less of that good and more of other goods. The Income Effect The income effect happens when a person changes his or her consumption of goods and services as a result of a change in real income.

8. Chapter 5SectionMain Menu Price As price increases… Supply Quantity supplied increases Price As price falls… Supply Quantity supplied falls The Law of Supply According to the law of supply, suppliers will offer more of a good at a higher price.

9. Chapter 5SectionMain Menu How Does the Law of Supply Work? Economists use the term quantity supplied to describe how much of a good is offered for sale at a specific price. The promise of increased revenues when prices are high encourages firms to produce more. Rising prices draw new firms into a market and add to the quantity supplied of a good.

10. Chapter 5SectionMain Menu $.501,000 Price per slice of pizzaSlices supplied per day Market Supply Schedule $1.001,500 $1.502,000 $2.002,500 $2.503,000 $3.003,500 Supply Schedules A market supply schedule is a chart that lists how much of a good all suppliers will offer at different prices.

11. Chapter 5SectionMain Menu Market Supply Curve Price (in dollars) Output (slices per day) 3.00 2.50 2.00 1.50 1.00.50 0 0500100015002000250030003500 Supply Supply Curves A market supply curve is a graph of the quantity supplied of a good by all suppliers at different prices.

12. Chapter 5SectionMain Menu 1.According to the supply curve, how many DVD’s will be supplied at the price of $14 each? 2.According to the supply curve, how many DVD’s will be supplied at the price of $20 each? 3.According to the supply curve, if you price the CD’s at $10, how CD’s will be supplied? Please write down the three questions below. Use the chart on the next slide to answer. Thanks.

13. Chapter 5SectionMain Menu a. Define the Law of Supply and the Law of Demand. b. Describe the role of buyers and sellers in determining market clearing price. c. Illustrate on a graph how supply and demand determine equilibrium price and quantity. d. Explain how prices serve as incentives in a market economy.

14. Chapter 5SectionMain Menu What is equilibrium price and quantity?

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16. Chapter 5SectionMain Menu Outside Arrows (Clockwise) – Money 1 - Revenue 2 - Wages 3 – Income 4 - Expenditure Inside Arrows (Counter clockwise) – Money A. – Goods and Services B. – Products C. – Productive resources D. - Resources

17. Chapter 5SectionMain Menu The buyer’s demand curve in a market is determined by adding together all the quantities consumers are willing and able to purchase at each price in the market.

18. Chapter 5SectionMain Menu The seller’s supply curve in a market is determined by adding together all the quantities producers are willing and able to sell at each price in the market.

19. Chapter 5SectionMain Menu The market clearing or equilibrium price is found at the intersection of the market demand and supply curves. This is the point at which the quantity demanded by consumers is equal to the quantity supplied by producers.

20. Chapter 5SectionMain Menu On the graph below, the equilibrium price is shown at Ep and the equilibrium quantity is shown at Eq.

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22. Chapter 5SectionMain Menu A shortage occurs when, at the current price, the quantity demanded is greater than the quantity supplied; shortages put pressure on prices to rise

23. Chapter 5SectionMain Menu A shortage occurs when, at the current price, the quantity demanded is greater than the quantity supplied; shortages put pressure on prices to rise

24. Chapter 5SectionMain Menu A surplus is a large, undesired inventory of goods; forces prices to drop to the equilibrium price

25. Chapter 5SectionMain Menu A surplus is a large, undesired inventory of goods; forces prices to drop to the equilibrium price

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