1. Unit 2: Supply and Demand 1

2. Demand Review Part 1 1.What is the Law of Demand? 2.Give an example of the substitution effect 3.Give an example of the income effect 2

3. 3

4. Demand Review Part 1 1.Give an example of the law of diminishing marginal utility 2.Explain how the law of diminishing marginal utility causes the law of demand 3.How do you determine the MARKET demand for a particular good? (from reading) 4

5. Shifts in Demand CHANGES IN DEMAND Ceteris paribus-“all other things held constant.” When the ceteris paribus assumption is dropped, movement no longer occurs along the demand curve. Rather, the entire demand curve shifts. A shift means that at the same prices, more people are willing and able to purchase that good. This is a change in demand, not a change in quantity demanded 5 Changes in price DON’T shift the curve!

6. Change in Demand Q o $5 4 3 2 1 Price of Cereal Quantity of Cereal Demand Schedule 10 20 30 40 50 60 70 80 6 Price Quantity Demanded $510 $420 $330 $250 $180 Demand What if cereal makes you smarter?

7. Change in Demand Q o $5 4 3 2 1 Price of Cereal Quantity of Cereal Demand Schedule 10 20 30 40 50 60 70 80 7 Price Quantity Demanded $510 $420 $330 $250 $180 Demand

8. Change in Demand Q o $5 4 3 2 1 Price of Cereal Quantity of Cereal Demand Schedule 10 20 30 40 50 60 70 80 8 Price Quantity Demanded $510 $420 $330 $250 $180 Demand

9. Change in Demand Q o $5 4 3 2 1 Price of Cereal Quantity of Cereal Demand Schedule 10 20 30 40 50 60 70 80 9 Price Quantity Demanded $51030 $42040 $33050 $25070 $180 100 Demand

10. Change in Demand Q o $5 4 3 2 1 Price of Cereal Quantity of Cereal Demand Schedule 10 20 30 40 50 60 70 80 10 Price Quantity Demanded $51030 $42040 $33050 $25070 $180 100 Demand D2D2 Increase in Demand Prices didn’t change but people want MORE cereal

11. Change in Demand Q o $5 4 3 2 1 Price of Cereal Quantity of Cereal Demand Schedule 10 20 30 40 50 60 70 80 11 Price Quantity Demanded $510 $420 $330 $250 $180 What if cereal causes baldness? Demand

12. Change in Demand Q o $5 4 3 2 1 Price of Cereal Quantity of Cereal Demand Schedule 10 20 30 40 50 60 70 80 12 Price Quantity Demanded $510 $420 $330 $250 $180 Demand

13. Change in Demand Q o $5 4 3 2 1 Price of Cereal Quantity of Cereal Demand Schedule 10 20 30 40 50 60 70 80 13 Price Quantity Demanded $510 $420 $330 $250 $180 Demand

14. Change in Demand Q o $5 4 3 2 1 Price of Cereal Quantity of Cereal Demand Schedule 10 20 30 40 50 60 70 80 14 Price Quantity Demanded $5100 $4205 $33020 $25030 $180 60 Demand

15. Change in Demand Q o $5 4 3 2 1 Price of Cereal Quantity of Cereal Demand Schedule 10 20 30 40 50 60 70 80 15 Price Quantity Demanded $5100 $4205 $33020 $25030 $180 60 DemandD2D2 Decrease in Demand Prices didn’t change but people want LESS cereal

16. Change in Demand Q o $5 4 3 2 1 Price of Cereal Quantity of Cereal Demand Schedule 10 20 30 40 50 60 70 80 16 Price Quantity Demanded $510 $420 $330 $250 $180 What if the price of MILK goes up? Demand

17. What Causes a Shift in Demand? 5 Shifters (changers) of Demand : MERIT 1.Market size 2.Expectations 3.Related Goods 4.Income 5.Tastes and preferences Changes in PRICE don’t shift the curve. It only causes movement along the curve. 17

18. Prices of Related Goods 2. Complements are two goods that are bought and used together. –If the price of one increase, the demand for the other will fall. (or vice versa) –Ex: If price of skis falls, demand for ski boots will... 1.Substitutes are goods used in place of one another. –If the price of one increases, the demand for the other will increase (or vice versa) –Ex: If price of Pepsi falls, demand for coke will… The demand curve for one good can be affected by a change in the price of ANOTHER related good. 18

19. Substitutes 19

20. Substitutes 20

21. Substitutes 21

22. Substitutes 22

23. Substitutes 23

24. Complements 24

25. Income 2. Inferior Goods –As income, demand – –Ex: used cars, used clothes, cheap food 1.Normal Goods –As income, demand increases –As income, demand –Ex: new cars, new clothes, jewelry, The incomes of consumer change the demand, but how depends on the type of good. 25

26. Inferior Goods 26

27. P Q Cereal o $3 $2 D1D1 Price of Cereal Quantity of Cereal 10 20 Change in Qd vs. Change in Demand AC B There are two ways to increase quantity from 10 to 20 D2D2 1.A to B is a change in quantity demand (due to a change in price) 2.A to C is a change in demand (shift in the curve)

28. Practice First, identify the determinant (shifter) then decide if demand will increase or decrease 28 Shifter Increase or Decrease Left or Right 1 2 3 4 5 6 7 8

29. Practice Hamburgers (a normal good) 1.Population Increase 2.Incomes fall due to recession 3.Price for chicken burger falls to $1 4.Price increases to $5 for hamburgers 5.Doctors say- “beef is bad very bad for health” 6.Hamburger restaurants announce that they will increase prices NEXT month 7.Government taxes cola and fries causes their prices to quadruple (x4). 8.Restaurants lower price of hamburgers to $1 First identify the determinant (Shifter). Then decide if demand will increase or decrease 29