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Unit 2: Supply, Demand, and Consumer Choice 1. Connection to Circular Flow Model 1.Do individuals supply or demand? 2.Do business supply or demand? 3.Who.

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Presentation on theme: "Unit 2: Supply, Demand, and Consumer Choice 1. Connection to Circular Flow Model 1.Do individuals supply or demand? 2.Do business supply or demand? 3.Who."— Presentation transcript:

1 Unit 2: Supply, Demand, and Consumer Choice 1

2 Connection to Circular Flow Model 1.Do individuals supply or demand? 2.Do business supply or demand? 3.Who demands in the product market? 4.Who supplies in the product market? 2

3 DEMAND DEFINED What is Demand? Demand is the different quantities of goods that consumers are willing and able to buy at different prices. (Ex: Bill Gates is able to purchase a Ferrari, but if he isn’t willing he has NO demand for one) What is the Law of Demand? There is an INVERSE relationship between price and quantity demanded 3

4 LAW OF DEMAND As Price Falls… …Quantity Demanded Rises As Price Rises… …Quantity Demanded Falls Price Quantity Demanded 4

5 Why does the Law of Demand occur? The law of demand is the result of three separate behavior patterns that overlap: 1.The Income Effect 2.The Substitution Effect 3.The Law of Diminishing Marginal Utility 5

6 Change N/A $54 $33 $15 $10 $5 Can you see the Law of Diminishing Marginal Utility in Disneyland’s pricing strategy?

7 Graphing Demand 7

8 GRAPHING DEMAND Q o $5 4 3 2 1 Price of Cereal Quantity of Cereal Demand Schedule 10 20 30 40 50 60 70 80 Draw this large in your notes 8 Price Quantity Demanded $510 $420 $330 $250 $180

9 GRAPHING 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 $510 $420 $330 $250 $180 Demand

10 What Causes a Shift in Demand? 5 Shifters (Determinates) of Demand : 1.Tastes and Preferences - Advertising, information, fads 2.Number of Consumers 3.Price of Related Goods 4.Income 5.Future Expectations Changes in PRICE don’t shift the curve. It only causes movement along the curve. 10

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 $51030 $42040 $33050 $25070 $180 100 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 $51030 $42040 $33050 $25070 $180 100 Demand D1D1 Increase in Demand Prices didn’t change but people want MORE cereal

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 What if cereal causes baldness? 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 $510 $420 $330 $250 $180 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 $510 $420 $330 $250 $180 Demand

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 $5100 $4205 $33020 $25030 $180 60 Demand

17 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 17 Price Quantity Demanded $5100 $4205 $33020 $25030 $180 60 DemandD2D2 Decrease in Demand Prices didn’t change but people want LESS cereal

18 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 18 Price Quantity Demanded $510 $420 $330 $250 $180 What if the price of MILK goes up? Demand

19 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)

20 Practice Hamburgers (a normal good) 1.Population boom 2.Incomes fall due to recession 3.Price for beef burritos falls to $1 4.Price increases to $5 for hamburgers 5.New health craze- “No ground beef” 6.Hamburger restaurants announce that they will significantly increase prices NEXT month 7.Government heavily taxes shake and fries causes their prices to quadruple. 8.Restaurants lower price of burgers to $.50 First identify the determinant (Shifter). Then decide if demand will increase or decrease 20

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