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Unit 2 Supply and Demand
Chapter 3 Supply and Demand
I. Competitive Market
a) Many buyers and sellersb) Supply and Demand model explains how a
competitive market worksc) Five key elements:
1. Demand Curve2. Supply Curve3. Demand and supply curve shifts4. Market equilibrium5. Changes in market equilibrium
I. Demand
a) Different quantities of goods that consumers are willing and able to buy at different prices.
b) Ex. Bill gates is able to purchase a Ferrari, but if he isn’t willing he has NO demand for on.
c) Law of Demand:1. Inverse relationship between price and quantity
demanded.
LAW OF DEMANDAs Price Falls… …Quantity Demanded RisesAs Price Rises… …Quantity Demanded Falls
Price Quantity Demanded
4
II. Demand Schedule
a) Shows how much of a good or service consumers will want to buy at different prices. 7.1
7.5
8.1
8.9
10.0
11.5
14.2
Price of coffee beans (per pound)
Quantity of coffee beans demanded
(billions of pounds)
1.75
1.50
1.25
1.00
0.75
0.50
$2.00
Demand Schedule for Coffee Beans
GRAPHING DEMAND
Qo
$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
6
PriceQuantityDemande
d
$5 10
$4 20
$3 30
$2 50
$1 80
GRAPHING DEMAND
Qo
$5
4
3
2
1
Price of Cereal
Quantity of Cereal
Demand Schedule
10 20 30 40 50 60 70 80
7
PriceQuantityDemande
d
$5 10
$4 20
$3 30
$2 50
$1 80
Demand
Pay More, Pump Less…
Because of high taxes, gasoline and diesel fuel are more than twice as expensive in most European countries as in the United States.
According to the law of demand, Europeans should buy less gasoline than Americans, and they do: Europeans consume less than half as much fuel as Americans, mainly because they drive smaller cars with better mileage.
1.0 1.40.60.2
$8
7
6
5
4
3
Price of gasoline
(per gallon)
0
ItalyFrance
Canada
United States
Japan
Germany
Spain
United Kingdom
Consumption of gasoline (gallons per
day per capita)
9
III. Shifting Demand
a) At the same prices, more or less people are willing and able to purchase that good.
b) Demand now changes. c) We don’t move along the curve….we shift it.
IV. Shifters of Demand
a) Changes in the prices of related Goods.1. Substitutes: Two goods that are easily
interchanged for each other if the price changes. (ie. Apples get expensive, people buy more oranges.
2. Complements: Two goods that need each other. (ie. Paint gets expensive so people buy fewer paint brushes.
IV. Shifters of Demand
b) Changes in tastesc) Changes in expectationsd) Number of consumerse) Changes in income
1. Normal goods: rise in income makes you want to buy more of something.
2. Inferior goods: rise in income makes you buy less of something.
Substitutes
13
Substitutes
14
Substitutes
15
Substitutes
16
Change in Demand
Qo
$5
4
3
2
1
Price of Cereal
Quantity of Cereal
Demand Schedule
10 20 30 40 50 60 70 80
17
PriceQuantityDemande
d
$5 10
$4 20
$3 30
$2 50
$1 80
Demand
Change in Demand
Qo
$5
4
3
2
1
Price of Cereal
Quantity of Cereal
Demand Schedule
10 20 30 40 50 60 70 80
18
PriceQuantityDemande
d
$5 10
$4 20
$3 30
$2 50
$1 80
Demand
Change in Demand
Qo
$5
4
3
2
1
Price of Cereal
Quantity of Cereal
Demand Schedule
10 20 30 40 50 60 70 80
19
PriceQuantityDemande
d
$5 10 30
$4 20 40
$3 30 50
$2 50 70
$1 80 100
Demand
Change in Demand
Qo
$5
4
3
2
1
Price of Cereal
Quantity of Cereal
Demand Schedule
10 20 30 40 50 60 70 80
20
PriceQuantityDemande
d
$5 10 30
$4 20 40
$3 30 50
$2 50 70
$1 80 100
Demand
D1
Increase in DemandPrices didn’t change but people
want MORE cereal
Change in Demand
Qo
$5
4
3
2
1
Price of Cereal
Quantity of Cereal
Demand Schedule
10 20 30 40 50 60 70 80
21
PriceQuantityDemande
d
$5 10
$4 20
$3 30
$2 50
$1 80
Demand
Change in Demand
Qo
$5
4
3
2
1
Price of Cereal
Quantity of Cereal
Demand Schedule
10 20 30 40 50 60 70 80
22
PriceQuantityDemande
d
$5 10
$4 20
$3 30
$2 50
$1 80
Demand
Change in Demand
Qo
$5
4
3
2
1
Price of Cereal
Quantity of Cereal
Demand Schedule
10 20 30 40 50 60 70 80
23
PriceQuantityDemande
d
$5 10 0
$4 20 5
$3 30 20
$2 50 30
$1 80 60
Demand
Change in Demand
Qo
$5
4
3
2
1
Price of Cereal
Quantity of Cereal
Demand Schedule
10 20 30 40 50 60 70 80
24
PriceQuantityDemande
d
$5 10 0
$4 20 5
$3 30 20
$2 50 30
$1 80 60
DemandD2
Decrease in DemandPrices didn’t change but people
want LESS cereal
PracticeFirst, identify the determinant (shifter) then
decide if demand will increase or decrease
25
Shifter Increase or Decrease
Left or Right
1
2
3
4
5
6
7
8
Practice
Hamburgers (a normal good)
1. Population boom 2. Incomes fall due to recession3. Price for Carne Asada burritos falls to $1 4. Price increases to $5 for hamburgers5. 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
26
V. Supply
a) The different quantities of a good that sellers are willing and able to sell at different prices.
b) Law of Supply1. Direct relationship between price and quantity.2. As price increases, producers make more.3. As price falls, producers make less
Example of SupplyYou own an lawn mower and you are
willing to mow lawns. How many lawns will you mow at these prices?
Price per lawn mowed
Quantity SuppliedSupply
Schedule
28
$1$5
$20$50
$100$1000
GRAPHING SUPPLY
Qo
$5
4
3
2
1
Price of Cereal
Quantity of Cereal
Supply Schedule
10 20 30 40 50 60 70 80
Draw this large in your notes
29
PriceQuantitySupplied
$5 50
$4 40
$3 30
$2 20
$1 10
GRAPHING SUPPLY
Qo
$5
4
3
2
1
Price of Cereal
Quantity of Cereal
Supply Schedule
10 20 30 40 50 60 70 80
30
PriceQuantitySupplied
$5 50
$4 40
$3 30
$2 20
$1 10
Supply
VI. Supply Shifters
a) Changes in input prices.b) Government Action: Taxes and Subsidiesc) Changes in prices of related goods and
services.d) Changes in technologye) Changes in expectationsf) Changes in the number of producers
Change in Supply
Qo
$5
4
3
2
1
Price of Cereal
Quantity of Cereal
Supply Schedule
10 20 30 40 50 60 70 80
32
PriceQuantitySupplied
$5 50
$4 40
$3 30
$2 20
$1 10
Supply
Change in Supply
Qo
$5
4
3
2
1
Price of Cereal
Quantity of Cereal
Supply Schedule
10 20 30 40 50 60 70 80
33
PriceQuantitySupplied
$5 50
$4 40
$3 30
$2 20
$1 10
Supply
Change in Supply
Qo
$5
4
3
2
1
Price of Cereal
Quantity of Cereal
Supply Schedule
10 20 30 40 50 60 70 80
34
PriceQuantitySupplied
$5 50 70
$4 40 60
$3 30 50
$2 20 40
$1 10 30
Supply
Change in Supply
Qo
$5
4
3
2
1
Price of Cereal
Quantity of Cereal
Supply Schedule
10 20 30 40 50 60 70 80
35
SupplyS2
PriceQuantitySupplied
$5 50 70
$4 40 60
$3 30 50
$2 20 40
$1 10 30
Increase in SupplyPrices didn’t change but there is
MORE cereal produced
Supply PracticeFirst, identify the determinant (shifter) then
decide if supply will increase or decrease
36
ShifterIncrease or Decrease Left or Right
1
2
3
4
5
6
Supply Practice
Hamburgers1. Mad cow disease kills 20% of cows 2. Price of hamburgers increase 30%3. Government taxes burger producers4. Restaurants can produce burgers and/or tacos. A demand
increase causes the price for tacos to increase 500%5. New bun baking technology cuts production time in half6. Minimum wage increases to $20
1. Which determinant (SHIFTER)?2. Increase or decrease?3. Which direction will curve shift?
37
VII. Supply, Demand and Equilibrium
a) Equilibrium: when quantity demanded of a good equals the quantity supplied (competitive market).
b) Known as equilibrium price1. Every buyer finds a seller2. Every good is sold
Qo
$5
4
3
2
1
PDemand Schedule
10 20 30 40 50 60 70 80
39
P Qd
$5 10
$4 20
$3 30
$2 50
$1 80
D
SSupply
Schedule
P Qs
$5 50
$4 40
$3 30
$2 20
$1 10
Supply and Demand are put together to determine equilibrium price and equilibrium quantity
Qo
$5
4
3
2
1
PDemand Schedule
10 20 30 40 50 60 70 80
40
P Qd
$5 10
$4 20
$3 30
$2 50
$1 80
Supply Schedule
P Qs
$5 50
$4 40
$3 30
$2 20
$1 10
Supply and Demand are put together to determine equilibrium price and equilibrium quantity
Equilibrium Price = $3 (Qd=Qs)
Equilibrium Quantity is 30
D
S
Qo
$5
4
3
2
1
PDemand Schedule
10 20 30 40 50 60 70 80
41
P Qd
$5 10
$4 20
$3 30
$2 50
$1 80
Supply Schedule
P Qs
$5 50
$4 40
$3 30
$2 20
$1 10
D
S
At $4, there is disequilibrium. The quantity demanded is less than quantity supplied.
Surplus (Qd<Qs)
How much is the surplus at $4?
Qo
$5
4
3
2
1
PDemand Schedule
10 20 30 40 50 60 70 80
42
P Qd
$5 10
$4 20
$3 30
$2 50
$1 80
Supply Schedule
P Qs
$5 50
$4 40
$3 30
$2 20
$1 10
D
S
At $2, there is disequilibrium. The quantity demanded is greater than quantity supplied.
Shortage(Qd>Qs)
How much is the shortage at $2?
Answer: 30
Qo
$5
4
3
2
1
PDemand Schedule
10 20 30 40 50 60 70 80
43
P Qd
$5 10
$4 20
$3 30
$2 50
$1 80
Supply Schedule
P Qs
$5 50
$4 40
$3 30
$2 20
$1 10
D
SWhen there is a
surplus, producers lower prices
The FREE MARKET system automatically pushes the price toward equilibrium.
When there is a shortage, producers
raise prices
VIII. Drawing shifting curves
1. Before the change:a) Draw supply and demandb) Label equilibrium price and quantity
2. The change:a) Did supply or demand change first?b) Which determinant caused the shift?c) Draw the increase or decrease.
3. After the change:a) Label new equilibriumb) Explain what happens to pricec) Explain what happens to quantity
Simultaneous Shifts of Supply and Demand
We can make the following predictions about the outcome when the supply and demand curves shift simultaneously:
Simultaneous Shifts of Supply and Demand
Supply Increases Supply Decreases
Demand Increases
Price: ambiguousQuantity: up
Price: upQuantity: ambiguous
Demand Decreases
Price: downQuantity: ambiguous
Price: ambiguousQuantity: down
S&D Analysis Practice
Analyze Hamburgers1. Price of sushi (a substitute) increases2. New grilling technology cuts production time in half3. Price of burgers falls from $3 to $1. 4. Price for ground beef triples5. Human fingers found in multiple burger restaurants.
1. Before Change (Draw equilibrium) 2. The Change (S or D, Identify Shifter)3. After Change (Price and Quantity After)
46
Use a S&D to explain this double shift
47
The ease of transmitting photos over the Internet and the relatively low cost of international travel beautiful young women from all over the world, eagerly trying to make it as models = influx of aspiring models from around the world
In addition the tastes of many of those who hire models have changed they prefer celebrities
What happened to the equilibrium price of a young (not a celebrity) fashion model? Use your supply and demand curves to determine the salaries of “America’s Next Best Models”…
Your Turn on the Runway: An Exercise of Supply, Demand and Supermodels