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