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Unit 2 Supply and Demand Chapter 3 Supply and Demand
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Page 1: Unit 2 Supply and Demand Chapter 3 Supply and Demand.

Unit 2 Supply and Demand

Chapter 3 Supply and Demand

Page 2: 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

Page 3: Unit 2 Supply and Demand Chapter 3 Supply and Demand.

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.

Page 4: Unit 2 Supply and Demand Chapter 3 Supply and Demand.

LAW OF DEMANDAs Price Falls… …Quantity Demanded RisesAs Price Rises… …Quantity Demanded Falls

Price Quantity Demanded

4

Page 5: Unit 2 Supply and Demand Chapter 3 Supply and Demand.

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

Page 6: Unit 2 Supply and Demand Chapter 3 Supply and Demand.

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

Page 7: Unit 2 Supply and Demand Chapter 3 Supply and Demand.

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

Page 8: Unit 2 Supply and Demand Chapter 3 Supply and 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)

Page 9: Unit 2 Supply and Demand Chapter 3 Supply and Demand.

9

Page 10: Unit 2 Supply and Demand Chapter 3 Supply and Demand.

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.

Page 11: Unit 2 Supply and Demand Chapter 3 Supply and Demand.

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.

Page 12: Unit 2 Supply and Demand Chapter 3 Supply and Demand.

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.

Page 13: Unit 2 Supply and Demand Chapter 3 Supply and Demand.

Substitutes

13

Page 14: Unit 2 Supply and Demand Chapter 3 Supply and Demand.

Substitutes

14

Page 15: Unit 2 Supply and Demand Chapter 3 Supply and Demand.

Substitutes

15

Page 16: Unit 2 Supply and Demand Chapter 3 Supply and Demand.

Substitutes

16

Page 17: Unit 2 Supply and Demand Chapter 3 Supply and 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

17

PriceQuantityDemande

d

$5 10

$4 20

$3 30

$2 50

$1 80

Demand

Page 18: Unit 2 Supply and Demand Chapter 3 Supply and 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

Page 19: Unit 2 Supply and Demand Chapter 3 Supply and 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

Page 20: Unit 2 Supply and Demand Chapter 3 Supply and 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

Page 21: Unit 2 Supply and Demand Chapter 3 Supply and 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

21

PriceQuantityDemande

d

$5 10

$4 20

$3 30

$2 50

$1 80

Demand

Page 22: Unit 2 Supply and Demand Chapter 3 Supply and 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

Page 23: Unit 2 Supply and Demand Chapter 3 Supply and 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

Page 24: Unit 2 Supply and Demand Chapter 3 Supply and 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

Page 25: Unit 2 Supply and Demand Chapter 3 Supply and Demand.

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

Page 26: Unit 2 Supply and Demand Chapter 3 Supply and Demand.

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

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Page 27: Unit 2 Supply and Demand Chapter 3 Supply and Demand.

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

Page 28: Unit 2 Supply and Demand Chapter 3 Supply and Demand.

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

Page 29: Unit 2 Supply and Demand Chapter 3 Supply and Demand.

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

Page 30: Unit 2 Supply and Demand Chapter 3 Supply and Demand.

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

Page 31: Unit 2 Supply and Demand Chapter 3 Supply and Demand.

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

Page 32: Unit 2 Supply and Demand Chapter 3 Supply and Demand.

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

Page 33: Unit 2 Supply and Demand Chapter 3 Supply and Demand.

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

Page 34: Unit 2 Supply and Demand Chapter 3 Supply and Demand.

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

Page 35: Unit 2 Supply and Demand Chapter 3 Supply and Demand.

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

Page 36: Unit 2 Supply and Demand Chapter 3 Supply and Demand.

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

Page 37: Unit 2 Supply and Demand Chapter 3 Supply and Demand.

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?

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Page 38: Unit 2 Supply and Demand Chapter 3 Supply and Demand.

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

Page 39: Unit 2 Supply and Demand Chapter 3 Supply and Demand.

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

Page 40: Unit 2 Supply and Demand Chapter 3 Supply and Demand.

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

Page 41: Unit 2 Supply and Demand Chapter 3 Supply and Demand.

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?

Page 42: Unit 2 Supply and Demand Chapter 3 Supply and Demand.

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

Page 43: Unit 2 Supply and Demand Chapter 3 Supply and Demand.

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

Page 44: Unit 2 Supply and Demand Chapter 3 Supply and Demand.

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

Page 45: Unit 2 Supply and Demand Chapter 3 Supply and Demand.

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

Page 46: Unit 2 Supply and Demand Chapter 3 Supply and Demand.

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)

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Page 47: Unit 2 Supply and Demand Chapter 3 Supply and Demand.

Use a S&D to explain this double shift

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Page 48: Unit 2 Supply and Demand Chapter 3 Supply and Demand.

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