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Unit 2: Supply, Demand, and Consumer Choice

Unit 2: Supply, Demand, and Consumer Choice. Do you see the cow?. Review. Explain the Law of Demand Explain the Law of Supply Identify the 5 shifters of demand Identify the 6 shifters of supply Define Subsidy Explain why price DOESN’T shift the curve Define Equilibrium Define Shortage

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Unit 2: Supply, Demand, and Consumer Choice

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  1. Unit 2: Supply, Demand, and Consumer Choice Do you see the cow?

  2. Review • Explain the Law of Demand • Explain the Law of Supply • Identify the 5 shifters of demand • Identify the 6 shifters of supply • Define Subsidy • Explain why price DOESN’T shift the curve • Define Equilibrium • Define Shortage • Define Surplus • Identify 10 stores in the mall

  3. Putting Supply and Demand Together!!!

  4. Supply and Demand are put together to determine equilibrium price and equilibrium quantity P Supply Schedule Demand Schedule S $5 4 3 2 1 D o Q 10 20 30 40 50 60 70 80 4

  5. Supply and Demand are put together to determine equilibrium price and equilibrium quantity P Supply Schedule Demand Schedule S $5 4 3 2 1 Equilibrium Price = $3 (Qd=Qs) D o Q 10 20 30 40 50 60 70 80 Equilibrium Quantity is 30 5

  6. Supply and Demand are put together to determine equilibrium price and equilibrium quantity What if the price increases to $4? P Supply Schedule Demand Schedule S $5 4 3 2 1 D o Q 10 20 30 40 50 60 70 80 6

  7. At $4, there is disequilibrium. The quantity demanded is less than quantity supplied. P Supply Schedule Demand Schedule S $5 4 3 2 1 Surplus (Qd<Qs) How much is the surplus at $4? Answer: 20 D o Q 10 20 30 40 50 60 70 80 7

  8. How much is the surplus if the price is $5? What if the price decreases to $2? P Supply Schedule Demand Schedule S $5 4 3 2 1 Answer: 40 D o Q 10 20 30 40 50 60 70 80 8

  9. At $2, there is disequilibrium. The quantity demanded is greater than quantity supplied. P Supply Schedule Demand Schedule S $5 4 3 2 1 How much is the shortage at $2? Answer: 30 Shortage (Qd>Qs) D o Q 10 20 30 40 50 60 70 80 9

  10. How much is the shortage if the price is $1? P Supply Schedule Demand Schedule S $5 4 3 2 1 Answer: 70 D o Q 10 20 30 40 50 60 70 80 10

  11. The FREE MARKET system automatically pushes the price toward equilibrium. P Supply Schedule Demand Schedule S $5 4 3 2 1 When there is a surplus, producers lower prices When there is a shortage, producers raise prices D o Q 10 20 30 40 50 60 70 80 11

  12. Shifting Supply and Demand

  13. Assume shifts in supply or demand change equilibrium P and Q instantaneously 13

  14. Easy as 1, 2, 3 • Before the change: • Draw supply and demand • Label original equilibrium price and quantity • The change: • Did it affect supply or demand first? • Which determinant caused the shift? • Draw increase or decrease • After change: • Label new equilibrium? • What happens to Price? (increase or decrease) • What happens to Quantity?(increase or decrease) • Let’s Practice! Supply and Demand Analysis

  15. Analyze Hamburgers Price of sushi (a substitute) increases New grilling technology cuts production time in half Price of burgers falls from $3 to $1. Price for ground beef triples Human fingers found in multiple burger restaurants. S&D Analysis Practice • Before Change (Draw equilibrium) • The Change (S or D, Identify Shifter) • After Change (Price and Quantity After)

  16. Double Shifts • Suppose the demand for sports cars fell at the same time as production technology improved. • Use S&D Analysis to show what will happen to PRICE and QUANTITY. • If TWO curves shift at the same time, EITHER price or quantity will be indeterminate.

  17. Use a S&D to explain this double shift 17

  18. Voluntary Exchange In the free-market, buyers and sellers voluntarily come together to seek mutual benefits.

  19. Voluntary Exchange In the free-market, buyers and sellers voluntarily come together to seek mutual benefits.

  20. Voluntary Exchange In the free-market, buyers and sellers voluntarily come together to seek mutual benefits.

  21. Voluntary Exchange In the free-market, buyers and sellers voluntarily come together to seek mutual benefits.

  22. Example of Voluntary Exchange Ex: You want to buy a truck so you go to the local dealership. You are willing to spend up to $20,000 for a new 4x4. The seller is willing to sell this truck for no less than $15,000. After some negotiation you buy the truck for $18,000. Analysis: Buyer’ Maximum- Sellers Minimum- Price- Consumer’s Surplus- Producer’s Surplus- $20,000 $15,000 $18,000 $2,000 $3,000

  23. Voluntary Exchange Terms Consumer Surplus is the difference between what you are willing to pay and what you actually pay. CS = Buyer’s Maximum – Price Producer’s Surplus is the difference between the price the seller received and how much they were willing to sell it for. PS = Price – Seller’s Minimum

  24. Pearl Exchange Activity 24

  25. Voluntary Exchange Activity 25

  26. Consumer and Producer’s Surplus • Calculate the area of: • Consumer Surplus • Producer Surplus • Total Surplus P $10 8 6 $5 4 2 1 S CS • CS= $25 • PS= $20 • Total= $45 PS D 2 4 6 8 10 Q

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