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Do Now! Questions: Supply and Demand—Just go with it clip http://www.youtube.com/watch?v=898OUCyBulM&feature=youtu.be http://www.youtube.com/watch?v=ShzPtU7IOXs • Define demand. • What factors cause a good/service to be “in demand”? • List 5 goods/services that you think have a high demand and explain why.

AP Macroeconomics MR. Graham Unit Two Supply and Demand

Module 5: Supply and Demand: Introduction and Demand 3

Competitive Market • A market in which there are many buyers and sellers of the same good or service. • No individual’s actions have a noticeable effect on the price at which a good or service is sold. • When a market is competitive, its behavior is well described by the supply and demand model. 4

Supply and Demand Model • There are five key elements in this model: • The demandcurve • The supply curve • The set of factors that cause the demand curve to shift and the set of factors that cause the supply curve to shift • The market equilibrium, which includes the equilibrium price and equilibrium quantity. • The way the market equilibrium changes when the supply curve or demand curve shifts 5

“Demand” Defined A schedule of quantities of goods or services that will be purchased at various prices, during a specified time period, other things being constant (“ceteris paribus”).

The Demand Schedule and the Demand Curve

Law of Demand Law of Demand A negative, or inverse, relationship between the price of any good or service and the quantity demanded, holding other factors constant (ceteris paribus) When the price of a good goes up, people buy less of it, other things being equal. When the price of a good goes down, people buy more of it, other things being equal.

“Quantity Demanded” vs. “Demand” A change in a good’s price leads to a change in quantity demanded (movement along the demand curve)

“Quantity Demanded” vs. “Demand” Whenever there is a change in a ceteris paribus condition, there will be a change in demand • A shift of the entire demand curve • The only thing that can cause the entire curve to move is a change in determinant other than price

“Quantity Demanded” vs. “Demand”

Let us review by using viewing “Quantity Demanded and Demand” from Reffonomics. “Quantity Demanded” vs. “Demand”

Determinants of Demand (8) Number of consumers Income: Normal Goods Tastes and preferences Income: Inferior Goods The prices of related goods: Substitutes The prices of related goods: Complements Expectations: Future Prices Expectations: Future Income

Shifts in Demand (cont'd) D3 D2 The Determinants of Demand Market Size (Number of Consumers) Price Increase in the number of consumers increases demand Decrease in the number of consumers decreases demand D1 Q/Units

Normal and Inferior Goods Normal Goods Goods for which demand rises as income rises; most goods are normal goods As Y , then demand for normal goods  In economics, the letter “Y” stands for income

Shifts in Demand (cont'd) Increase in income increases demand Decrease in income decreases demand D3 D2 The Determinants of Demand Income: Normal Good Price D1 Q/Units

Shifts in Demand (cont'd) Hybrid vehicles • Increase in demand SUVs • Decrease in demand D3 D2 The Determinants of Demand Tastes and Preferences Price D1 Q/Units

Normal and Inferior Goods Inferior Goods Goods for which demand falls as income rises As Y , then demand for inferior goods 

Shifts in Demand (cont'd) D3 D2 The Determinants of Demand Income: Inferior Good Price Decrease in income increases demand Increase in income decreases demand D1 Q/Units

Shifts in Demand (cont'd) Substitutes Two goods are substitutes when a change in the price of one causes a shift in demand for the other in the same direction as the price change There are millions of products that have substitutes: Soap (Ivory v. Dove) Pizza (Pizza Hut v. Dominos) Cola (Coke v. Pepsi)

Shifts in Demand (cont'd) D2 The Determinants of Demand Price of Related Goods: Substitutes Price Butter and Margarine • Price of both = $2/lb • Price of margarine increases to $3/lb • Demand for butter increases D1 Q/Butter

Shifts in Demand (cont'd) Complements Two goods are complements when a change in the price of one causes an opposite shift in the demand curve for the other There are millions of products that complement each other: Soap and Shampoo Toothbrush and Toothpaste Shoes and Socks Peanut Butter and Jelly

Shifts in Demand (cont'd) D3 D2 The Determinants of Demand Price of Related Goods: Complements Price Speakers and Amplifiers • Decrease the relative price of amplifiers • Demand for speakers increases Speakers and Amplifiers • Increase the relative price of amplifiers • Demand for speakers decreases D1 Q/Speakers

Shifts in Demand (cont'd) D3 D2 The Determinants of Demand Expectations: Future Prices Price Expectations of a higher future price will increase demand Expectations of a lower future price will decrease demand D1 Q/Units

Determinants of Demand (8) Number of consumers Income: Normal Goods Tastes and preferences Income: Inferior Goods The prices of related goods: Substitutes The prices of related goods: Complements Expectations: Future Prices Expectations: Income

Shifts in Demand (cont'd) D3 D2 The Determinants of Demand Expectations: Income Price A higher income will increase demand A lower income will decrease demand D1 Q/Units

Shifts in Demand Let us review by using viewing the “Demand Interactive Chart” from Reffonomics.

Do Now!--PRICE OF “JOE” • For those who need a cappuccino, mocha latte, or Frappuccino to get through the day, coffee drinking can become an expensive habit. And on October 6, 2006, the habit got a little more expensive. On that day, Starbucks raised its drink prices for the first time in six years. The average price of coffee beverages at the world’s leading chain of coffee-houses rose about 11 cents per cup. • Respond to the following: Starbucks had kept its prices unchanged for six years. So what compelled them to finally raise their prices in the fall of 2006?

Who decided to raise the prices of coffee beans? Nobody: prices went up because of events outside anyone’s control. Specifically, the main cause of rising bean prices was a significant decrease in the supply of coffee beans from the world’s two leading coffee exporters: Brazil and Vietnam. In Brazil, the decrease in supply was a delayed reaction to low prices earlier in the decade, which led coffee growers to cut back on planting. In Vietnam, the problem was weather: a prolonged drought sharply reduced coffee harvests. • And a lower supply of coffee beans from Vietnam or Brazil inevitably translates into a higher price of coffee on Main Street. It’s just a matter of supply and demand. • What do we mean by that? Many people use “supply and demand” as a sort of catchphrase to mean “the laws of the marketplace at work.” To economists, however, the concept of supply and demand has a precise meaning: it is a model of how a market behaves. • http://www.criticalcommons.org/Members/fsustavros/clips/stossel-2007-oil-supplies

Module 6: Supply and Demand: Supply and Equilibrium 37

“Supply” Defined A schedule of quantities of goods or services that will be supplied at various prices, during a specified time period, other things being constant (“ceteris paribus”)

The Supply Schedule and the Supply Curve

The Law of Supply Law of Supply The higher the price of a good, the more of that good sellers will make available over a specified time period, other things equal At higher prices, a larger quantity will generally be supplied than at lower prices, all other things held constant. At lower prices, a smaller quantity will generally be supplied than at higher prices, all other things held constant.

“Quantity Supplied” vs. “Supply” What is the difference between Quantity Supplied and Supply?

“Quantity Supplied” vs. “Supply” A change in a good’s own price leads to a change in quantity supplied.

“Quantity Supplied” vs. “Supply” Whenever there is a change in a ceteris paribus condition, there will be a change in supply • A shift of the entire supply curve to the right or to the left • The only thing that can cause the entire curve to move is a change in a determinant other than the good’s own price

Determinants of Supply (6) Number of suppliers Cost of inputs Physical availability of resources Technology and productivity (in long run) Taxes and subsidies Price expectations

Shifts in Supply (cont'd) S3 The Determinants of Supply Number of Suppliers Price S1 S2 Decrease in the number of firms decreases supply Increase in the number of firms increases supply Q/Units

Shifts in Supply (cont'd) S3 S2 The Determinants of Supply Cost of Inputs Price S1 Increase in cost decreases supply Decrease in cost increases supply Q/Units

Shifts in Supply (cont'd) S3 S2 The Determinants of Supply Physical Availability of Resources Price S1 Generally unavailable resources decrease supply Existence or discovery of new deposits of resources increases supply Q/Units

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