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Unit 2: Supply, Demand, and Consumer Choice

Unit 2: Supply, Demand, and Consumer Choice. VERY IMPORTANT COW!. Demand Review. What are the two key aspects of the definition of demand? What is the Law of Demand? Give an example of the substitution effect Give an example of the income effect

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Unit 2: Supply, Demand, and Consumer Choice

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  1. Unit 2: Supply, Demand, and Consumer Choice

  2. VERY IMPORTANT COW!

  3. Demand Review • What are the two key aspects of the definition of demand? • What is the Law of Demand? • Give an example of the substitution effect • Give an example of the income effect • Give an example of the law of diminishing marginal utility • Explain how the law of diminishing marginal utility causes the law of demand • How do you determine the MARKET demand for a particular good? (from reading) • Name 10 fast food places

  4. Shifts in Demand Changes in price DON’T shift the curve! CHANGES IN DEMAND • Ceteris paribus-“all other things held constant.” • When the ceteris paribus assumption is dropped, movement no longer occurs along the demand curve. Rather, the entire demand curve shifts. • A shift means that at the same prices, more people are willing and able to purchase that good. This is a change in demand, not a change in quantity demanded

  5. Change in Demand Demand Schedule What if cereal makes you smarter? Price of Cereal $5 4 3 2 1 Demand o Q 10 20 30 40 50 60 70 80 Quantity of Cereal 5

  6. Change in Demand Demand Schedule Price of Cereal $5 4 3 2 1 Demand o Q 10 20 30 40 50 60 70 80 Quantity of Cereal 6

  7. Change in Demand Demand Schedule Price of Cereal $5 4 3 2 1 Demand o Q 10 20 30 40 50 60 70 80 Quantity of Cereal 7

  8. Change in Demand Demand Schedule Price of Cereal $5 4 3 2 1 Demand o Q 10 20 30 40 50 60 70 80 Quantity of Cereal 8

  9. Change in Demand Demand Schedule Price of Cereal Increase in Demand Prices didn’t change but people want MORE cereal $5 4 3 2 1 D2 Demand o Q 10 20 30 40 50 60 70 80 Quantity of Cereal 9

  10. Change in Demand Demand Schedule What if cereal causes baldness? Price of Cereal $5 4 3 2 1 Demand o Q 10 20 30 40 50 60 70 80 Quantity of Cereal 10

  11. Change in Demand Demand Schedule Price of Cereal $5 4 3 2 1 Demand o Q 10 20 30 40 50 60 70 80 Quantity of Cereal 11

  12. Change in Demand Demand Schedule Price of Cereal $5 4 3 2 1 Demand o Q 10 20 30 40 50 60 70 80 Quantity of Cereal 12

  13. Change in Demand Demand Schedule Price of Cereal $5 4 3 2 1 Demand o Q 10 20 30 40 50 60 70 80 Quantity of Cereal 13

  14. Change in Demand Demand Schedule Price of Cereal $5 4 3 2 1 Decrease in Demand Prices didn’t change but people want LESS cereal D2 Demand o Q 10 20 30 40 50 60 70 80 Quantity of Cereal 14

  15. Change in Demand Demand Schedule What if the price of MILK goes up? Price of Cereal $5 4 3 2 1 Demand o Q 10 20 30 40 50 60 70 80 Quantity of Cereal 15

  16. What Causes a Shift in Demand? • 5 Shifters (Determinates) of Demand: • Tastes and Preferences • Number of Consumers • Price of Related Goods • Income • Future Expectations • Changes in PRICE don’t shift the curve. It only causes movement along the curve.

  17. 2. Complements are two goods that are bought and used together. If the price of one increase, the demand for the other will fall. (or vice versa) Ex: If price of skis falls, demand for ski boots will... Substitutes are goods used in place of one another. If the price of one increases, the demand for the other will increase (or vice versa) Ex: If price of Pepsi falls, demand for coke will… The demand curve for one good can be affected by a change in the price of ANOTHER related good. Prices of Related Goods

  18. Substitutes 18

  19. Substitutes 19

  20. Substitutes 20

  21. Substitutes 21

  22. Substitutes 22

  23. Substitutes 23

  24. Substitutes 24

  25. Complements 25

  26. 2. Inferior Goods As income increases, demand falls As income falls, demand increases Ex: Top Romen, used cars, used cloths, Normal Goods As income increases, demand increases As income falls, demand falls Ex: Luxury cars, Sea Food, jewelry, homes The incomes of consumer change the demand, but how depends on the type of good. Income

  27. Inferior Goods 27

  28. Change in Qd vs. Change in Demand There are two ways to increase quantity from 10 to 20 Price of Cereal P • A to B is a change in quantity demand (due to a change in price) • A to C is a change in demand (shift in the curve) A C $3 $2 B D2 D1 o Q Cereal 10 20 Quantity of Cereal

  29. Practice First, identify the determinant (shifter) then decide if demand will increase or decrease

  30. Practice Hamburgers (a normal good) Population boom Incomes fall due to recession Price for Carne Asada burritos falls to $1 Price increases to $5 for hamburgers New health craze- “No ground beef” Hamburger restaurants announce that they will significantly increase prices NEXT month Government heavily taxes shake and fries causes their prices to quadruple. Restaurants lower price of burgers to $.50 First identify the determinant (Shifter). Then decide if demand will increase or decrease 30

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