1. Unit 2: Supply, Demand, and Consumer Choice
Can they see me?

2. Demand

3. Why does the Law of Demand occur?
What is Demand?
Demand is the different quantities of goods that consumers are willing and able to buy at different prices.
What is the Law of Demand?
INVERSE relationship between price and quantity demanded
Why does the Law of Demand occur?
The Substitution effect
The Income effect
The Law of Diminishing Marginal Utility

4. What Causes a Shift in Demand?
5 Determinates of Demand (SHIFTERS) :
Tastes and Preferences
Number of Consumers
Price of Related Goods
Income
Future Expectations
Changes in PRICE don’t shift the curve.

5. Prices of Related Goods
Substitutes
P _____Demand for Other _____
Compliments

6. Income _____Demand _____
Normal
Income _____Demand _____
Inferior

7. Other things equal, if the price of a key resource used to produce product X falls, the:
A) supply curve of X will shift to the right.
B) demand curve of X will shift to the right.
C) supply curve of X will shift to the left.
D) demand curve of X will shift to the right.
E)both the supply and demand of X will increase
If Z is an inferior good, a decrease in income will shift the:
A) supply curve for Z to the left.
B) supply curve for Z to the right.
C) demand curve for Z to the left.
D) demand curve for Z to the right
E) there is no shift since this only changes price

8. Supply

9. Supply Shifters Prices/Availability of inputs (resources)
What is supply?
Supply is the different quantities of a good that sellers are willing and able to sell (produce) at different prices.
What is the Law of Supply?
There is a DIRECT (or positive) relationship between price and quantity supplied.
Shifters
Prices/Availability of inputs (resources)
Number of Sellers
Technology
Government Action: Taxes & Subsidies
Opportunity Cost of Alternative Production
Expectations of Future Profit

10. Price
Controls

11. Draw an effective Price Floor and Price Ceiling What are the results?
Price of Corn P S $5 4 3 2 1 D 7 o Q
Quantity of Corn

12. Surplus Shortage P S Floor Ceiling D o Q 7 Price of Corn $5 4 3 2 1 Q
Quantity of Corn

13. At price $20, there would be a surplus of…
A) 100 B) 150 C) 200 D) 50 E) 0
What would be the effect of a price floor at $60
A) It would be ineffective E) A shortage of 100
B) A shortage of D) A surplus of 100
C) Quantity demanded would increase

14. Excise Taxes
Taxes on producers

15. Practice
FRQ #1

18. Double Shifts
Demand for sports cars fell at the same time as production technology improved.
What happens to P and Q?
If TWO curves shift at the same time, EITHER price or quantity will be indeterminate.

19. Which of the following statements is correct?
A) If demand increases and supply decreases, equilibrium price will fall.
B) If the demand and the supply both fall at the same time, quantity will be indeterminate
C) If demand decreases and supply increases, equilibrium price will rise.
D) If supply increases and demand decreases, equilibrium price will fall.
E) If supply falls and demand remains constant, equilibrium price will fall.

20. How does the S&D graph show consumer and producer’s surplus?
$10 8 7 6 5 4 3 2
Consumer’s Surplus = Buyers Maximum - Price
Producer’s Surplus = Price- Sellers Minimum S D Q

21. Practice FRQ #2

24. Elasticity

25. Inelastic Demand INelastic = Insensitive to a change in price.
If price increases, quantity demanded will fall a little
If price decreases, quantity demanded increases a little.
In other words, people will continue to buy it.
20% 5%
General Characteristics of INelastic Goods:
Few Substitutes
Necessities
Small portion of income
Required now, rather than later

26. Elastic Demand Elastic = Sensitive to a change in price.
If price increases, quantity demanded will fall a lot
If price decreases, quantity demanded increases a lot.
In other words, the amount people buy is sensitive to price.
General Characteristics of Elastic Goods:
Many Substitutes
Luxuries
Large portion of income
Plenty of time to decide

27. Perfectly and Unit Elastic
Perfectly INELASTIC
Unit Elastic (45 degrees)

28. Total Revenue Test
Use elasticity to show how changes in price will affect total revenue (TR).
Elastic Demand-
Price _____ causes TR to _____
Inelastic Demand
Unit Elastic-
Price _____causes TR to ______

29. Practice FRQ #3

32. Consumer Choice

33. To maximize utility, how should the $10 income be allocated?
UTILITY MAXIMIZING COMBINATION
Product A:
Price = $1
Product B:
Price = $2
$ 10 income
Marginal
utility per
dollar
(MU/price)
Marginal
utility per
dollar
(MU/price)
Marginal
utility,
utils
Marginal
utility,
utils
Unit of
product
First
To maximize utility, how should the $10 income be allocated?

34. marginal utilities per dollar
UTILITY MAXIMIZING COMBINATION
Product A:
Price = $1
Product B:
Price = $2
$ 10 income
Marginal
utility per
dollar
(MU/price)
Marginal
utility per
dollar
(MU/price)
Marginal
utility,
utils
Marginal
utility,
utils
Unit of
product
First
Examine the
marginal utilities per dollar

35. First 10 10 24 12 Second 8 8 20 10 Third 7 7 18 9 Fourth 6 6 16 8
UTILITY MAXIMIZING COMBINATION
Product A:
Price = $1
Product B:
Price = $2
$ 10 income
Marginal
utility per
dollar
(MU/price)
Marginal
utility per
dollar
(MU/price)
Marginal
utility,
utils
Marginal
utility,
utils
Unit of
product
First
Second
Third
Fourth
Fifth
Sixth
Seventh

36. First 10 10 24 12 Second 8 8 20 10 Third 7 7 18 9 Fourth 6 6 16 8
UTILITY MAXIMIZING COMBINATION
Product A:
Price = $1
Product B:
Price = $2
$ 10 income
Marginal
utility per
dollar
(MU/price)
Marginal
utility per
dollar
(MU/price)
Marginal
utility,
utils
Marginal
utility,
utils
Unit of
product
First
Second
Third
Fourth
Fifth
Sixth
Seventh

37. First 10 10 24 12 Second 8 8 20 10 Third 7 7 18 9 Fourth 6 6 16 8
UTILITY MAXIMIZING COMBINATION
Product A:
Price = $1
Product B:
Price = $2
$ 10 income
Marginal
utility per
dollar
(MU/price)
Marginal
utility per
dollar
(MU/price)
Marginal
utility,
utils
Marginal
utility,
utils
Unit of
product
First
Second
Third
Fourth
Fifth
Sixth
Seventh

38. First 10 10 24 12 Second 8 8 20 10 Third 7 7 18 9 Fourth 6 6 16 8
UTILITY MAXIMIZING COMBINATION
Product A:
Price = $1
Product B:
Price = $2
$ 10 income
Marginal
utility per
dollar
(MU/price)
Marginal
utility per
dollar
(MU/price)
Marginal
utility,
utils
Marginal
utility,
utils
Unit of
product
First
Second
Third
Fourth
Fifth
Sixth
Seventh

39. First 10 10 24 12 Second 8 8 20 10 Third 7 7 18 9 Fourth 6 6 16 8
UTILITY MAXIMIZING COMBINATION
Product A:
Price = $1
Product B:
Price = $2
$ 10 income
Marginal
utility per
dollar
(MU/price)
Marginal
utility per
dollar
(MU/price)
Marginal
utility,
utils
Marginal
utility,
utils
Unit of
product
First
Second
Third
Fourth
Fifth
Sixth
Seventh

40. First 10 10 24 12 Second 8 8 20 10 Third 7 7 18 9 Fourth 6 6 16 8
UTILITY MAXIMIZING COMBINATION
Product A:
Price = $1
Product B:
Price = $2
$ 10 income
Marginal
utility per
dollar
(MU/price)
Marginal
utility per
dollar
(MU/price)
Marginal
utility,
utils
Marginal
utility,
utils
Unit of
product
First
Second
Third
Fourth
Fifth
Sixth
Seventh

41. First 10 10 24 12 Second 8 8 20 10 Third 7 7 18 9 Fourth 6 6 16 8
UTILITY MAXIMIZING COMBINATION
Product A:
Price = $1
Product B:
Price = $2
$ 10 income
Marginal
utility per
dollar
(MU/price)
Marginal
utility per
dollar
(MU/price)
Marginal
utility,
utils
Marginal
utility,
utils
Unit of
product
First
Second
Third
Fourth
Fifth
Sixth
Seventh

42. combination is 2 of Product A
UTILITY MAXIMIZING COMBINATION
Product A:
Price = $1
Product B:
Price = $2
$ 10 income
Marginal
utility per
dollar
(MU/price)
Marginal
utility per
dollar
(MU/price)
Marginal
utility,
utils
Marginal
utility,
utils
Unit of
product
First
Second
Third
Fourth
Fifth
Sixth
Seventh
Utility maximizing
combination is 2 of Product A
and 4 of product B

43. Utility Maximizing Rule
UTILITY MAXIMIZING COMBINATION
Product A:
Price = $1
Product B:
Price = $2
$ 10 income
Marginal
utility per
dollar
(MU/price)
Marginal
utility per
dollar
(MU/price)
Marginal
utility,
utils
Marginal
utility,
utils
Unit of
product
First
Utility Maximizing Rule
The consumer’s money should be spent so that the marginal utility per dollar of each goods equal each other.
MUx = MUy
Px Py

44. Practice FRQ #4

47. UNIT 1 KEY CONCEPT Absolute and Comparative Advantage

48. Output: Other goes Over
Output Questions:
OOO=
Output: Other goes Over

49. Input: Other goes Under
Input Questions:
IOU=
Input: Other goes Under