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

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Presentation on theme: "Unit 2: Supply, Demand, and Consumer Choice Can they see me?"— Presentation transcript:

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

3 Demand

4 DEMAND 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? 1.The Substitution effect 2.The Income effect 3.The Law of Diminishing Marginal Utility

5 What Causes a Shift in Demand? 5 Determinates of Demand (SHIFTERS) : 1.Tastes and Preferences 2.Number of Consumers 3.Price of Related Goods 4.Income 5.Future Expectations Changes in PRICE dont shift the curve.

6 Prices of Related Goods Substitutes P _____Demand for Other _____ Compliments P _____Demand for Other _____

7 Income Normal Income _____Demand _____ Inferior Income _____Demand _____

8 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 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

9 Supply

10 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

11 Price Controls

12 7 S P Q o $ D Price of Corn Quantity of Corn Draw an effective Price Floor and Price Ceiling What are the results?

13 7 S P Q o $ D Price of Corn Quantity of Corn Shortage Surplus Floor Ceiling

14 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 50 D) A surplus of 100 C) Quantity demanded would increase

15 Excise Taxes Taxes on producers

16 Practice FRQ #1

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19 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.

20 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.

21 S P Q D How does the S&D graph show consumer and producers surplus? $ Consumers Surplus = Buyers Maximum - Price Producers Surplus = Price- Sellers Minimum

22 Practice FRQ #2

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25 Elasticity

26 Inelastic Demand 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. General Characteristics of INelastic Goods: Few Substitutes Necessities Small portion of income Required now, rather than later 20% 5% INelastic = Insensitive to a change in price.

27 Elastic Demand 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 Elastic = Sensitive to a change in price.

28 Perfectly and Unit Elastic Perfectly INELASTICUnit Elastic (45 degrees)

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

30 Practice FRQ #3

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33 Consumer Choice

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

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

36 $ 10 income UTILITY MAXIMIZING COMBINATION Unit of product Product A: Price = $1 Product B: Price = $2 Marginal utility, utils Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility per dollar (MU/price) First Second Third Fourth Fifth Sixth Seventh

37 First Second Third Fourth Fifth Sixth Seventh $ 10 income UTILITY MAXIMIZING COMBINATION Unit of product Product A: Price = $1 Product B: Price = $2 Marginal utility, utils Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility per dollar (MU/price)

38 First Second Third Fourth Fifth Sixth Seventh $ 10 income UTILITY MAXIMIZING COMBINATION Unit of product Product A: Price = $1 Product B: Price = $2 Marginal utility, utils Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility per dollar (MU/price)

39 First Second Third Fourth Fifth Sixth Seventh $ 10 income UTILITY MAXIMIZING COMBINATION Unit of product Product A: Price = $1 Product B: Price = $2 Marginal utility, utils Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility per dollar (MU/price)

40 First Second Third Fourth Fifth Sixth Seventh $ 10 income UTILITY MAXIMIZING COMBINATION Unit of product Product A: Price = $1 Product B: Price = $2 Marginal utility, utils Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility per dollar (MU/price)

41 First Second Third Fourth Fifth Sixth Seventh $ 10 income UTILITY MAXIMIZING COMBINATION Unit of product Product A: Price = $1 Product B: Price = $2 Marginal utility, utils Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility per dollar (MU/price)

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

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

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

45 Practice FRQ #4

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48 UNIT 1 KEY CONCEPT Absolute and Comparative Advantage

49 Output Questions: OOO= Output: Other goes Over

50 Input Questions: IOU= Input: Other goes Under


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