1. Unit 2 Supply & Demand and the Nature and Function of Markets

2. Demand Basics Demand Schedule and Demand Curve

3. Demand Basics Demand versus Quantity Demanded Demand- quantities consumers are willing and able to buy at various prices Quantity Demanded- quantity consumers are willing and able to buy at a given price

4. Demand Basics Demand versus Quantity Demanded Demand- the whole curve Quantity Demanded- a point on the curve

5. Demand Basics Demand versus Quantity Demanded Change in Demand- the whole curve shifts Change in Quantity Demanded- move from one point on the curve to another

6. Demand Basics Changes in Demand –C–Consumer Income Normal v. Inferior Goods –P–Population –P–Preference/Taste –P–Price of Other Goods Compliments Substitutes –E–Expectation of Change in Price

7. Supply Basics Supply Schedule and Supply Curve

8. Supply Basics Supply versus Quantity Supplied Supply - quantities producers are willing and able to sell at various prices Quantity Supplied- quantity producers are willing and able to sell at a given price

9. Supply Basics Supply versus Quantity Supplied Supply - the whole curve Quantity Supplied- a point on the curve

10. Supply Basics Change in Supply - the whole curve shifts Change in Quantity Supplied- move from one point on the curve to another

11. Supply Basics- Changes # of Producers Technology Price of Inputs Substitutes of Production Compliments of Production Taxes and Subsidies Other Regulations

12. Individual & Market Demand Curve Horizontal sum of individual demand curves

13. Individual & Market Supply Curve Horizontal sum of individual supply curves

15. What if they both shift? Equilibrium Price? Equilibrium Quantity? One change is certain The other is ambiguous

16. What if they both shift? Coffee –New Rebecca Black Song –New Fertilizer

17. What if they both shift? Same Shift- know Q Opposite Shift- know P

18. Equilibrium Price = Market Clearing Price

19. Let’s Review Shifts Double Shifts Ceilings and Floors Shortage and Surplus ------------------------------------------ Quantifying Shortage and Surplus Other Effects of Ceilings and Floors

20. If the market price is above equilibrium price…

21. If the market price is below equilibrium price…

24. S & D for Non-Smart Phones (inferior good) Decrease in unemployment Increase in the price of Smart Phones

25. S & D for Non-Smart Phones (inferior good) Decrease in unemployment Increase in the price of Smart Phones * If the income effect is greater than the substitute effect*

26. Agenda HW and Field Trip Beyond Surpluses and Shortages Binding v. Non-Binding Price Controls A Closer Look at the Downward Slope Marginal Utility Activity (HW if incomplete)

27. Price Controls Effects beyond Surpluses and Shortages

28. BOTH reduce the quantity of a good bought and sold

29. Price Ceilings Shortages Inefficiencies Black Markets

30. Price Ceilings- Inefficiencies Misallocation of Resources –Need and willingness to pay Wasted Resources –Time and money spent overcoming the shortage Inefficiently Low Quality

31. Price Ceilings- Black Markets Illegal Markets Prices ABOVE equilibrium –Prices account for additional cost in the form of risk

32. How to stop Canal Street Sales?

33. Price Ceilings Non-Binding Set above equilibrium Market prices will remain below the ceiling

34. Price Floors Non-Binding Set below equilibrium Market prices will remain above the floor

35. Price Floors Surpluses Inefficiencies Black Markets

36. Price Floors- Inefficiencies Misallocation of Resources –Those willing to sell at the lowest price do not always succeed Wasted Resources Inefficiently High Quality

37. Price Floors- Black Markets Illegal Markets Prices below equilibrium –Prices account for the relatively low number of consumers willing to break the law

38. Is minimum wage a binding price ceiling?

39. Now that you are thinking… Is minimum wage a binding price floor?

40. Why Demand Slopes Downward and what’s up with the shape? Income Effect Substitute Effect Diminishing Marginal Utility

41. Conspicuous Goods

42. Why Demand Slopes Downward and what’s up with the shape? Income Effect Substitute Effect Diminishing Marginal Utility

43. Why Demand Slopes Downward? Income Effect –Higher price = Lower purchasing power –Lower price = Higher purchasing power –“ability to buy”

44. Why Demand Slopes Downward? Substitute Effect- think opportunity cost –Higher price = Lower relative price of substitutes –Lower price = Higher relative price of substitutes

45. Why? 1 st pizza for full price ($10.00), get a 2 nd for $5?

46. Why? Buy one pair at regular price and get the second pair half off? BOGO Days!

48. Why Demand Slopes Downward? Diminishing Marginal Utility

49. Why Demand Slopes Downward? Diminishing Marginal Utility –MU= satisfaction (quantified in dollars) of an additional unit of consumption –Marginal Utility ALWAYS* decreases with additional consumption –Total Utility increases at a decreasing rate

50. Why Demand Slopes Downward? Diminishing Marginal Utility/Benefit Cost-Benefit Analysis –How many slices will you consume? OPTIMAL PURCHASE RULE –MU=P

51. Optimal Purchase Rule?

53. Optimizing Purchase of 2 or More Goods MU per $1

54. Consumer Equilibrium Maximize Total Utility MU per $1 (MU/$) MU x /P x = MU y /P y

59. Did you make any consumer equilibrium decisions this weekend?

61. Tax Incidence

62. Nominal (Statutory) versus Economic Incidence If “law” doesn’t matter, what does?

63. PED

64. Relationship between % change in price and % change in quantity

65. PED Perfectly Inelastic = 0 Unit Elastic = 1 Perfectly Elastic =

66. PED Perfectly Inelastic = 0 Unit Elastic = 1 Perfectly Elastic = Inelastic <1 Unit Elastic = 1 Elastic > 1

67. PED

70. *Total Revenue Method* Price Decrease – TR Increase –Elastic Price Decrease – TR Constant –Unit Elastic Price Decrease – TR Decrease –Inelastic

71. *Total Revenue Method* Elastic Demand –Decrease price to Increase TR Unit Elastic Demand Inelastic Demand –Increase Price to Increase TR

72. TIP of the DAY Remember 2 not 6

73. Apples The price has increased The quantity has decreased What likely happened?

74. Reminder and Update and Reminder PHILLY TRIP!!!!!!!!!!!! FRQs- moved to Tuesday Graphs Due Tomorrow

75. TIP of the DAY Remember 2 not 6 1. Inelastic PED- Increase in Price will Increase Total TR –*Increase P will Increase TR 2. Perfectly Inelastic = 0

76. Tip of the Day Study 2 days before the test as if it were the day before The review will expose your weaknesses

77. PES- Only difference?

78. Other Elasticities Price Elasticity- % Q/ % P PED versus PES Income Elasticity of Demand –Normal –Inferior goods Cross Price Elasticity –Complements and substitutes

79. Income Elasticity of Demand % Q / %Income –Normal –Inferior

80. Income Elasticity of Demand % Q / %Income –Normal –Inferior

81. Income Elasticity of Demand % Q / %Income –Necessity –Luxury (________)

82. Cross Price Elasticity % Q x / % P y Substitutes = Complements = Neither =

83. Draw TWO S & Ds Add a Binding Price Floor to one Add a Binding Price Ceiling to the other Shade DWL