1. Supply and Demand Chapters 4 – 6, 9
Unit II
Supply and Demand
Chapters 4 – 6, 9

2. Unit 2 (Demand & Supply: Ch 4, 5, 6 & 9) Page 13 – Demand
Directions – Working with a partner, grab a textbook and define the following terms:
Demand
Law of Demand
Demand Schedule
Market Demand Schedule
Demand Curve
Market Demand Curve

3. Page 13 - Demand
Demand
the desire for an item AND the ability to pay for it
Law of demand
when price of good or service goes up, quantity demand goes down
when price of good or service goes down, quantity demand goes up

4. Page 13 - Demand # of iPhones Demanded Price ($)
Demand schedule
a table that summarizes one consumers’ behavior
lists how much of an item an individual will buy at each price
Market demand schedule
a table that summarizes all consumers’ behavior
lists how much of an item all consumers will buy at each price
Price ($)
# of iPhones Demanded
500 4
400 6
300 8
200 10
100 12

5. Market Demand Curve for Shirts
Page 13 - Demand
Demand curve
a graph that shows amount of an item a consumer will buy at each price
Market demand curve
amount all consumers will buy at each price
Both are a graphic representation of a demand schedule
Market Demand Curve for Shirts 20 15 10 5 1
Price

6. Page 13 - Demand
On your paper draw the following schedules: Demand Schedule Market Demand Schedule
Price ($)
# of Shirts Demanded 20 15 10 5 1
Price ($)
# of Shirts Demanded 20 15 10 5 1

7. Page 13 - Demand
Goal – Work with your group to create a demand schedule and a demand curve. Step 1: Assume you have $100 TOTAL dollars to spend on shirts for school. Step 2: Fill in the individual demand schedule. What is the max amount of shirts you would purchase at $20 a piece? How about at $15?
Price ($)
# of Shirts Demanded 20 X 15 10 5 1

8. Page 13 - Demand
Price ($)
# of Shirts Demanded 20
= 8 15
= 14 10 5 1
Step 3: Talk to three of your peers and find out how many albums they would purchase at each price point. Add these figures to your own. Step 4: Fill in the market demand schedule.

9. Market Demand Curve for Shirts
Page 13 - Demand
Market Demand Curve for Shirts 20 15 10 5 1
Price
Step 5: Translate the market demand schedule into a market demand curve on the other side of the paper.

10. Can you think of some factors that might cause a CHANGE IN DEMAND?
Page 14 – Change in Demand
KEY CONCEPTS
CHANGE IN QUANTITY IS NOT THE SAME AS CHANGE IN DEMAND
CHANGE IN DEMAND is caused by a change in the marketplace
Something prompts people to buy different amounts at every price
also called SHIFT IN DEMAND
Can you think of some factors that might cause a CHANGE IN DEMAND?

11. CHANGE IN DEMAND is caused by a change in the marketplace
Something prompts people to buy different amounts at every price
also called SHIFT IN DEMAND
Factor 1
Factor 2
Factor 3
Factor 4
Factor 5
Factor 6
DIRECTIONS:
SET UP PAGE 14 LIKE THIS.
USE PAGES 109 – 113 TO SUMMARIZE EACH FACTOR THAT AFFECTS DEMAND.
DRAW A SYMBOL OR GRAPHIC REPRESENTATION OF EACH FACTOR.
LIST THREE EXAMPLES OF EACH.
YOU MAY WORK WITH A PARTNER. 25 MINUTES WILL BE ON CLOCK.

12. Page 14 – Change in Demand FACTOR 1: Income
A person’s ability to buy goods changes as his or her income changes
As incomes of most consumers in a market change, so does total demand
normal goods: demanded more when consumers’ incomes rises
inferior goods: demanded less when consumers’ incomes rise

13. Page 14 – Change in Demand FACTOR 2: Market Size
As number of consumers in an area changes, so does market size
Demand for most goods changes as market size changes
rise in population leads to increased demand
decrease in population leads to decreased demand

14. Page 14 – Change in Demand FACTOR 3: Consumer Tastes
Consumer tastes change; products gain and lose popularity
Consumers demand a greater amount of popular items at every price
Sellers advertise to create demand for products

15. Page 14 – Change in Demand FACTOR 4: Consumer Expectations
Expectations about future price of items affect individual behavior
expected rise or fall in price can decide whether to buy now or wait
Expectations of all consumers in a market affect demand
Ex: because cars go on sale at end of summer, demand goes up then

16. Page 14 – Change in Demand FACTOR 5: Substitutes
Substitutes are products used in place of each other
If price of substitute drops, people buy it instead of original item
If price of original item rises, people will buy substitute

17. Page 14 – Change in Demand FACTOR 6: Complements
Complements are goods that are used together
Rise in demand for one increases the demand for the other
If price of one product changes, demand for both changes in same way
if price of one rises, demand for both will drop

18. Page 15 – Elasticity of demand
What is elastic?
Elasticity of demand is a measure of how responsive consumers are to price changes.
Elastic—quantity demanded changes greatly as price changes
Inelastic—quantity demanded changes little as price changes

19. Page 15 – Elasticity of demand
FACTOR 1: Substitute Goods or Services
No substitute for a product = inelastic
Examples?
Available substitutes = elastic

20. Page 15 – Elasticity of demand
FACTOR 2: Proportion of Income
Demand for expensive items is generally elastic
Demand for inexpensive items tends to be inelastic

21. Page 15 – Elasticity of demand
FACTOR 3: Necessity or Luxury
Necessity - something needed for life = usually inelastic
Luxury - something desired but not essential = usually elastic

22. Page 15 – Elasticity of demand
Key
o – Old
n – New
Q – Quantity
P – Price
 Four Steps for Calculating Elasticity:
Calculate the percentage change in quantity demanded.
oQ – nQ_ x = % Change in Quantity Demanded oQ
Calculate the percentage change in price.
oP – nP_ x = % Change in Price oP
Calculate elasticity. Use absolute value (disregard – sign).
% Change in Quantity = Elasticity
% Change in Price
Evaluate elasticity.
# > 1 = Elastic AND # < 1 = Inelastic

23. Page 16 – Elasticity of Demand: Part II
Why do we use elasticity?
Knowing elasticity of demand tells sellers whether to cut prices.
Think about it:
Should a business owner increase prices or decrease prices in order to generate more revenue? What do you think?
Answer: It depends…
If demand is elastic, price cuts might increase earnings.
If demand is inelastic, price cuts will not increase earnings.

24. Page 16 – Elasticity of Demand: Part II
Total revenue—amount of money company gets for selling its products
Formula: TOTAL REVENUE = P (price) x Q (quantity sold)
Total revenue test—shows total revenue from item at various prices
If total revenue increases after price drops, demand is elastic.
If total revenue decreases after price drops, demand is inelastic.

25. Page 16 – Elasticity of Demand: Part II
Directions: Create the following chart in your notebook. Fill in the Total Revenue column, then use the figures to answer the questions below.
Price of a Movie Ticket ($)
Quantity Demanded per Month
Total Revenue ($) 14
1,000 12
2,000 10
6,000 8
12,000 6
18,000
What is the total revenue at $10 per ticket?
When price drops from $12 to $10, what happens to demand?
Does this demand schedule show a positive or negative correlation? Why?
When the price changes from $8 to $6, is demand elastic or inelastic? Explain.

26. Page 17 - Supply
Directions - Working with a partner, use pages in the text to define and draw a pic for the following terms:
Supply (define + pic)
Law of Supply (define + pic)
Supply Schedule (define + pic)
Market Supply Schedule (define + create an example schedule)
Supply Curve (define + pic)
Market Supply Curve (define + plot your example schedule)
**When you are finished, read the short excerpt entitled The NBA Goes International on page 136.
How do price and quantity supplied affect who plays in the NBA?
If European teams offered higher salaries than the NBA, what might happen?

27. Page 17 - Supply
Supply – willingness and ability of producers to offer goods, services Law of Supply – producers willing to sell more of product at higher price than at lower price

28. Why would producers want to use these?
Page 17 - Supply
Supply Schedule –
amount of product individuals are willing, able to offer at each price
Market Supply Schedule
amount of product all producers willing, able to offer at each price
Why would producers want to use these?
some producers want to learn prices, amount offered by all in market
Price
($)
Quantity Supplied
500
1,000
700
3,000
900
7,000

29. Page 17 - Supply Supply Curve and Market Supply Curves –
graphic representations of the law of supply. Both show data on corresponding schedules.

30. Page 18 – Costs of Production
Fixed costs - expenses owners incur no matter how much they produce.
Ex. mortgage, insurance, manager salaries, machinery
Variable costs - expenses that vary as level of output changes
Ex. workers’ wages, electricity, materials, shipping

31. Page 18 – Costs of Production
Total cost - the sum of fixed and variable costs
Marginal cost - additional cost of making one more unit of the product
Change in Total Cost/Change in Total Product

32. Page 18 – Costs of Production
Marginal revenue - money made from sale of each additional unit sold. Also referred to as price.
Total Revenue - income from selling a product
Total Revenue = P (price) x Q (quantity purchased at that price)

33. Page 18 – Costs of Production
Maximizing Profit
Marginal Analysis
Compares costs and benefits of adding a worker and making another unit
Profit-Maximizing Output - Level of production yielding highest profit
marginal cost =
marginal revenue

34. Page 18 – Costs of Production
“Too many cooks in the kitchen.”
Diminishing Returns
Adding workers does not always lead to an increase in production… WHY?
At first, each additional worker causes increasing returns, but then output decreases and negative returns are experienced.
Results in increased marginal costs

35. Page 19 – Factors affecting supply
If you finish early, read case study on 152 and answer question C at bottom of page. You may record your answer somewhere on page 19.
Divide page 19 into six boxes. You can use the entire page.
Use pages Include an explanation of each term, two examples of each, and a picture or symbol.
Input Costs
Labor Productivity
Technology
Government Action
Producer Expectations
Number of Producers

36. Page 19 – Factors Affecting supply
Factor 1: Input Costs
Input costs - price of resources needed to produce a good or service
Can you think of a business and an example input cost?

37. Page 19 – Factors Affecting supply
Factor 2: Labor Productivity
Labor productivity - amount of product worker can produce in set time
Rise in productivity lowers production costs; supply increases
Can you identify two factors that might increase productivity?
Specialization and better trained workers

38. Page 19 – Factors Affecting supply
Factor 3: Technology
Technology - use of scientific methods, discoveries in production to make goods more efficiently
Can you think of some improvements in technology that have made work easier?

39. Page 19 – Factors Affecting supply
Factor 4: Government Action
Excise Tax - tax on production or sale of specific good or service
Sometimes placed on items that government wants to discourage use of
Regulation - set of laws designed to control business behavior
i.e. banning use of certain resources, worker safety laws, etc.
What happens to supply if cost increases?

40. Page 19 – Factors Affecting supply
Factor 5: Producer Expectations
Producers have expectations about future price of their product - - How much will I supply?
Expectations of higher price in future may lead to different actions
Can you think of some scenarios where business owners might want to control supply?

41. Page 19 – Factors Affecting supply
Factor 6: Number of Producers
When one producer has successful new idea, others enter the market
Increase in number of producers leads to increased competition
Less-efficient producers driven out of market

42. Page 20 – market demand and supply
Use page 167 as a reference
1. Plot the following points on a graph: 2. Identify the following: a. Market Equilibrium (specific point) b. Shortage (area on graph) c. Surplus (area on graph) 3. What is the quantity supplied at $6? 4. How do these market demand and supply curves illustrate the concept of equilibrium price?

43. Page 20 - Market Demand and Supply
= Quantity Supplied
= Quantity Demanded X X X X X X X

44. Page 21 - Supply, Demand and Price
Black Market
Competitive pricing
Incentive
Minimum wage
Price ceiling
Price floor
Rationing
Once you have completed this answer questions 1 – 8 on page 188.
Define the following terms and explain the purpose of each.
*Use pages

45. page 22 - rationing Bottom Half: Draw and fill in the following table:
Top Half: World War II Food Rationing Video
What was the rationing board?
How many rationing boards were in the United States during World War II?
What were they trying to accomplish by setting price ceilings?
What happened to the economy without price ceilings?
Bottom Half: Draw and fill in the following table:

46. Page 23 – Developing a business plan
Copy these questions on to page 19 so that you can work on your project on home.
Create a Mission Statement.
Describe your company and product or service.
Complete a Market Analysis.
Describe your management team.
Explain how you plan to market the product or service.
Analyze your company’s weaknesses.
List your company’s costs.
Develop a Production Cost Schedule.
Create a Market Supply Curve.
Create a name, slogan a logo for your company.

47. Page 24 – Business Plan evaluation
Directions: Look over the business plan for Honest Tea with your group. Then, answer the following questions.
Who started the business? When was it started? Why was it started?
Based on the market research, was this plan viable? Why or why not?
How did they advertise?
Summarize Honest Tea’s “Statement and Aspirations for Social Responsibility”.
Identify two potential risks associated with starting the business.
Based on this business plan, would you invest in Honest Tea? Why or why not?