Chapter 2 Review

What is Demand Demand is a relationship between a product’s price and quantity demanded. Demand is shown using a schedule or curve. The law of demand states that price and quantity demanded are inversely related. Market demand is the sum of quantities demanded by all consumers in a market.

Your Demand Curve for Strawberries The Demand Curve Your Demand Schedule for Strawberries Your Demand Curve for Strawberries 2.50 a Quantity Demanded (kg per month) Point on graph Price ($ per kg) b 2.00 c $2.50 7 a 1.50 Price ($ per kg) D 2.00 9 b 1.00 1.50 11 c 0.50 1 3 5 7 9 11 13 Quantity Demanded (kg per month) 3

Individual and Market Demand Schedules for Strawberries Let’s assume that we want to buy our strawberries at $2, what is our Revenue? Individual and Market Demand Schedules for Strawberries Price ($ per kg) You (D0) Friend (D1) Market (Dm) (kg per month) $2.50 2.00 1.50 1 2 3 2 3 4 3 5 7

Deriving Market Demand Your Demand Curve for Strawberries Friend’s Demand Curve for Strawberries Let’s assume that we want to buy our strawberries at $2, what is the revenue of D0, D1 and Dm? 2.50 2.50 2.00 2.00 Price ($ per kg) 1.50 Price ($ per kg) 1.50 1.00 1.00 D0 D1 0.50 0.50 1 2 3 4 5 6 7 1 2 3 4 5 6 7 Quantity Demanded (kg per month) Quantity Demanded (kg per month) Do = 2.50 x 2 = 5 D1 = 2 x 3 = 6 Dm= 2 x 5 = 10 Market Demand Curve for Strawberries Individual and Market Demand Schedules for Strawberries 2.50 Price ($ per kg) You (D0) Friend (D1) Market (Dm) 2.00 Price ($ per kg) 1.50 1.00 (kg per month) Dm 0.50 $2.50 2.00 1.50 1 2 3 2 3 4 3 5 7 1 2 3 4 5 6 7 Quantity Demanded (kg per month) 3

Changes in Demand (Shifting R and L) Market Demand Curve for Strawberries Market Demand Schedule for Strawberries 0.50 1.00 1.50 2.00 2.50 Price ($ per kg) Quantity Demanded (millions of kg) (D2) (D0) (D1) Price ($ per kg) D2 D0 D1 What happens to your Demand and Profit if you SHIFT the curve to the RIGHT? LEFT? $2.50 5 7 9 2.00 7 9 11 1.50 9 11 13 1 3 5 7 9 11 13 Quantity Demanded (millions of kg per year) 3

Demand Factors Demand factors include the following: The number of buyers (an increase causes a rightward demand shift) Income For normal products, an increase causes a rightward demand shift. For inferior products, an increase causes a leftward demand shift. Prices of other products For substitute products, a rise in the other product’s price causes a rightward demand shift. For complementary products, a rise in the other product’s price causes a leftward demand shift. Consumer preferences Consumer expectations

Changes in Quantity Demanded are shown by movements along demand curve are caused by price changes 5000 6000 Quantity Demanded (pairs of skis) Change in Quantity Demanded Price ($ per pair of skis) 0.50 1.00 1.50 2.00 5000 Quantity Demanded (pairs of skis) Change in Demand Price ($ per pair of skis) 0.50 1.00 1.50 2.00 a b D0 D0 D1

What Is Supply? Supply: is a relationship between a product’s price and quantity supplied is shown using a schedule or curve The law of supply states there is a direct relationship between price and quantity supplied. 6

The Supply Curve Market Supply Curve for Strawberries Market Supply Schedule for Strawberries f S 0.50 1.00 1.50 2.00 2.50 e Price ($ per kg) Quantity Supplied (millions of kg) Points on graph d $1.50 5 d Price ($ per kg) Compare the Demand Curve… 2.00 9 e 2.50 13 f 1 3 5 7 9 11 13 Quantity Supplied (millions of kg per year)

Changes in Supply Changes in supply: are shown by shifts in the supply curve are caused by changes in supply factors

Market Supply Curve for Strawberries Market Supply Schedule for Strawberries 0.50 1.00 1.50 2.00 2.50 Price ($ per kg) Quantity Supplied (millions of kg) (S2) (S0) (S1) If you were the Distributor (the one SELLING the strawberries..) which Curve would you prefer? S1 because for the same price (use $2 at a pricepoint)… you are getting MORE for the same price When does a supply curve shift RIGHT? .. When there are MORE producers and they are COMPETING with you When does a supply curve shift LEFT? Price ($ per kg) $2.50 11 13 15 2.00 7 9 11 1.50 3 5 7 1 3 5 7 9 11 13 15 Quantity Supplied (millions of kg per year)

Supply Factors Supply factors include the following factors: Number of producers (an increase causes a rightward supply shift) Resource prices (an increase causes a leftward supply shift) State of technology (an improvement causes a rightward supply shift) Prices of related products (an increase causes a leftward supply shift) Changes in nature (an improvement causes a rightward shift for some products) Producer expectations (an expectation of lower prices in the future causes an immediate rightward supply shift)

Changes in Quantity Supplied are shown by movements along the supply curve are caused by price changes

Changes in Quantity Supplied 1 2 Quantity Supplied (millions of kg per year) Change in Quantity Supplied Price ($ per kg) 20 40 60 80 100 120 Change in Supply 1 2 Quantity Supplied (millions of kg per year) Price ($ per kg) 20 40 60 80 100 120 S0 S0 S1 b a 3

Market Equilibrium When a product is in surplus: there is excess supply price is pushed down When a product is in shortage: there is excess demand price is pushed up 10

Market Equilibrium Market Demand and Supply Schedules for Strawberries Market Demand and Supply Curves for Strawberries S 3.00 Surplus (+) or Shortage (-) (millions of kg) Surplus Quantities Price ($ per kg) 2.50 (millions of kg) D S a a 2.00 e In eq, the quantity of a good producers will supply exactly matches the quantity consumers want to buy -this results without external influence When price is at $2.50, The Demand is LESS than the supply.. Is ~6 and Supply is ~11…. So there is a surplus… The output of the good would exceed what consumers want and producers would be left with unsold goods on their hands. To dispose of them, producers would cut the price, as happens during sales when retailers wish to sell unsold goods => As prices fall, consumers would demand more of the good and producers produce less pushing it back to the EQ point $3.00 5 13 +8 2.50 7 11 +4 2.00 9 9 0 1.50 11 7 -4 1.00 13 5 -8 Price ($ per kg) 1.50 b b Shortage 1.00 D 15 1 3 5 7 9 11 13 Quantity (millions of kg per year)

Changes in Equilibrium A rightward demand shift pushes up both equilibrium price and quantity. A leftward demand shift pushes down both equilibrium price and quantity. A rightward supply shift pushes equilibrium price down and equilibrium quantity up. A leftward supply shift pushes equilibrium price up and equilibrium quantity down. 12

Demand Changes and Equilibrium Market Demand and Supply Curves for Strawberries Market Demand and Supply Schedules for Strawberries Price Quantities (D0) (D1) (S) ($ per kg.) (millions of kg) S 1.00 1.50 2.00 2.50 3.00 b a shortage D1 Price ($ per kg) If Do is our ANTICIPATED / Last year’s supply and D1 is our NEW supply.. Is there a shortage or surplus? $3.00 5 9 13 2.50 7 11 11 D0 2.00 9 13 9 1.50 11 15 7 1.00 13 17 5 1 3 5 7 9 11 13 15 17 Quantity (millions of kg per year)

Supply Changes and Equilibrium Market Demand and Supply Curves for Strawberries Market Demand and Supply Schedules for Strawberries Price Quantities ($ per kg) (millions of kg) S0 S1 1.00 1.50 2.00 2.50 3.00 Surplus (D0) (S0) (S1) a b Price ($ per kg) “So” is our budgeted original supply curve.. And S1 is what we have right now.. If we keep our price constasnt at $2 and look at the quantity… we can see that before we had around 9 million kg and now we have 11kg…. What does this tell us? Look at Equilb point “a and “b”… it went down.. The equilb shifted down….. What does this tell us? Because we have more Supply now.. And our DEMAND stayed the same… it means that there is more supply than the market can handle and that producers are competing with each other.. Thus pushing the price down $3.00 5 13 17 2.50 7 11 15 D0 2.00 9 9 13 1.50 11 7 11 1.00 13 5 9 1 3 5 7 9 11 13 15 17 Quantity (millions of kg per year)

A local grocery store orders 200 cases of Pepsi each week and sells them at a price of $6.00 per case. At the end of the first week, they have only sold 160 cases. What economic situation is the grocery store facing and what will have to happen to price in order for equilibrium to be attained? a. surplus; price will rise. b. surplus; price will fall. c. shortage; price will rise. d. shortage; price will fall. e. nothing since the market is in equilibrium. b. surplus; price will fall.

For Next Class Homework Describe how prices or gross substitutes or gross complements shift demand Describe how input costs or production costs shift supply. Point form

Shifting Demand Curve Left Decrease in Demand Fall in income A fall in price of a substitute Rise in the price of a complement

Shifting Demand Curve to the Right Rise in income Rise in the price of substitute Fall in the price of a complement