Unit 2: Supply, Demand, and Prices Length: 3 Weeks Chapters: 4, 5, and 6 Activity: Pearl Exchange Assignment: PS #2

This is the most important cow all year!

Circular Flow Model Review Do individuals supply or demand? Do business supply or demand? Who demands in the product market? Who supplies in the product market? Both, they demand products and supply resources Both, the supply products and demand resources Individuals and the government Businesses Copyright ACDC Leadership 2015

Resource Market DEMAND SUPPLY Individuals Businesses Government SUPPLY $$$ Income $$$ (Factor payments) $$$ Costs $$$ Resources Resources (Factors of Production) $$$ Taxes Taxes Subsidies Transfer Payments Public Goods Public Goods Individuals Businesses Government $$$ Goods and Services Goods and Services $$$ Revenue $$$ SUPPLY $$$ Spending $$$ DEMAND Product Market 4 Copyright ACDC Leadership 2015

Graphing Review

Graphing the Classroom Activity

The Hudsucker Proxy – An Introduction to Demand

Demand

DEMAND DEFINED What is Demand? What is the Law of Demand? Demand is the different quantities of goods that consumers are willing and able to buy at different prices. (Ex: Bill Gates is able to purchase a Ferrari, but if he isn’t willing he has NO demand for one) What is the Law of Demand? The law of demand states There is an INVERSE relationship between price and quantity demanded

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Example of Demand I am willing to sell several A’s in AP Economics. How much will you pay? Price Quantity Demanded Demand Schedule

LAW OF DEMAND As Price Falls… …Quantity Demanded Rises As Price Rises… …Quantity Demanded Falls Quantity Demanded Price

Inverse Relationship

Inverse Relationship

Why does the Law of Demand occur? The law of demand is the result of three separate behavior patterns that overlap: The Substitution effect The Income effect The Law of Diminishing Marginal Utility We will define and explain each…

Why does the Law of Demand occur? 1. The Substitution Effect If the price goes up for a product, consumer buy less of that product and more of another substitute product (and vice versa) 2. The Income Effect If the price goes down for a product, the purchasing power increases for consumers -allowing them to purchase more.

The “feeling richer effect”

Why does the Law of Demand occur? 3. Law of Diminishing Marginal Utility U- TIL- IT- Y Utility = Satisfaction We buy goods because we get utility from them The law of diminishing marginal utility states that as you consume more units of any good, the additional satisfaction from each additional unit will eventually start to decrease In other words, the more you buy of ANY GOOD the less satisfaction you get from each new unit. Discussion Questions: What does this have to do with the Law of Demand? How does this affect the pricing of businesses?

The Law of Diminishing Marginal Utility

Can you see the Law of Diminishing Marginal Utility in Disneyland’s pricing strategy? Change N/A $54 $33 $15 $10 $5

Graphing Demand

Label Carefully!!

Let’s draw a new demand curve for milk… The Demand Curve A demand curve is a graphical representation of a demand schedule. The demand curve is downward sloping showing the inverse relationship between price (on the y-axis) and quantity demanded (on the x-axis) When reading a demand curve, assume all outside factors, such as income, are held constant. (This is called ceteris paribus) Let’s draw a new demand curve for milk… Copyright ACDC Leadership 2015

GRAPHING DEMAND Draw this large in your notes Demand Schedule Price of Milk Draw this large in your notes $5 4 3 2 1 Price Quantity Demanded $5 10 $4 20 $3 30 $2 50 $1 80 10 20 30 40 50 60 70 80 Q Quantity of Milk Copyright ACDC Leadership 2015

GRAPHING DEMAND Demand Schedule Price of Milk $5 10 $4 20 $3 30 $2 50 Quantity Demanded $5 10 $4 20 $3 30 $2 50 $1 80 Demand 10 20 30 40 50 60 70 80 Q Quantity of Milk 26

Where do you get the Market Demand? Billy Jean Other Individuals Market Price Q Demd $5 1 $4 2 $3 3 $2 5 $1 7 Price Q Demd $5 $4 1 $3 2 $2 3 $1 5 Price Q Demd $5 9 $4 17 $3 25 $2 42 $1 68 Price Q Demd $5 10 $4 20 $3 30 $2 50 $1 80 P P P P $3 $3 $3 $3 D D D D Q Q Q Q 3 2 25 30

Demand Review What are the two key aspects of the definition of demand? What is the Law of Demand? Give an example of the substitution effect Give an example of the income effect Give an example of the law of diminishing marginal utility Explain how the law of diminishing marginal utility causes the law of demand How do you determine the MARKET demand for a particular good? Name 10 fast food places Copyright ACDC Leadership 2015

Shifts in Demand Ceteris paribus-“all other things held constant.” When the ceteris paribus assumption is dropped, movement no longer occurs along the demand curve. Rather, the entire demand curve shifts. A shift means that at the same prices, more people are willing and able to purchase that good. This is a change in demand, not a change in quantity demanded PRICE DOESN’T SHIFT THE CURVE Copyright ACDC Leadership 2015

Change in Demand What if milk makes you smarter? Demand Schedule Price of Milk What if milk makes you smarter? $5 4 3 2 1 Price Quantity Demanded $5 10 $4 20 $3 30 $2 50 $1 80 Demand 10 20 30 40 50 60 70 80 Q Quantity of Milk 30

Change in Demand What if milk makes you smarter? Demand Schedule Price of Milk What if milk makes you smarter? $5 4 3 2 1 Price Quantity Demanded $5 10 $4 20 $3 30 $2 50 $1 80 Demand 10 20 30 40 50 60 70 80 Q Quantity of Milk 31

Change in Demand Demand Schedule Price of Milk $5 30 $4 40 $3 50 $2 70 1 Price Quantity Demanded $5 30 $4 40 $3 50 $2 70 $1 80 100 Demand 10 20 30 40 50 60 70 80 Q Quantity of Milk 32

Prices didn’t change but people want MORE Milk Change in Demand Demand Schedule Price of Milk Increase in Demand Prices didn’t change but people want MORE Milk $5 4 3 2 1 Price Quantity Demanded $5 30 $4 40 $3 50 $2 70 $1 80 100 D1 Demand 10 20 30 40 50 60 70 80 Q Quantity of Milk 33

Change in Demand What if milk makes causes baldness? Demand Schedule Price of Milk What if milk makes causes baldness? $5 4 3 2 1 Price Quantity Demanded $5 10 $4 20 $3 30 $2 50 $1 80 Demand 10 20 30 40 50 60 70 80 Q Quantity of Milk 34

Change in Demand What if milk makes causes baldness? Demand Schedule Price of Milk What if milk makes causes baldness? $5 4 3 2 1 Price Quantity Demanded $5 10 $4 20 $3 30 $2 50 $1 80 Demand 10 20 30 40 50 60 70 80 Q Quantity of Milk 35

Change in Demand Demand Schedule Price of Milk $5 $4 5 $3 20 $2 30 $1 Quantity Demanded $5 $4 5 $3 20 $2 30 $1 80 60 Demand 10 20 30 40 50 60 70 80 Q Quantity of Milk 36

Prices didn’t change but people want LESS Milk Change in Demand Demand Schedule Price of Milk $5 4 3 2 1 Decrease in Demand Prices didn’t change but people want LESS Milk Price Quantity Demanded $5 $4 5 $3 20 $2 30 $1 80 60 D2 Demand 10 20 30 40 50 60 70 80 Q Quantity of Milk 37

The demand stays the same Change in Demand Demand Schedule Price of Milk What happens to the demand for milk if the price of milk goes up? $5 4 3 2 1 Price Quantity Demanded $5 10 $4 20 $3 30 $2 50 $1 80 NOTHING! The demand stays the same Demand 10 20 30 40 50 60 70 80 Q Quantity of Milk 38

Change in Qd vs. Change in Demand There are two ways to increase quantity from 10 to 20 Price of Milk P A to B is a change in quantity demand (due to a change in price) A to C is a change in demand (shift in the curve) A C $3 $2 B D2 D1 Q Milk 10 20 Quantity of Milk

What Causes a Shift in Demand? 6 Shifters (Determinants) of Demand: 1.Tastes and Preferences 2. Number of Consumers Price of Related Goods 3. Substitutes 4. Complements 5. Income 6. Future expectations Changes in PRICE don’t shift the curve. It only causes movement along the curve.

Prices of Related Goods The demand curve for one good can be affected by a change in the price of ANOTHER related good. Substitutes are goods used in place of one another. Ex: If price of Pepsi falls, demand for coke will… If the price of one increases, the demand for the other will increase (or vice versa) 2. Complements are two goods that are bought and used together. Ex: If price of hot dogs falls, demand for hot dog buns will... If the price of one increase, the demand for the other will fall. (or vice versa)

Substitutes or Complements?

Substitutes 43 43

Substitutes 44 44

Substitutes 45 45

Substitutes 46 46

Substitutes 47 47

Substitutes 48 48

Substitutes 49 49

Substitutes 50 50

Substitutes 51 51

Complements 52 52

Income The incomes of consumer change the demand, but how depends on the type of good. Normal Goods Ex: Luxury cars, Sea Food, jewelry, homes As income increases, demand increases As income falls, demand falls 2. Inferior Goods Ex: Top Ramen, used cars, used clothes As income increases, demand falls As income falls, demand increases Spam-Inferior Yachts- Normal Off Brand Cereal-Inferior McDonald’s-Inferior Toilet Paper- Probably no connection to income (The point-some products are very reliant on income and others are not) Copyright ACDC Leadership 2015

Inferior Goods 54 54

Practice Questions 1. Which of the following will cause the demand for milk to decrease? Increase in the price of a substitute A decrease in income assuming that milk is a normal good A decrease in the price of milk An increase in the price of milk A decrease in the price of a complementary good Answer B Copyright ACDC Leadership 2015

Practice Questions 2. Which of the following will cause the quantity demanded of milk to decrease? Increase in the price of a substitute A decrease in income assuming that milk is a normal good A decrease in the price of milk An increase in the price of milk A decrease in the price of a complementary good Answer D Copyright ACDC Leadership 2015

Practice Identify the determinant (shifter) then decide if demand will increase or decrease Shifter Increase or Decrease Left or Right 1 2 3 4 5 6

Hamburgers (a normal good) Practice – Part 1 Identify the determinant (shifter) then decide if demand will increase or decrease Hamburgers (a normal good) Population boom Incomes fall due to recession Price of tacos, a substitute, decreases New health craze- “No ground beef” Hamburger restaurants announce that they will significantly increase prices NEXT month Price of fries, a complement, increases Number of consumers, increase. Income, decrease. Price of Related Goods (Substitute), decrease. Price doesn’t shift curve, no change. Tastes and preferences, decrease. Expectations, increase. Price of Related Goods (Complements), decrease. 58 58

Part 2: For each of the shifts in part 1, create a clear and complete graph showing the demand shift and the effects on price and quantity.