AP MACRO ECONOMICS COACH SUTHERLAND SUPPLY AND DEMAND MODULE 5 PAGES 48-58 1

QUIZ 8-INTRO TO DEMAND 1. WHAT IS THE PURPOSE OF THE SUPPLY AND DEMAND MODEL? 2. DRAW A DEMAND SCHEDULE (GO OUT FIVE PLACES 3. TRANSFER YOUR DEMAND SCHEDULE TO THE DEMAND CURVE 4. SHOW A MOVEMENT ALONG THE DEMAND CURVE 5. WHAT REASON WOULD CAUSE # 4 TO OCCUR? 2

SUPPLY AND DEMAND: A MODEL OF A COMPETITIVE MARKET MARKETS ARE BOTH COMPETITIVE AND NOT COMPETITIVE EXAMPLES: THE COLA BEVERAGE MARKET THE COTTON MARKET FOR PURPOSES OF EASE, WE WILL START OUT WITH THE COMPETITIVE MARKET WHEN MARKETS ARE COMPETITIVE, WE USE SUPPLY AND DEMAND MODELS TO DESCRIBE THEIR BEHAVIOR 3

5 KEY ELEMENTS TO SUPPLY & DEMAND THE DEMAND CURVE THE SUPPLY CURVE FACTORS THAT CAUSE CURVES TO SHIFT MARKET EQUILIBRIUM HOW MARKET EQUILIBRIUM CHANGES WHEN SUPPLY OR DEMAND CURVE “SHIFTS” 4

Demand is the different quantities of goods that consumers are willing and able to buy at different prices. (Ex: Bill Gates is able to buy a Ferrari, but if he isn’t willing to then he has NO demand for one) The law of demand states there is an INVERSE relationship between price and quantity demanded : AS PRICE GOES UP THE QUANTITY DEMANDED WILL DROP & AS PRICE DROPS DEMAND RISES 5 5

…Quantity Demanded Rises As Price Rises… …Quantity Demanded Falls As Price Falls… …Quantity Demanded Rises As Price Rises… …Quantity Demanded Falls Quantity Demanded Price 6 6

1. The Substitution effect The law of demand is the result of three (3) separate behavior patterns that overlap: 1. The Substitution effect 2. The Income effect 3. The Law of Diminishing Marginal Utility 7 7 7

1. The Substitution Effect If the price goes up for a product, consumers 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. 8 8

3. Law of Diminishing Marginal Utility Utility = Satisfaction 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 of that good. 9 9

Disneyland’s pricing strategy is another example of marginal utility (law of diminishing demand) Change N/A $54 $33 $15 $10 $5 10

A demand curve is a graphical representation of a demand schedule or table. The demand curve is downward sloping showing the inverse relationship between price (always on the y-axis) & quantity demanded (always on the x-axis) When reading a demand curve, assume all outside factors, such as income, weather, etc. are held constant or equal (ceteris paribus) 11 11 11

GRAPHING DEMAND FOR CALVIN’S CEREAL Demand Schedule Price of Cereal $5 4 3 2 1 Price Quantity Demanded $5 10 $4 20 $3 30 $2 50 $1 80 o 10 20 30 40 50 60 70 80 Q Quantity of Cereal 12 12

Demand Schedule Price of Cereal $5 10 $4 20 $3 30 $2 50 $1 80 Demand o Quantity Demanded $5 10 $4 20 $3 30 $2 50 $1 80 Demand o 10 20 30 40 50 60 70 80 Q Quantity of Cereal 13 13

Keys to Graphing Demand 1. The slope of the curve is always down and to the right 2. A change in demand at the same price requires a SHIFT but a change in demand due to a change in price is shown as MOVEMENT along the curve 14

QUANTITY DEMANDED VS. CHANGE IN DEMAND A change in the quantity demanded is a movement from one point to another on the demand curve. (DUE TO PRICE) A change in demand itself is a shift of the entire curve (DUE TO A M.E.R.I.T. FACTOR) 15

Demand Will Shift if there is M.E.R.I.T 1. Market Size 2. Expectations 3. Related Prices (compliments/substitutes) 4. Income (normal & inferior) 5. Tastes 16

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A M.E.R.I.T. FACTOR HAS CAUSED A SHIFT IN THE DEMAND CURVE (NOTE IT IS TO THE RIGHT REFLECTING THE INCREASED DEMAND. A DECREASE IN DEMAND WOULD MEAN A SHIFT TO THE LEFT) 20 20

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PAGE 55 OF THE TEXTBOOK TO SEE THE INDIVIDUAL DEMAND CURVE OF (a) and (b) and then note that (c) Is the sum of all the individual demand curves of all consumers. In this case Darla and Dino. 22 22

Billy Jean Other Individuals Market $5 1 $4 2 $3 3 $2 5 $1 7 $5 $4 1 How to get the Market Demand / add the demand of each consumer at the market equilibrium point of each consumer 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 23

Key Terms Substitute good is one whose demand goes up when the price of another good goes up (coffee and tea is an example) Compliment goods are ones usually used together and thus if demand for one falls then demand for the other will also fall (cars and gasoline are examples of this) Most goods are “normal” (demand increases as income rises) but some are “inferior” (demand drops as income rises…for example buses…as income rises people tend to then take taxis) 24