Willingness to Pay - is the maximum amount a person would be willing to pay, sacrifice or exchange for a good Consumer Surplus – the value to a consumer of consumption of a good, minus the price paid Demandslide 1

Diminishing marginal value – the value of last unit consumed declines as the number consumed rises Demandslide 2

Demandslide 3 MODEL OF DEMAND The model of demand is an attempt to explain the amount demanded of any good or service. DEMAND DEFINED The amount of a good or service a consumer wants to buy, and is able to buy per unit time.

Demandslide 4 THE DEMAND CURVE The demand curve for any good shows the quantity demanded at each price, holding constant all other determinants of demand. The DEPENDENT variable is the quantity demanded. The INDEPENDENT variable is the good’s own price.

Demandslide 5 THE LAW OF DEMAND The Law of Demand says that a decrease in a good’s own price will result in an increase in the amount demanded, holding constant all the other determinants of demand. The Law of Demand says that demand curves are negatively sloped.

Demandslide 6 A DEMAND CURVE A demand curve must look like this, i.e., be negatively sloped. own price quantity demanded demand Market for tacos

Demandslide 7 The demand curve means: You pick a price, such a p 0, and the demand curve shows how much is demanded. own price quantity demanded demand p0p0 Q0Q0 Market for tacos

Demandslide 8 What if the price of tacos were less than p 0 ? How do you show the effect on demand? Go to hidden slide

Demandslide 9 At a lower price, consumers want to buy more. own price quantity demanded demand p0p0 Q0Q0 p lower Q1Q1 Market for tacos

Demandslide 10 Suppose people want to buy more of a good when incomes rise, holding constant all other factors affecting demand, including the good’s own price. own price quantity of beer I = $1000 Market for beer How does this affect the demand curve? How does this affect the demand curve? $1/can

Demandslide 11 This is a change in demand. It shows up as a shift to the right of the original demand curve. own price quantity I = $1000 Market for beer $1/can I = $2000

Demandslide 12 Normal and inferior goods defined Normal good: When an increase in income causes an increase in demand. Inferior good: When an increase in income causes a decrease in demand.

Demandslide 13 Substitutes defined Substitutes: Two goods are substitutes if an increase in the price of one of them causes an increase in the demand for the other. Thus, an increase in the price of pizza would increase the demand for spaghetti if the goods were substitutes.

Demandslide 14 Complements defined Complements: Two goods are complements if an increase in the price of one of them causes a decrease in the demand for the other. Thus, an increase in the price of pizza would decrease the demand for beer if the goods were complements.

Demandslide 15 DEMAND SUMMARY Demand is a function of own-price, income, prices of other goods, and tastes. The demand curve shows demand as a function of a good's own price, all else constant. Changes in own-price show up as movements along a demand curve. Changes in income, prices of substitutes and complements, and tastes show up as shifts in the demand curve.

Supplyslide 16 MODEL OF SUPPLY The model of supply is an attempt to explain the amount supplied of any good or service. SUPPLY DEFINED The amount of a good or service a firm wants to sell, and is able to sell per unit time.

Supplyslide 17 YOU COULD WRITE THE MODEL THIS WAY: The supply function for tacos Q S (tacos) = S(P tacos, P taco shells, P lettuce, P labor, P tomatoes,...,technology, taxes & subsidies)

Supplyslide 18 THE SUPPLY CURVE The supply curve for any good shows the quantity supplied at each price, holding constant all other determinants of supply. The DEPENDENT variable is the quantity supplied. The INDEPENDENT variable is the good’s own price.

Supplyslide 19 THE LAW OF SUPPLY The Law of Supply says that an increase in a good’s own price will result in an increase in the amount supplied, holding constant all the other determinants of supply. The Law of Supply says that supply curves are positively sloped.

Supplyslide 20 A SUPPLY CURVE A supply curve must look like this, i.e., be positively sloped. own price quantity supplied supply TACO MARKET

Supplyslide 21 The supply curve means: You pick a price, such a p 0, and the supply curve shows how much is supplied. own pric e quantity supplied supply p0p0 Q0Q0 TACO MARKET

Supplyslide 22 own pric e quantity supplied supply p0p0 Q0Q0 TACO MARKET If the price of tacos rises, how is the supply curve affected?

Supplyslide 23 At a higher price, firms want to sell more. own pric e quantity supplied supply p0p0 Q0Q0 p highe r Q1Q1 TACO MARKET

Supplyslide 24 Other factors affecting supply The question here is how to show the effects of changes in input prices, technology, and taxes. The answer, of course, is that changes in input prices, technology, or taxes cause the supply curve to shift.

Supplyslide 25 Changes in input prices Consider the supply of beer, and suppose the price of hops, a crucial input to beer, falls. Beer firms now find that beer production is more profitable than it was before, and they respond to this be increasing the supply of beer.

Supplyslide 26 The price of hops falls from $300 per ton to $100 per ton. own price quantity hops price of $300/ton BEER MARKET How will this affect the supply curve for beer? How will this affect the supply curve for beer? Go to hidden slide

Supplyslide 27 This is a change in supply. Beer firms want to sell more beer at each price of beer. own price quantity hops price of $300/ton hops price of $100/ton BEER MARKET

Supplyslide 28 Change in technology An improvement in technology makes it possible to produce a level of output with fewer inputs than before. Because this lowers the cost of production, profits rise, and firms will try to supply more.

Supplyslide 29 own price quantity old technology BEER MARKET Suppose beer technology improves. How does this affect the supply curve for beer? How does this affect the supply curve for beer? Go to hidden slide

Supplyslide 30 own price quantity old technology improved technology BEER MARKET There is an increase in supply. The supply curve shifts to the right

Supplyslide 31 price Q S (no tax) How would you suspect an excise tax affects the supply of a good? Go to hidden slide

Supplyslide 32 price Q S (no tax) S (with excise tax) This distance is the amount of the excise tax per unit of the good. How would you suspect an excise tax affects the supply of a good?

Supplyslide 33 Supply summary Supply is a function of own price, input prices, and technology. The supply curve shows supply as a function of own price, all else constant. Changes in a good’s own price show up as movements along a supply curve. Changes in input prices, technology, or taxes show up as shifts in the supply curve.