1. Unit 2: Supply, Demand, and Consumer Choice Do you see the cow? 1

2. 1. The relationship between quantity supplied and price is _____ and the relationship between quantity demanded and price is _____. A) direct, inverse B) inverse, direct C) inverse, inverse D) direct, direct E) strong, weak 2. An increase in the price of a product will reduce the quantity demanded for that product because: A)supply curves are upward sloping. B)the higher price means purchasing power has risen. C)consumers will substitute other products for the one whose price has risen. D)consumers get increasing marginal utility for each new unit of a good they consume

3. 1. The relationship between quantity supplied and price is _____ and the relationship between quantity demanded and price is _____. A) direct, inverse B) inverse, direct C) inverse, inverse D) direct, direct E) strong, weak 2. An increase in the price of a product will reduce the quantity demanded for that product because: A)supply curves are upward sloping. B)the higher price means purchasing power has risen. C)consumers will substitute other products for the one whose price has risen. D)consumers get increasing marginal utility for each new unit of a good they consume

4. 3. Which of the following will NOT cause the demand for video games to change? A) a change in the price of a close substitute B) a change in consumer incomes C) a change in the price of video games D) a change in consumer tastes E) a change in consumer preferences 4. An economist for a bicycle company predicts that a rise in consumer incomes will increase the demand for bicycles. This prediction assumes that: A)there are many substitutes for bicycles. B)there are many complementary goods for bicycles. C)there are few goods that are substitutes for bicycles. D)bicycles are normal goods. E)bicycles are an inferior good

5. 3. Which of the following will NOT cause the demand for video games to change? A) a change in the price of a close substitute B) a change in consumer incomes C) a change in the price of video games D) a change in consumer tastes E) a change in consumer preferences 4. An economist for a bicycle company predicts that a rise in consumer incomes will increase the demand for bicycles. This prediction assumes that: A)there are many substitutes for bicycles. B)there are many complementary goods for bicycles. C)there are few goods that are substitutes for bicycles. D)bicycles are normal goods. E)bicycles are an inferior good

6. 5. Which of the following statements is correct? A)A decline in the price of X will increase the demand for substitute product Y. B)A decrease in income will decrease the demand for an inferior good. C)An increase in income will decrease the demand for a normal good. D) increase in the price of X will decrease the demand for complementary product Y. 6. A leftward shift of a supply curve might be caused by: A)an improvement in the relevant technique of production. B)a decline in the prices of needed inputs (resources). C)an increase in consumer incomes. D)some firms leaving a market.

7. 5. Which of the following statements is correct? A)A decline in the price of X will increase the demand for substitute product Y. B)A decrease in income will decrease the demand for an inferior good. C)An increase in income will decrease the demand for a normal good. D) increase in the price of X will decrease the demand for complementary product Y. 6. A leftward shift of a supply curve might be caused by: A)an improvement in the relevant technique of production. B)a decline in the prices of needed inputs (resources). C)an increase in consumer incomes. D)some firms leaving a market.

8. Putting Supply and Demand Together!!! 8

9. Q o $5 4 3 2 1 P Demand Schedule 10 20 30 40 50 60 70 80 9 PQd $510 $420 $330 $250 $180 D S Supply Schedule PQs $550 $440 $330 $220 $110 Supply and Demand are put together to determine equilibrium price and equilibrium quantity

10. Q o $5 4 3 2 1 P Demand Schedule 10 20 30 40 50 60 70 80 10 PQd $510 $420 $330 $250 $180 Supply Schedule PQs $550 $440 $330 $220 $110 Supply and Demand are put together to determine equilibrium price and equilibrium quantity Equilibrium Price = $3 (Qd=Qs) Equilibrium Quantity is 30 D S

11. Q o $5 4 3 2 1 P Demand Schedule 10 20 30 40 50 60 70 80 11 PQd $510 $420 $330 $250 $180 Supply Schedule PQs $550 $440 $330 $220 $110 Supply and Demand are put together to determine equilibrium price and equilibrium quantity D S What if the price increases to $4?

12. Q o $5 4 3 2 1 P Demand Schedule 10 20 30 40 50 60 70 80 12 PQd $510 $420 $330 $250 $180 Supply Schedule PQs $550 $440 $330 $220 $110 D S At $4, there is disequilibrium. The quantity demanded is less than quantity supplied. Surplus (Qd<Qs) How much is the surplus at $4? Answer: 20

13. Q o $5 4 3 2 1 P Demand Schedule 10 20 30 40 50 60 70 80 13 PQd $510 $420 $330 $250 $180 Supply Schedule PQs $550 $440 $330 $220 $110 D S How much is the surplus if the price is $5? Answer: 40 What if the price decreases to $2?

14. Q o $5 4 3 2 1 P Demand Schedule 10 20 30 40 50 60 70 80 14 PQd $510 $420 $330 $250 $180 Supply Schedule PQs $550 $440 $330 $220 $110 D S At $2, there is disequilibrium. The quantity demanded is greater than quantity supplied. Shortage (Qd>Qs) How much is the shortage at $2? Answer: 30

15. Q o $5 4 3 2 1 P Demand Schedule 10 20 30 40 50 60 70 80 15 PQd $510 $420 $330 $250 $180 Supply Schedule PQs $550 $440 $330 $220 $110 D S Answer: 70 How much is the shortage if the price is $1?

16. Surplus and Shortage Defined What is a surplus? A surplus is the amount by which the quantity supplied of a product exceeds the quantity demanded at a specific price. A surplus may only occur above the equilibrium price. What is a shortage? A shortage is the amount by which the quantity demanded of a product exceeds the quantity supplied at a specific price. A shortage may only occur below the equilibrium price. 16

17. Q o $5 4 3 2 1 P Demand Schedule 10 20 30 40 50 60 70 80 17 PQd $510 $420 $330 $250 $180 Supply Schedule PQs $550 $440 $330 $220 $110 D S When there is a surplus, producers lower prices The FREE MARKET system automatically pushes the price toward equilibrium. When there is a shortage, producers raise prices

18. Shifting Supply and Demand 18

19. Supply and Demand Analysis Easy as 1, 2, 3 1.Before the change: Draw supply and demand Label original equilibrium price and quantity 2.The change: Did it affect supply or demand first? Which determinant caused the shift? Draw increase or decrease 3.After change: Label new equilibrium? What happens to Price? (increase or decrease) What happens to Quantity? (increase or decrease) Let’s Practice! 19

20. S&D Analysis Practice Analyze Hamburgers 1.New grilling technology cuts production time in half 2.Price of chicken sandwiches (a substitute) increases 3.Price of burgers falls from $3 to $1. 4.Price for ground beef triples 5.Human fingers found in multiple burger restaurants. 1.Before Change (Draw equilibrium) 2.The Change (S or D, Identify Shifter) 3.After Change (Price and Quantity After) 20

21. Voluntary Exchange In the free-market, buyers and sellers voluntarily come together to seek mutual benefits. 21

22. Voluntary Exchange In the free-market, buyers and sellers voluntarily come together to seek mutual benefits. 22

23. Voluntary Exchange In the free-market, buyers and sellers voluntarily come together to seek mutual benefits. 23

24. Voluntary Exchange In the free-market, buyers and sellers voluntarily come together to seek mutual benefits. 24

25. Example of Voluntary Exchange Ex: You want to buy a truck so you go to the local dealership. You are willing to spend up to $20,000 for a new 4x4. The seller is willing to sell this truck for no less than $15,000. After some negotiation you buy the truck for $18,000. Analysis: Buyer’ Maximum- Sellers Minimum- Price- Consumer’s Surplus- Producer’s Surplus- $20,000 $15,000 $18,000 $2,000 $3,000 25

26. Consumer Surplus is the difference between what you are willing to pay and what you actually pay. CS = Buyer’s Maximum – Price Producer’s Surplus is the difference between the price the seller received and how much they were willing to sell it for. PS = Price – Seller’s Minimum Voluntary Exchange Terms 26

27. Pearl Exchange Activity 27

28. Voluntary Exchange Activity 28

29. S P Q D Consumer and Producer’s Surplus $10 8 6 $5 4 2 1 10 2 4 6 8 CS PS 29 Calculate the area of: 1.Consumer Surplus 2.Producer Surplus 3.Total Surplus 1.CS= $25 2.PS= $20 3.Total= $45